D2 Wine business - 2020 Flashcards
What are costs that contribute to the price at which producers and retailers would like to sell the wine?
Costs of
- growing the grape
- producing the wine
- getting it to the end consumer
How is the price of the wine determined?
By the concept of supply and demand.
What happens when supply of the wine exceeds demand?
Prices tend to fall as consumers have a greater choice of cheaper alternatives. Producers may therefore need to lower their prices (so reducing their profits) to remain competitive. However, a fall in prices may lead to increased demand which may benefit producers in the long run.
What happens when demand of the wine exceeds supply?
Prices are likely to increase. While consumers may be willing to pay higher prices for some wines (generally if they perceive that there are no alternatives available), for other wines consumers may not be willing to pay more and may simply switch to another wine or a different alcoholic drink altogether
What factors influence the demand for wine in general or demand for wine of a particular country, region, grape variety, style of price?
A variety of social, economic. legislative and political factors. These are alle connected and cannot be considered in isolation.
What are social factors that influence the demand for wine?
- changes in consumption habits
- changes in consumer preferences
- changes in spending patterns
What is the IWSR?
International Wines and Spirits Record
What can you tell me about changes in consumer habits when talking about social factors?
In general, wine consumption has been falling in traditional wine-drinking countries and rising in others.
In the USA the consumption is rising due to increasing globalisation of the foods and drinks industry as well as both increases and improvements in wine production in the domestic market.
In China it is a sign of wealth to move from local products to wine.
What are reasons where wine consumption is falling?
- younger people drink less wine
- health concerns (e.g. Loi Evin in France)
- changes in lifestyle
- reduced availability of cheap wine
What can you tell me about changes in consumer preferences when talking about social factors?
- Rose has become popular
- Sparkling wine has become popular
- There is a demand for lower-alcohol wines
- There is less demand for fortified wines
- There is less demand for medium-sweet German wines
What can you tell me about changes in reputation when talking about social factors?
If a Key Opinion Leader has a good review of the product, this is very valuable for the producer and can encourage them to increase their prices.
A bad review has, if any, little impact on the price of the wine and this will take years.
What can you tell me about changes in spending patterns when talking about social factors?
In some markets, such as in Germany and UK, consumers are unwilling to pay more than the lowest price possible (Price Sensitive Market). In the USA many consumers are willing to pay above the minimum price in order to buy a wine which they perceive to be of better quality.
Competition is fierce in price sensitive markets so many producers try to build up ‘brand loyalty’ so they can up their prices.
Spending patterns are slow to change. Premiumisation has been a trend, this means that consumers are willing to pay more for individual bottles of wine, often because they are buying less wine by volume
What are economic factors that influence the demand for wine?
- strength of the economy
- fluctuations in currency exchange
- changes to the market
What can you tell me about the strength of the economy when talking about economic factors?
Sales of wine will change with the level of consumer disposable income.
What can you tell me about fluctuations in currency exchange when talking about economic factors?
Changes in exchange rates have a significant effect, especially in price sensitive markets.
If a wine-exporting country’s currency gains value compared to that of the importing country, a producer has two options: increase the price of the wine and therefore risk losing sales to another country’s wines or keep the price stable and lose profit.
In contrast, if the exporting country’s currency loses value against that of an importing country, a wine exporter can either lower the price of the wine, which should boost sales, or keep it stable and improve profits for future investment
What can you tell me about changes to the market when talking about economic factors?
Markets are changing and when companies or products disappear, the supply decreases, creating opportunities for the competition. If supply is limited, it may also be possible to raise prices. However, the introduction of new lower-priced or better-value wine may cause a fall in demand for other similar products and may force producers to lower their prices to remain competitive or look to alternative markets
What are legislative and political factors that influence the demand for wine?
- Laws prohibiting or limiting the sale of alcohol
- Government policies to reduce alcohol consumption
- Taxation
- International trade
- Wine laws
What can you tell me about laws prohibiting or limiting the sale of alcohol when talking about legislative and political factors?
For example state-owned monopolies or the USA’s three-tier system. Any such controls inevitably limit the supply of wine and usually increase prices. Other examples are minimal drinking age, or limiting the sale of alcohol to particular hours of the day
What can you tell me about government policies to reduce alcohol consumption when talking about legislative and political factors?
For example, Loi Evin in France. Introduced in 1991, had greatly restricted the advertising of alcoholic drinks and is considered a significant factor in the reduction in wine consumption in France. As a result, France is not considered a market with growth potential.
The Scottish Government is the first to introduce ‘minimum unit pricing’. The minimum price of an alcoholic drink will be GBP 0,50 per unit.
Most countries impose a limit on the amount of alcohol that can be consumed before driving: Blood Alcohol Concentration limit. The imposition an tightening of drink-driving laws have been shown to reduce alcohol consumption
What can you tell me about taxation when talking about legislative and political factors?
