D2 - from 2021 textbook Flashcards
(45 cards)
What are the factors that influence the DEMAND for wine?
Social
Economic
Legal
Social
- Changes in CONSUMPTION HABITS (e.g., younger drink less, health concerns)
- Changing consumer PREFERENCES (e.g., rose, Prosecco, low alcohol)
- Changes in REPUTATION of region or wine (critic scores, influencers, films, TV)
- Changes in SPENDING PATTERNS (e.g., price sensitive markets vs. not, the “premiumization” of the US market)
Economic
- Strength of the ECONOMY
- CURRENCY EXCHANGE
- Changes to the MARKET (exit or entry)
Legal / Political
- LAWS prohibiting SALES and reducing CONSUMPTION of alcohol
- TAXATION
- International TRADE
Factors that influence SUPPLY of wine
Production
- area under vine
- vine pulls schemes
- EU restrictions on planting new vineyards
- Conversion of vineyards to other use
- Urbanization
- Human decisions in the vineyard e.g., irrigation
- Natural factors (weather, climate change)
Legislation
- PDOs in EU have rules on grapes, max yields,
- Some PDOs have rules on irrigation; other areas (Spain) are changing rules about irrigation.
What are challenges of an oversupply of wine
First, this is common.
- Prices fall as consumers can easily find alternatives.
- Producers may have to reduce price further to free up equipment.
- Selling at a lower price can devalue the brand, so
- Some producers will work to find new markets - private label, lower-tier brand.
What are the challenges of an under-supply of wine?
Producer doesn’t have enough wine to sell
Disappointing clients
Strained business relationships.
Prices increase - or producers issue wines to their main distributors on allocation.
Consumers will find cheaper alternatives.
BIG PICTURE: What are the key factors that influence cost of a bottle of wine?
Grape growing costs Winemaking costs Transportation costs Importation costs Sales costs Marketing costs
Also, legislation can impact cost.
Fluctuations in currency can impact cost.
Detail: What are the costs associated with growing grapes?
VINEYARD ESTABLISHMENT - buying the land - understanding it - surveying + soil analysis - site clearance - building access roads - buying and planting vines - buying stakes and wires - drainage and/or irrigation installation - protections against weather hazards - protection from animal pests - buying machinery and equipment Mostly capital costs.
VINEYARD MANAGEMENT
- Labor
- Machinery and fuel
- Supplies (tools, gloves, etc.)
- Vineyard treatments (for pests, etc.)
- Water
- Electricity
- Insurance & depreciation
Detail: What are the costs associated with winemaking?
WINERY ESTABLISHMENT
- Land
- Building winery
- Buying equipment (pumps, pipes, tanks, presses, refrigeration)
WINEMAKING COSTS
- Grape growing or “bought-in” fruit
- Labor
- Machinery and equipment running costs
- Winery materials (sugar, de-acidification agents, acid, cultured yeasts, CO2, fining and filtering agents)
- Water
- Electricity
- Maturation (space, vessels, labor, cash)
- Packaging
- Depreciation
What are the most common methods of transportation from most to least expensive?
Air - only for special circumstances (competition, Beaujolais Nouveau for Japanese market
Road - if long distance, expensive.
Rail - If containerized, do-able. If on pallets, expensive
Sea - cheapest by far. But slow.
What do we need to know about bulk transportation? Give stats by country in 2018.
In 2018, 34% by volume of world wine was exported by bulk.
2018 - Spain (55%) and USA, South Africa, Australia and Chile all exported»_space; 40% of wine exports in bulk.
Up to now, bulk was associated with inexpensive wine, but this may be changing.
Bulk transport - advantages and disadvantages
Advantages:
- wine in tank is much lighter than wine in bottles.
- also more space efficient. Same space can hold 24,000 liters in bulk vs 9000-10,000 liters in bottle. (i.e., 2x in same space can be transported)
- significantly reduces fuel needed
Disadvantage:
- only for large consignments
- if sale is less than 15,000 cases, there is no cost advantage over transporting in bottles
What are importation costs that contribute to the cost of a bottle of wine? What do these costs lead producers to do?
- duties & taxes
- labelling laws (different everywhere)
THUS, many producers use a distributor. A distributor will take between 5 and 25% margin.
What are the SALES costs that contribute to the cost of a bottle of wine?
- Property costs. The cost of the retail premise, including ongoing costs like security, maintenance, etc.
