Chapter 1 - Supply & Demand Flashcards
(84 cards)
1
Q
What factors affect the price of a wine bottle?
A
- supply & demand
- cost of grape growing, producing the wine,
2
Q
What are the main concepts/factors that determine the price of wine?
A
- Costs through the supply chain (growing grapes, producing wine, getting it to end consumer)
- Supply and demand: The amt of wine available to buy (supply) compared to the amt that people or business want to buy (demand)
3
Q
In a perfect world what would supply and demand look like for wine?
A
Supply & demand would be in balance:
* Producers would be able to sell all wine they make at a price that covers the cost of production, pays dividents to any shareholders, finance future investments and still leads profit for producer.
* In turn, consumers buy all the wine they want, of a style they enjoy, at a price they are willing to pay.
4
Q
Why is supply & demand for wine seldom in balance?
What factor can cause fluctuations in wine production levels?
A
Wine is an agriculture product and is subject to weather conditions, like high rainfall increasing production or spring frosts reducing it
5
Q
What is the general broad trend with wine prices as it relates to supply and demand?
How does it impact producers & consumers?
A
- When supply exceeds demand, prices tend to fall because consumers have greater choice of cheaper alternatives. Producers may need to lower their prices to remain competitive (reducing their profits).
- When demand exceeds supply, prices are likely to increase. Some consumer may be willing to pay higher prices for some wines, other may switch to another wine or diff drink category
6
Q
What are factors that influence demand for wine?
A
- social
- economic
- legislative & political (impacts supply as well)
7
Q
What are the categories of social factors that can influence the demand for wine?
A
- changes in consumption habits
- changing consumer preferences
- changes in reputation
- changes in spending patterns
8
Q
Describe how changes in consumer consumption habits has influenced demand
A
Global consumption trend:
* Global wine consumption increase rapidly in first part of 2000s, then fell back after 2008 global financial crisis
* It hasn’t regained same vol. levels but popularity in certain categories like rose & sparkling wine significantly increased in last decade.
Change in habits vary by country:
* Consumption is falling or static for “traditional’ wine drinking countries (eg FR & IT).
* Consumption increasing in countries where wine drinking has not historically been a major part of the culture
* USA: wine drinking has become part of mainstream culture, due to increase globalisation of food & drinks industry (growth of multi-national corps, increase of exports, consumer embrace new tastes) and increase in wine production in domestic market
* China: consumption increased over last 2 decades. Growing middle class show wealth status by moving from local drinks to imported wines, initially FR wines but now else like AU and CH (benefit from bilateral trade agreement)
9
Q
Explain possible reasons why consumption is falling in certain regions.
A
- younger people drinking less wine: some regard wine as old fashioned (parents/gpa’s drink), turn to other categories (e.g. gin in Spain)
- health concerns: increasing awareness of negative health effects of alc. health related gov campaigns/policies can have an impact (e.g. Loi Evin in FR thought to contribute to drop in wine consumption)
- changes in lifestyle: busy modern lifestyle, less time for longer meals w/ wine; alc is increasingly forbidden/socially unacceptalbe during work hours
- reduced availability of cheap wine: traditional wine producing countries used to produce & sell large vol of cheap wine, but various steps taken to reduce over-production (e.g vine pull scheme), so less vol of these wines available. some consumers switch to other cheaper alc or non alc drinks.
