Ch 1 - Supply and Demand Flashcards
(20 cards)
Supply and Demand
What are the 4 overall factors that influence demand?
S - Social
E - Economic
L - Legislative
P - Political
Supply and Demand
What are key trends impacting demand overall and in key markets?
Rapid growth in 2000s - hurt by 2008 recession
Declining demand in traditional/old world markets
New world driving growth in consumption - US China
- US became #1 in global cons in 2011 - wine part of culture, inc imptc of food culture, more domestic prod
- China major growth - slowing more recently - growing middle class w/ aspiration
Supply and Demand
What is the definition of Supply?
What is the definition of Demand?
What are consequences of imbalance bet S and D?
Supply - amount of a product available for sale
Demand - consumer willingness to buy a product/svc
Imbalance impact:
* oversupply - leads to P reductions as consumers have more options, and potential less π and possible devaluation of brand
* undersupply - leads to P inc but can alienate consumers and/or strain business relationships
Supply and Demand
What is a balanced market?
Ensures producers cover costs, invest in future and earn a profit
Ensures consumers can buy wines they prefer at acceptable prices
Demand
What are key SOCIAL factors influencing demand?
- Change in consumption habits
- Changing cons preferences
- Changing spending patterns
- Changes in reputation
Demand
What are key trends in demand globally and by market?
Significant global decrease since financial crisis late 00s (-4% in 2022)
* old world decline - Italy, France, Germany (flat)
* new world increase - US, China
Demand - social factors
What are social factors that influence demand?
- Changing consumption habits
- Decrease
- younger people drinking less - seen as old fashioned, shift to other alc, spend less time in bars
- health concerns - inc awarenss of health effects + govn’t policies
- changes in lifestyle- busy lifestyles, less time socializing, lunch drinking less acceptable
- less cheap wine avail - policies to reduce supply, cons switch to cheaper alt or non-alc bevs
- Increase - growth in non-trad markets
- US - global trade, cons open to new tastes; China - rise of middle class, aspiration- Changing cons preferences
- less demand for fortified, sweet german; increase demand for rose, prosecco
- Changing cons preferences
- Reputation impacts
- Pos rep inc demand and allows P ↑
- Neg rep/trends ↓D - Change in spending patterns
- Price-sensitive markets - cons unwilling to pay more than lowest possible P = fierce competition- Prod reluctant to ↑P to keep share but have lower π
- USA - premiumization - spend more/bottle
- Usually slow to change
- Prod reluctant to ↑P to keep share but have lower π
Supply and Demand - summary
What social factors increase demand for wine?
What social factors decrease demand for wine?
Increase:
* lower prices
* changes in cons beh - popular categories
* Improved reputation
* Category shifts - rose, prosecco, natural wines
Decrease:
* younger people drinking less
* Health concerns
* Lifestyle changes
* Less cheap wine avail
* Consumer pref changes
* Reputation changes
* Spending pattern changes - slow to change- price sensitivity; changes to p/v willingness
Demand - economic factors
What are the 3 main economic factors that influence (inc/dec) demand?
-
Disposable income/health of economy
- weak econ = ↓disposable inc -> cons buy cheaper wine; strong econ = more premium (aspiration) -
Exchange rates
- Currency fluctuations infl import/export dynamics and relative price changes
- Weak producer currencies can boost export competitiveness but raise production costs -
Market changes
- changes to supply such as new competitors/exits can disrupt pricing - inc demand and/or shift to compet prod
Demand - exchange rates
Hows does stronger exporter currency impact demand and market actions?
How does weaker exporter currency impact demand and market actions?
Export country stronger:
* more expensive in import market -> producer can maint P and risk lower D or ↓P and keep/gain share but risk less π
Export country weaker
* less expensive in import market - maint P to boost sales (better p/v for cons) or ↑P to inc π
Demand - Legislative/Political
What are 5 legislative/political factors that impact demand?
How do they impact demand?
-
Laws prohibit/limit sale of alc
- Sale completely prohibited in some countries; others limit via market structure (monopoly, 3-tier) -> limits supply and inc prices
- minimum legal drinking age/sales hours limited -
Gov’t policies to reduce consumption
- advertising limits - France Loi Evin - 1991
- minimum pricing - scotland
- driving limits (BAC) - many countries reduce Scotland/NZ - reduce from 80mg/mL to 50 -
Taxation
- gov’t impose taxes and duties - reduce consumption (↑P) and inc revenue -
Trade policies
- major inc in last 15yrs - doubled
- embargoes
- tariffs - can be revenue gen, but also protection of domestic industry
- trade agreements - can inc demand through better P (SA and Chile in EU) -
Wine Laws/GIs
- increasing number of GI globally - can enhance rep and ability to ↑P, but they limit production flexibility
- China - anti-extravagance campaign - signif ↓prem category overnight (Bord, Burg)
Demand - Legislative/Political
How do taxes impact demand?
○ Taxes inc P and reduce D, also raise signif revenue for govn’t
○ Sales/VAT taxes apply like for all prod
○ Specific excise taxes on alc - can be by category (Ireland sw tax double still -> signif reduce sw demand)
○ Hong Kong - reduced taxes to inc category competitiveness - 2008 elim tax on alc to become trading hub of Asia - signif inc in auction sales
Demand - Legislative/Political
How does international trade impact demand?