Sales tax (or VAT) applies to alcoholic drinks in the same way as other products, this is paid at the point of sale. Many countries also impose specific excise duties or taxes on alcohol, which are payable at the point of manufacture. Because level of duty usually varies between different categories of drink, it can influence demand. For example, the large difference between the excise duty on still (3,20/bottle) and sparkling wine (6,37/bottle) has greatly reduced the demand for sparkling wine. In Hongkong the excise duty has been abolished with the aim to become the 'wine trading hub' of East Asia.
What can you tell me about International Trade when talking about legislative and political factors?
The value of wine exports has more than doubled during the last fifteen years. Trading relations can fluctuate over time. Many countries impose customs duties (trade tariffs). In the EU, member states can import and export products between themselves tariff-free. Tariffs can be reduced by trade agreements (South Africa and Chile - EU).
A country can also ban imports from or exports to a particular country (embargo). E.g. Russian wine imports have fallen considerably due to various trade embargos imposed for political reasons on Russia and by Russia.
What can you tell me about wine laws when talking about legislative and political factors?
PDO and PGI can have a significant impact on the level of supply of wine.
The creation of a GI can increase recognition and demand for wines from that region and allow producers to increase the price of their wines.
In Europe, PDO rules can be very strict, limiting producers to certain grape varieties, methods of production, maturation periods and so on, whereas producers outside the EU are rarely subject to such limitations.
In China (2012) the government wanted to stop lavish gifting, the tradition of showing respect to business colleagues, customers or suppliers by giving gifts - the more expensive the better. Often these gifts were super-premium prices wines. Demand for those wines dropped almost immediately
What are production factors that influence the supply of wine
- area under vine
- human factors
- natural factors
What can you tell me about area under vine when talking about production factors?
Area under vine is the size of the vineyard planting. The greater the area under vine, the greater the volume of wine that can be produced. It has fallen in Europe in the 21st century.
There has been growth outside Europe and this is largely due to the establishment of new vineyard ares, particularly in China which now has the second largest area under vine in the world.
What are factors that influence the area under vine?
- Vine pull schemes (mid 1980) EU wine productions was greater than demand creating the ‘wine lake’. Growers were paid to pull up poor quality vines
- EU restrictions on planting new vineyards. to reduce wine productions there was also a limit on planting new vineyards.
- Conversion of vineyard land to other uses. Wine grapes are a low value agricultural crop and growers may want to switch to higher value products
- Abandonment of rural areas. Rural economies are suffering from a lack of labour and investment and it is sadly not uncommon to see abandoned vineyards, even in prestigious wine regions
What can you tell me about human factors when talking about production factors?
The relaxation of laws banning irrigation of vineyards in Spain, which means that areas that were previously not able to support vines are now viable, and the increased use of more modern higher density planting have increased production in certain areas, which has offset the reduction in the area under vine.
Modern techniques, such as better site selection, clonal selection, improved canopy management and pest and disease control. have mad it possible to produce a greater amount of healthy grapes
What can you tell me about natural factors when talking about production factors?
Variation in weather conditions from year to year can also have a significant impact on the volume of wine produced. In Europe is weather variation very visible in vintage variation. Longer-term climate change is also threatening wine production, such as serious droughts in South Africa and California.
What are legislative factors that influence the supply of wine?
The main legislative influence on the supply of wine is the increasing number of GIs. Outside the EU there are systems such as American Viticultural Areas, Wines of Origin in South Africa and Geographical indications of Australia, these have none of the strict rules found in the PDO system of Europe.
One aim of GIs, especially in Europe, is to define the style of wine produced in a particular region. Another aim is to bring supply and demand more into line and so reduce the risk of downward price pressure.
In Europe PDOs have a governing body which helps set and enforce the rules. In the 1970s the French introduced the vin de pays system, which formed the basis of the European PGI system to offer greater freedom.
What are challenges is there is an oversupply of wine?
Global wine production has consistently exceeded global wine consumption. Prices tend to fall as consumers can easily find a cheaper alternative. Producers may end up with unsold wine in tank. However, they can also try to find new markets and outlets for their wine.
Also, an option is to bottle the wine under a different label and offer it to a supermarket, deep discounter, bar or restaurant as a private label wine.
I f a producer is forced to sell their wine at a lower than usual price, or if a retailer orders too much wine and the has to lower the price to sell it, this can devalue the ‘brand image’ of the wine and create lasting damage to the brand
What are challenges if there is an undersupply of wine?
A global lack of supply of wine is unusual although it an happen: for example, following the bad harvests across Europe in 2017. However, undersupply is more common in the case of particular wines.
If a producer is not having enough wine to sell, disappointing clients and leading to strained business relationships. If the producer has a contract with a large retailer, they may impose a financial penalty or cancel the contract if the required volume of wine is not available.
An excess of demand over supply would result in an increased price for the product.
What are different grape growing costs through the supply chain?
- Vineyard establishment
- Vineyard management
What can you tell me about vineyard establishment when it comes to grape growing costs through the supply chain?