10
Q
Describe how changing consumer preferences has influenced demand
A
Wine preferences change over time:
* rose extremely popular in USA in recent years
* Prosecco sales in UK and USA has risen
* if supply does not meet demand, prices will increase; however the increase in the area covered by Prosecco DOC has increased supply, kept prices from rising
* health concerns = increase in demand for lower ABV wines; less consumption of fortified wines;
* medium sweet German wines out of fashion as drinkers turn to drier styles
11
Q
Describe how changes in reputation influences demand
A
- as reputation of region/wine/producer grows, demand increases (may be able to justify higher prices)
- good review from leading publications (Wine Spectator or Jancis Robison) can be valuable and producers may increase prices
- onine influencers or key opinion leaders can have impact of reputation of a brand or style of wine
- wines in popular culture (movies, tv, music) can also have impact
- loss of reputation has opposite effect
12
Q
Describe how changes in spending patterns influences demand
A
how much consumers willing to spend on wine
* DE & UK - consumers unwilling to pay more than lowest price possible for style of wine they want to buy - price sensitive market
* USA - consumers willing to pay abvoe min price to buy a wine they perceive to be better quality than cheapest option on offer
* changes in spending patterns can be slow process
* trend for premiumisation in USA and UK - consumer more willing to pay more for individual bottle, bc they are buying less vol of wine (buy higher quality, premum price even if it means buying less)
13
Q
What is a price sensitive market? What is the challenge in these markets?
A
- Markets where consumers are unwilling to pay more than lowest price possible for style of wine they want to buy (ex: DE & UK)
- Competition is fierce. producers compete within reduced price range, result in lower price for consumer but can be unprofitable for producer (who may choose not to sell to these markets)
- Producers reluctant to pass increases in production cost to consumer for fear of losing sales, some avoid by building brand loyalty in their marketing campaigns
14
Q
What is premiumisation?
A
Consumers increasingly willing to pay more for individual bottles of wine, often because they are buying less wine by volume
15
Q
What are the economic factors influencing demand
A
how much consumers spend on wine affected by wider economic situation, national & global level.
- strength of the economy
- fluctuations in currency exchange
- changes to the market
16
Q
How does the strength of the economy influence demand?
A
- sales change w/ level of consumer disposable income
- when it falls, as in a recession, consumers likely to trade down to cheaper wines or less expensive alc drinks like beer & cider. (ex: financial crash - demand for Champagne shrank, cheaper sparkling grew)
- when economy is growing & disposable income increases, consumers willing to buy more expensive wines (China middle class drive increase in wine sales & aspirational wines, Bordeaux & Burgundy)
17
Q
How does the fluctuations in currency exchange influence demand?
A
exchange rate changes can affect demand for imported wines (esp price sensitive markets)
* if exporting country currency gains value to that of importing coutnry, producer has 2 options: keep price stable and risk losing sales or decrease price of wine and lose profit
* if exporting country currency loses value to that of importing country, producer can keep price stable (which should boost sales) or increase the price and improve profits
* downside to weak currency, producer has to pay more to import equipment & supplies, which can offset additional profits
* ex: boom in wines from AR due to weak peso, so wines were competitively priced on global market
18
Q
How does changes to the market influence demand?
A
markets constantly change w/ new comp & products entering/disappearing
* if product disappears from a market, supply decreases; creates opps for the competition, which could increase their sales
* if supply is limited, may be possible to increase prices
* if new lower priced or better value wine introduced to market, may cause fall in demand for other similar products, force producer to lower their prices to remain competitive or they look for other markets
19
Q
What are the legislative & political factors that influence supply AND demand?
A
- laws prohibiting/limit sale of alc
- gov policies to reduce alc consumption
- taxation
- international trade
- wine laws
20
Q
How do laws prohibiting/limiting sale of alc influence supply & demand?
A
- sale of alc is completely prohibited in some countries
- others permit sales but tightly contrlled, like state-owned monopolies in Sweden, Canada or the USA 3-tier system
- these controls will limit supply of wine and usually increase prices
- some countries have min legal drinking age and limit sales to certain hours of the day
21
Q
How do govt policies reducing alc consumption influence supply & demand. Give examples
A
- as excessive consumption leads to illness, injuries, crminal behavior, countries have implement laws intended to encourage citizens to drink less
- Loi Evin 1991 law in FR, restricts advertising of alc drinks –> reducing consumption
- Scottish govt introduce minimum unit pricing to reduce avail of cheap alc. (wines of certain unit must cost a min price)
- most countries impose limit on amt of alc that can be consumed b4 person drives vehicle - BAC (blood alc concentration); most countries move in downward direction to reduce alc consumption
22
Q
What is Loi Evin?