Examples - Argentina, China/US, Russia, Canada
○ Export market has doubled in last 15 yrs
○ Trade relations bet countries
○ Import duties/tariffs - revenue generation/domestic protectionism to encourage consumption of domestic prod
○ EU - duty free w/in, external partners pay -> bi-lateral agreements e.g., UK, S Africa, Chile
○ UK - brexit - can now form bi-lateral agreements (Australia) to make those prod cheaper than EU prod
○ Domestic protection/political retaliation - trade restriction, tariffs, embargo, neg consumer feelings
§ Argentina 2010s - limited imports plus imports of equip = higher P + limited foreign investment = much slower growth
§ US/China - reciprocal tariffs from China on US wine
§ Russia - embargo wine imports from EU/US
§ Canada - consumers avoid US products due to trade war
Supply
What are key supply-related stats?
- global wine prod
- Who are top 5 producers?
BOOK
* * Global wine prod ~270 million hL +/- 10%
* Italy, France, Spain top 3, then US and Argentina
OIV 2024 data
* wine prod lowest since 1961 - 226mhl -4.8% vs 2023
* Italy, France and Spain top producers
Supply
What is area under vine?
How change globally?
○ Generally, more area under vine = more volume
○ 90% is wine grapes, 10% table; China fastest growing but mainly table grapes
○ Gradual global decline
OIV 2024 - ~10% drop since 2000, 7.1mha
* Spain, France, China top 3
Supply factors - summary
What are 3 main supply influences?
- AUV
- Production volumes - natural and human factors
- Legislative constraints
Supply
4 What are factors relating to declining AUV?
- Vine pull schemes
§ 1980s EU - too much supply = “wine lake”
§ Gov’ts and EU paid growers to pull up low quality vineyards - esp S France, Italy, Spain -> reduce by hundreds of 000s ha; also Austr, NZ, Arg - EU new vineyard restrictions - part of reduction of supply plan, but since 2016 can in auv 1%/yr -> plantings in France and Italy have started to rise
- Convert land to other uses - switch to higher value crops or use for tourism/other purposes
§ Elgin - plant apples; CA - plant almonds - Abandonment of rural areas - labor shortages reduces avail workforce in vineyard areas -> can lead to abandoned vineyards
Supply
What and how do natural factors impact supply?
What and how do human factors impact supply?
Spain example
Natural
○ Weather variation - Europe prone to signif vintage var which signif global wine supply
§ 2017 - spring frosts, hail and heat waves -> 14% less yoy production
○ Climate change - droughts, severe weather = lower yields = less volume = ↑P = pot ↓D
§ Drought - SA 2015-19; CA - reduced ground water reserves
Human
○ Inc productivity can offset reduction in ↓ AUV - allow more volume at desired price on same or less land
§ Allowing irrigation + higher density planting in Spain - traditionally very dry + low vine plant density -> areas not able to support vines can now do so = more productive land
§ Modern techniques - canopy mgt, pest and disease mgt (IPM), machine harvesting
Supply
What is main legislation factor that impacts supply?
How is it structured/managed?
○ Main leg infl - inc # GIs globally which define where grapes can be grown
○ New world - loose rules + more Gis inc volume of wine
○ EU - strict PDO rules act to restrict supply - AOC (France) and DOC (Italy) - limit var, yields, wm techniques, mat rules
○ Goal of GIs - in addition to defining style in an area - keep supply and demand in balance to reduce ↓P pressure
§ Allow consumers to ID specific wines of an area/style (NZ SB) and given rules, less S means higher P
○ When demand for a style/GI is inc - pressure to inc delimited area -> Prosecco
§ Plant new vineyards, but expansion can lead to planting in less suitable areas and can ↓Q
○ EU - PDOs have governing bodies which set and enforce rules -> limit supply and maintain P
○ EU - PGI system - more flex to for producers to compete with less heavily regulated regions
§ Strict rules hurt competitiveness vs less regulated areas
§ French Vin de Pays led to development of PGI
§ Still req 85% of fruit from defined geo area, but more flex on var and no viti or wm rules
§ S France - signif ↑volume, now ↑Q
Over- and under-supply
What are OVER supply challenges and options for producers?
What are UNDER supply challenges and options for producers?
Oversupply
○ Generally wine S > D - recent growth in US and China D helped offset
○ Higher S = ↓P -> cons find cheaper alt
○ Impact - harder to sell wine and can have unsold stock in tanks -> tie up equip, sell at loss
○ Option -
§ look for new markets - but takes time, so maybe only for prod w/ presence in market already
§ Bottle under diff label and offer to supermarket/discounter, bar/rest
§ Sell for lower than usual price/retailer orders too much and has to lower P - brand damage
Undersupply
○ Most common for particular wine/area; global lack of S unusual - bad harvests in 2017 did cause it
○ Key issue - disappoint clients, hurt bus relat - can be penalty if contract w/large retailer
○ Under supply not always lead to ↑P - many producers issue wines on allocation; Bordeaux and Burg can have higher P if S lower
○ Distrib/POS - switch to cheaper alts if region/brand of a wine not impt -> esp in price sensitive markets
○ Fragmentation of wine prod (vs beer, spirits) = few large companies; large # small and med
§ Few, large players (EJ Gallo, Treasury) have large portfolios and are in many markets - easy to switch between wines and markets to address S shortages (shift to less P sensitive markets)