First of all, the land has to be bought. The prices reflect te land’s potential to produce high-quality fruit and the name of the appellation within which the vineyard is situated. Scarcity of land increases the price. Other costs are for:
- surveying the land
- site clearance
- building access roads
- buying and planting vines
- buying stakes and wires
- installation of deep drainage channels and pipework
- establishing irrigation system
- protections against weather hazards
- protection from animal pests
- buying machinery and equipment
These costs are capital costs. These are high plus the vines take three years to production. To find a way to fund these capital costs, loans are an option (interest and capital repayment) or funding from investors (return on investment and share on profits).
Another option, if available, are subsidies in the form of tax incentives or lump-sum contributions
What can you tell me about vineyard management when it comes to grape growing costs through the supply chain?
Costs involved in running the vineyard are:
- Labour. With a balance found in the cost of labour and the capital costs of machinery
- Machinery and equipment running costs
- Vineyard materials
- Vineyard treatment
- Water
- Electricity
What are different winemaking costs through the supply chain?
- Winery establishment
- Winemaking costs
- Maturation
- Packaging
What can you tell me about winery establishment when it comes to winemaking costs through the supply chain?
Winery establishment is a capital cost. Costs are mainly in the equipment and building the winery
What can you tell me about winemaking costs when it comes to winemaking costs through the supply chain?
Winemaking costs are ongoing costs, they include:
- labour
- machinery and equipment running costs
- winery materials
- bought-in fruit
- water
- electricity
What can you tell me about maturation when it comes to winemaking costs through the supply chain?
The winery needs storage place for maturation. Also new oak barrels can be very expensive and add to the production costs. There is skilled labour needed to monitor the maturation.
There is the loss of cashflow by storing the wine for maturation.
What can you tell me about packaging when it comes to winemaking costs through the supply chain?
Bottles, closures, labels (plus design), cartons and pallets. Also a bottling line will be required, this can either be bought or rented (with the labour to operate it)
What are different transportation costs through the supply chain?
There are different costs involved in tranportation of wine:
- transportation of wine in bottle
- bulk transportation
- insurance
What can you tell me about transportation of wine in bottle when it comes to transportation costs through the supply chain?
Transportation of wine in bottle is the most common way. It is carried out by freight forwarders, most of them specialise in the transportation of wine. The specialist freight forwarder takes steps to limit the risk of loss or damage, such as using highly-specialised temperature-controlled shipping containers.
Four ways of transportation, most to least expensive:
- Air
- Road
- Rail (containerization)
- Sea (containerization) (slow)
What can you tell me about bulk transportation when it comes to transportation costs through the supply chain?
Bulk wine is either transported in plastic flexitanks or non-flexible ISO tanks.
One key advantage of bulk transportation is that the wine in tank is much lighter than in bottle, much more efficient en thus cheaper. Disadvantage is it is only suitable for moving large volumes of the same wine. If a single consignment is less than 15000 cases there is no cost advantage of transporting in bottle.
What can you tell me about insurance when it comes to transportation costs through the supply chain?
Insurance is needed during the journey. The party taking out the insurance should be the one which assumes the risk for loss or damage. Using a specialist freight forwarder should reduce the risk and many offer insurance as part of their service.
What are importation costs through the supply chain?
Other than customs duties and taxes, different countries also have different labelling laws. Like the exact abv or a health warning.
Distributors are employed to learn about different requirements and comply with them, to deal with foreign markets. They charge a fee, the margin. The margin is usually quoted as a percentage and is calculated as the profit divided by the revenue. Margins range from 5-25 percent. Distributors selling to hospitality are more expensive than those who are specialised in the retail sector.
What are sales costs through the supply chain?
- Property costs
- Labour
- Equipment and materials
- Storage costs
- Delivery costs
- Margin at the point of sale
What can you tell me about property costs when it comes to sales costs through the supply chain?
For both retail and hospitality the property costs are high. Either in capital investment and maintenance or in a lease with rent (and a possibility that the lease will end). Retail premises are often located in prime locations, and thus more expensive.
For online retailers, property costs will be lower as they only need to buy or lease warehouse space.
What can you tell me about labour when it comes to sales costs through the supply chain?
Labour costs vary according to the type of retail outlet. Supermarket labour is cheap, specialist wine retailers will employ highly knowledgeable staff and these people are more expensive.
Non-destination restaurants do not need to employ wine specialists, where as in fine dining there is even a head sommelier.
What can you tell me about equipment and materials when it comes to sales costs through the supply chain?
The requirements vary considerably between different types of retail outlet. Between a shop and a restaurant.
What can you tell me about storage costs when it comes to sales costs through the supply chain?
Either on the retail premises in expensive wine fridges or in the costs/lease of a warehouse plus the travel
What can you tell me about delivery costs when it comes to sales costs through the supply chain?
Delivery to the end consumer is one of the most expensive elements of the supply chain. Wine is heavy, fragile and there is a risk that bottles are broken
What can you tell me about margin at the point of sale when it comes to sales costs through the supply chain?
Retailers needs to make a profit, the amount of margin varies. Specialist wine retailers usually look for a margin of 30-50%. In many bars and restaurants, the margin can even be 66,6%