A
French law passed in 1991 that has restricted the advertising of alcoholic drinks and is considered a significant factor in the reduction in wine consumption in France.
23
Q
Describe minimum pricing unit and how it works.
A
- First introduced by Scottish govt to reduce availabiity of cheap alc.
- Min price of an alc drink is 0.50 GBP per unit. meaning 75cl with 12% abv (9 units in UK) must cost at least 4.50 GBP, whereas it used to be as little as 3GPB
24
Q
How does taxation influence demand?
A
- govt impose taxes & duty on alc, so higher prices reduce consumption
- on other hand, tax & duty becomes a major revenue generation for many govts
- sales tax (VAT in the EU), paid at point of sale;
- many impose specific excise duties or taxes on alc payable at point of manufacture (paid by producer if local or importer if foreign)
- level of duty varies btw diff categoires of drink, influencing demand
- Republic of Ireland has much higher duty on sparkline wines than still, reducing demand for sparkling
- govt tend to increase duty over time, but some reduce certain categories to make it more competitive (HK abolished excise duty on wine with aim of becoming wine trading hub of east asia leading to massive increase in auction sales of fine wine
25
How does **international trade** influence demand?
value of wine exports doubled during last 15 years
* trading relations btw countries flutuate, affecting demand for products traded btw them
* many impose **customs duties (trade tariffs)** on imported goods; sometimes form of revenue generation, but often a protectionism policy to encourage sale of domestic rather than imported goods
* EU is free-trade area allowing member states to import/export goods btw themselves tarrif free; tarffis still on goods from imported from most non members (some non members SA & CH have entered into trade agreements, so they enjoy tarrif free or reduce tarrif, giving their wines a competitive edge)
* UK left EU can now negotiate w/ AU, making AU wines cheaper than EU wine, could change buying habits
* US/China trade war - China impose tarrifs on US wine after US tarrif on China products
* AR Trade restrictions in 2010s affected wine imports and limited import of winery equipment (barrels, cork, etc), increasing production costs. Govt also imposed restrictions on foreign ownership of land, slowing down investment and growth
* **Embargo**: extreme form of protection - country bans imports from or exports to particular country (ex Russia)
26
What is an embargo? Give an example
An extreme form of protection in international trade, where a country bans imports from or exports to particular country, can be political or economic reasons.
Example: imports into Russia fallen due to trade embargos imposed for political reasons on Russia or by Russia)
27
How do **wine laws** influence demand?
* increase in global creation of Geographical Indications GIs, like PDOs or PGIs, can impact demand & supply of wine
* consumers drawn to wines from a GI, bc strong reputation or enjoyed it in past
* creatino of GI may increase recognition & demand for wines from that region, allow producers to increase price
* PDOs can be strict, limit producer to certain varieties, productino methods, maturation period, etc. while outside EU less subject to limitations, more free to react to changes in consumer preference and maintain demand for their wine
* sudden changes in laws like China prohibiting 'lavish gifting' via anti-extravagence campaign
28
What is lavish gifting, how was it restricted, how does it impact demand?
* Concept in China of showing respect to colleagues, customers, suppliers by giving gifts paid for by government money. Gifts like super premium Bordeaux/Burgundy wines
* Anti-Extravagance campaign was launched explicitly to prohibit the gifting to or consumption by government officials of luxury wines and spirits. Demand for those wines dropped
* Meanwhile, an increase in less epxensive wines from growing middle class who want to show status vs for lavish gifting
29
What does the Scottish minimum unit pricing law aim to achieve?
Reduce the availability of cheap alcohol.
30
What is the blood alcohol concentration (BAC) limit aimed at?
Reducing drunk driving incidents.
31
What effect can good reviews from wine publications have on producers?
Increase demand and allow for higher prices.
32
What is a 'price-sensitive market'?