- Labor
- Equipment & materials to outfit store, bar or restaurant
- Storage costs (restos: Wine fridges; supermarkets: Warehouses)
- Delivery costs to end consumer (for retail shops)
- Margin at the point of sale (retailer profit)
- Specialist wine retailers: 30-50%
- Bars & restos: as much as 66% (3x what the bar purchased it for)
What are the MARKETING costs that contribute to the cost of a bottle of wine?
Labor - of the marketing team, in-house or outsourced.
Design and production of bottles & labels
Marketing campaign (adv, promo materials, sample bottles, events)
What is the impact of LEGISLATION on the cost of a bottle of wine?
Bonded warehouse in UK - costs money.
Tariffs
Onerous labelling laws
How can businesses in the wine industry mitigate the effect of exchange rate fluctuations?
Options - buy an option to buy the wine later at a specific price. Large importers may do this.
Fix the price in the currency of the importer at date of ordering. Shifts risk to producer who may not agree to this.
Buy currency to cover specific orders
Enter a contract to fix the exchange rate
Trade in EURO/USD
- more stable.
- if producer buys equipment in EUR/USD, it reduces the # of conversions made
Open a foreign current account in a local bank
Open an account in an overseas bank.
What are the types of businesses engaged in production of wine?
Estates
Growers (Beckstoffer)
Grower-producers (common in Burgundy - make the wine, sell it immediately)
Merchants (buy immature wine, mature it, sell it under merchant’s name)
Grower-merchants (E. Guigal)
Co-operatives (Plaimont. Grow grapes, make wine, market)
Custom-crush facilities (new world - CA)
Virtual Winemakers/Wineries
Conglomerates (E&J Gallo)
Between a high-volume inexpensive wine and a low-volume super-premium wine, where will you see the biggest cost differentials?
Cost of grapes
- Labor in the vineyard,
- real estate taxes,
- vineyard depreciation
Winemaking
- oak
- cellar overheads (ageing)
What % of total winemaking costs come from grape growing?
70%
In a free market, what are the options for getting a wine to the point of sale?
Producer can go to…
- retailer (not in the US!)
- distributors (aka, importer, agent, wholesaler)
- producer/distributor joint venture
- broker (a matchmaker essentially)
- direct to consumer, skipping the retailer (cellar door, events, wine clubs and online)
In a free market, what are the advantages and disadvantages to a producer of using a distributor?
Advantages:
- distributor’s knowledge of the market (players, consumer preference and trends)
- contacts
- retailers requirements and preferences
- help with admin burden (logistics, risk, legal compliance, labelling, language barrier)
- will market / promote a wine*
- you’re part of a portfolio
Disadvantages:
- $$$
- more expensive to hospitality than to retail
- *and you may lose control of your brand story / brand image
- you’re part of a portfolio
NET: You need to find the right distributor!
In a free market, what are the advantages & disadvantages of selling directly to the retailer?
Advantages:
- no middle man costs
- producer chooses which retailers stock their wines, retaining control over brand image
Disadvantage
- large administrative burden of getting wine to retailer (arranging collection, transporting, delivering the wine – and if exported, even more hassle - duties / taxkes / labelling & packaging.)
- You can use a freight forwarder for these things - $$$
- You retain full risk of wine being damaged in transport
- if going to foreign market, you must get to know retailers in target market, consumer preferences and legislation
What are advantages and disadvantages of cellar door?
Adv:
• Higher margin sales – no middle man.
• Direct relationship with the consumer with the authenticity of the site of production to build a personal relationship and develop loyal brand advocates.
• Can trial new products and get immediate and direct feedback (foregoing the need for market research).
• It is relatively easy to gather consumer data for ongoing marketing and sales.
• Can offer tastes of wine to help aid and encourage a confident consumer purchase.
• Within touristic regions or proximity to population density, will be relatively easy to attract visitors.
• Can position cellar door in urban areas if winery is too remote or isolated (though this can detract from some of the authenticity)
• Can collaborate with other like-minded industries (culinary, farming, artisans) to attract customers and offer an immersive experience.
Disadvantages:
- space / property and labor
- lack of suitable location
- a distraction
How are deep discounters able to sell at such low prices?
Lower profit margin - focused on volume
Stores are basic - products may be on pallets
Products are often private label ($2 Chuck or brands created with producer directly)
Rarely stock major brands
Often buy directly from the producer (in free market).
What are some trends associated with deep discounters?
Stock more expensive wine - when it’s gone, it’s gone.
Consumers purchase that + cheaper wine.
When they return, buy the cheaper wine.
In 2018, 37% of wine drinkers bought wine from a deep discounter in the UK.
Aldi & Lidl, Netto, Trader Joe’s