A market where consumers are unwilling to pay more than the lowest price possible.
33
What can happen to demand when a new lower-priced wine enters the market?
Demand for similar products may decrease.
34
What is the blood alcohol concentration (BAC) limit for driving?
* Varies between countries, generally moving downward to reduce drunk driving incidents.
* New Zealand and Scotland have reduced their maximum BAC from 80 mg/100 mL to 50 mg/100 mL
* Norway and Sweden have a limit of 20 mg/100 mL.
35
How do drink-driving laws impact alcohol consumption?
Imposition and tightening of laws have been shown to reduce alcohol consumption
36
What is the role of taxation in alcohol consumption?
Higher prices may reduce consumption but also generate government revenue. Taxation includes sales tax (VAT) and specific excise duties on alcoholic drinks.
37
What is the difference in excise duty on still and sparkling wines in the Republic of Ireland?
Still: EUR 3.19/bottle; Sparkling: EUR 6.37/bottle. This significant difference has reduced the demand for sparkling wine.
38
What did Hong Kong do in 2008 regarding wine taxation?
Abolished excise duty on wine to become the 'wine trading hub' of East Asia
## Footnote
This led to a massive increase in auction sales of fine wine.
39
How have wine exports changed in the last 15 years?
The value of wine exports has more than doubled. This growth has made exports a vital part of the global wine industry.
40
What are customs duties?
Taxes on imported goods that can be a form of revenue generation or protectionism. They encourage domestic sales over imports.
41
What is the EU's trade policy?
A free-trade area allowing member states to trade tariff-free. Tariffs apply to non-member states, affecting competitiveness.
42
What potential change could affect the UK wine market post-Brexit?
Negotiation of free-trade arrangements with countries like Australia. This could make Australian wine cheaper than EU wine.
43
What trade restrictions were imposed in Argentina in the early 2010s?
Trade restrictions were imposed that affected wine imports and severely limited import of winery equipment (barrels, cork, etc), increasing production costs. Govt also imposed restrictions on freign ownership of land, slowing down investment and growth
44
What is an embargo?
A ban on imports or exports between countries for political or economic reasons
## Footnote
Example: Wine imports into Russia have fallen due to various trade embargos.
45
What are Geographical Indications (GIs)?
Legal designations like PDOs and PGIs that impact wine supply. GIs can increase recognition and demand for wines from specific regions. However, strict regulations can also limit
46
What are PDO rules in Europe?
Strict regulations on grape varieties, production methods, and maturation periods
## Footnote
Producers outside the EU face fewer limitations.
47
What was the impact of Xi Jinping's Anti-Extravagance campaign in China?
Demand for luxury wines dropped significantly. This led to an increase in sales of less expensive wines among the growing middle class who wanted to show status vs lavish gifting
48
What are broad key areas/categories that have an influence **supply** of wine?
* Production
* Legislation
49
What categories in production have an influence on supply of wine?
Area under vine
* Vine pull schemes
* EU restrictions on planting new vineyards
* Conversion of vineyard land to other uses
* Abandonment of rural areas
Human factors
Natural factors
50
How does **area under vine** impact supply of wine
Area under vine - size of vineyard plantings. GENERALLY the greater area under vine, the greater vol of wine that can be produced (~90% of vineyards used for wine production)
51
Describe what factors have impacted area under the vine and what factors has lead to the **graduation reduction in vineyard land**, particularly in the EU.
* **Vine pull schemes**: 1980's EU wine production was greater than demand, creating surplus (aka 'wine lake'); EU & govt paid growers to pull up poor quality vines esp in S. France, IT & ES, leading to hundreds thousands hectares being pulled;
* **EU restrictions on planting new vineyards**: EU also limited planting of new vineyards in 80's. Since 2016, member states can now authorised planting up to annual growth of 1% of vineyard area already planted. Plantings now rising in FR & IT
* **Conversion of vineyard land to other uses**: grape can be low value crop, so some growers switch to higher value product (ex: Elgin replace w/ apples, greater ROI or to combat oversupply in US, some vineyards now grow almonds/pistachios; vineyard in Madeira bought for property development/tourism)
* **Abandonment of rural areas**: younger ppl leaving rural areas to work in urban areas; reduced workfoce for vineyard work, no one to take over family estates; vineyards abandoned)
52
Describe how **human factors** have impacted production & supply of vine
* Spain traditionall lower yields than FR & IT due to dry cliamte and low density plannting. However, the relaxation of irrigation laws in Spain has allowed areas that didnt typically support vines now viable
* increased use of modern, higher density planting have increase in certain areas, offset reduction in area under vine
* Modern techniques like site selection, clonal selection, improved canopy management, pest & disease control, machine harvesting, made it possible to product greater amt of heallthy grapes COUPLED w/ modern winemaking technology, resulted in greater vol of higher quality wines
53
Describe how **natural factors** impact production & supply of wine
* weather conditinos vary year to year influence vol produced
* good weather, leads to higher than abg harvest & production; bad weather the opposite
* EU (holds half of worlds vineyard area) highly suspectible to vintage variation, have major impact on global wine production
* Spring frost, hail storms, heat waves, lead to drop in production in EU in 2017
* Climate change threatens production; drought in SA, CA & CH
* Natural factors reduce yield --> Lowers production --> shortage of supply --> higher prices that consumers may not want to pay
54
Give an example of how decline in vineyard area do not result in reduced production
* Spain: relaxation of irrigation allow areas that didnt typically support vines now viable and increased use of modern, higher density planting have increase in certain areas, offset reduction in area under vine and modern high density planting
* Modern techniques like site selection, clonal selection, improved canopy management, pest & disease control, machine harvesting, made it possible to product greater amt of heallthy grapes PLUS modern winemaking tech, resulted in greater vol of higher quality wines
55
Describe how **legislation** can influence supply
the increase in no. of GIs has had impact of supply:
* AVA in US and Wines of Origin in SA or GIs in AU only define where grapes for wines under specific GIs can be grown, but don't have strict rules found in PDOs of EU
* France's AOC and Italy's DOC & DOCG dictate grapes, max yields, winemaing & maturation techniques, which limit vol of wine produced
* GIs/PDOs bring supply & demand more in line to reduce risk of downward price pressure;
* PDOs have governing body to set/enforce rules - COmite Champagne and Sherry Consejo Regulador limit amt of wine that's release in any one year, ensuring there's no oversupply & maintaining price levels
56
What are the aims of GIs/EU's PDO system
* define style of wine produced in particular region
* bring supply & demand more in line to reduce risk of downward price pressure; if market research shows demand for Marlborough Sauv Blanc, retailer constrained to buy from small area in NZ (producer has more control over price as retailer can't source wine anywhere else)
57
Winemakes within EU PDOs have to follow strict regulations that affect vol & supply and couldn't compete with counterparts in less regulation regions. How has this been addressed?
* Prosecco DOC extend permitted production areas, more vines can be planted but it could mean extending to less suitable sites for diluation in overall quality
* **Vin de pay system** introduced in 70's - offered greater freedom; 85% of grapes have to come from particular geographical area in FR but permit wider range of varieties & don't impose rules on viticlulture & winemaking; very importanted in South of France
58
What is the relationship between vineyard size/area under vine and wine production?
Greater area under vine generally leads to higher wine production
## Footnote
90% of global vineyards are used for wine production, but this varies by country.
59
What is the wine lake and its impact? What did it lead to?
In mid 1980's in EU, there was an excess wine production exceeding demand. This led to vine pull schemes to reduce poor quality vine acreage.
60
What is the relationship between area under vine and wine production?
Generally, the greater the area under vine, the greater the volume of wine that can be produced.
61
What percentage of vineyards globally are used for wine production?
It is estimated that 90 percent of vineyards are used for wine production.
62
Which country has a significant proportion of its vineyards devoted to table grapes?
China has the majority of its vineyards devoted to table grapes.
63
What are vine pull schemes?
Vine pull schemes are programs where growers are paid to remove poor quality vines to reduce surplus.
64
What has been the impact of EU restrictions on planting new vineyards?
EU restrictions have limited the planting of new vineyards, contributing to reduced wine production.
65
What is one reason for the conversion of vineyard land to other uses?
Growers may switch to higher value products, such as apples, for greater financial return.
66
What factor has contributed to the abandonment of rural vineyard areas?
Younger people leaving rural areas for urban areas has reduced the available workforce for vineyard work.
67
True or False: A decline in vineyard area always results in reduced wine production.
False.
68
What modern techniques have increased wine production efficiency?
Techniques include better site selection, clonal selection, improved canopy management, pest and disease control, and machine harvesting.
69
What impact do weather conditions have on wine production?
Weather conditions can significantly influence the volume of wine produced, with good weather leading to higher harvests and bad weather reducing production.
70
What percentage of Chile's vineyard area is projected to face irrigation water shortages by 2050?
95 percent.
71
What is the role of geographical indications (GIs) in wine production?
GIs define where grapes for wines with specific geographical names can be grown.
72
How do PDO systems in Europe affect wine production?
PDO systems impose strict rules on what grapes can be grown, maximum yields, and winemaking techniques, limiting production.
73
What is one aim of GIs in the European PDO system?
To define the style of wine produced in a particular region.
74
What system did the French introduce in the 1970s to allow more freedom for winemakers?
The vin de pays system.
75
What is the significance of PGI wines in regions like the South of France?
PGI wines have become extremely important, increasing both production and quality.
76
Fill in the blank: The _______ of France dictates what grapes can be grown in specific areas.
Appellation d'origine contrôlée (AOC)
77
What has been a recent trend affecting vineyard land in the USA?
Conversion of vineyards to grow almonds and pistachios as part of a strategy to combat over-supply.
78
Describe the **over-supply of wine** and its challenges and impact
* global wine production has consistently exceed global wine consumption, somewhat reduced to increase consumption in US & China and limitations on production
* prices tend to fall as consumer can easily find cheaper alternative
* harder for producers to sell their stock, may end up with unsold wine in tanks; may be forced to sell excessive wine much lower, sometimes below production cost
* if selling at lower price, this can devalue the brand image, lasting damage to the brand
79
What are options for producers dealing an over-supply of wine?
* find new markets/outlets for wines, easier for those who have presence in a market already or a distributor who can find htem new customers
* producers can bottle wine under diff lavel and offer it to supermarket, deep discounter, bar as private label
80
Describe the **under-supply of wine** and its challenges and impact
* global under-supply more unsual but happened following bad harvest in 2017 in EU
* more common for under-supply of particular wines
* producer doesn't have enough, disappoint client and lead to strained business relationships
* if contract w/ retailer, they may impose finanicial penalty or cancel contract
* under supply could result in increased prices, but most cases producer prefer to issue wines to distributors on alocation
* if origin of wine not important, cheaper alt from other grape varieties and/or countries may be found (esp in price sensitive markets)
* larger companies (Gallo, Accolade) have diff price points and styles so they can ovver alternative in their portfolio or sell to diff markets (eg price incrases from undersupply cause sales to drop in one country, so sell into less price sensitive markets)
81
how can global over-supply of wine impact high vol inexpensive Chardonnay
* leads to lower prices, competition from cheaper alt, threat of being left unsold in tank
* producer may need to sell at lower price, even below production cost
82
how does global over-supply impact low vol, super premium Cab Sauv
little impact on super premium sector as vol are very small
83
how does strength of economy, global and in envisaged markets impact high vol, inexpensive Chard
can result in threat to sales
84
how does strength of economy, global and in envisaged markets impact low vol, super premium Cab Sauv
may have little impact as vol are very small and buyers of wine in this price band are less likely to be at risk during a recession.
