D2C01/C02 Factors that Affect the Price of Wine - Supply, Demand, & Costs Flashcards Preview

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Flashcards in D2C01/C02 Factors that Affect the Price of Wine - Supply, Demand, & Costs Deck (108)
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Explain the 'perfect world' balance in supply and demand.

Producers would be able to sell all the wine they make at the price which

- covers the cost of production

- pays a dividend to any shareholders

- finances future investment

- still leaves a profit.

Consumers would be able to

- buy the wine they want

- of a style they enjoy

- at a price they are willing to pay.


Explain the effects when supply of a particular product exceeds demand, in very broad terms

Prices tend to fall as consumers have a greater choice of cheaper alternatives.

Producers therefore need to lower their prices (so reducing profits) to remain competitive.

However, the fall in prices may lead to increased demand which may benefit producers in the long run.


Explain the effects when demand of a particular product exceeds supply

Prices are likely to increase.

(Generally when perceiving that there are no alternatives,) consumers may be willing to pay higher prices for some wines.

Other consumers may not be willing to pay more and may simply switch to another wine or a different alcoholic drink altogether.


What are the generic factors affecting the demand of wine?

(A variety of)

  • Social factors
  • Economic factors
  • Legislative factors
  • Political factors

(These are all connected and cannot be considered in isolation)


What categories of habits and preferences of wine drinkers will affect demand?

Changes in...

  1. Consumption habits
  2. Consumer preferences
  3. Reputation
  4. Spending patterns


How did global wine consumption (habits) change since 2001?

  • Rapidly increased in first part of the 2000s
  • Fall back after global financial crisis in 2008, as many consumers reduced spending on non-essential products
  • Sales of still wines declined very slighlty in recent years
  • Sales of still wines due to remain stable to 2021
  • Strong growth seen in sparkling wine sales in recent years, due to continue to 2021


What are the top 5 countries for wine consumption?

  1. USA
  2. France
  3. Italy
  4. Germany
  5. China


How has wine consumption (habits) changed in the top 5 countries for wine consumption?

  • Falling or static in the 'traditional' wine drinking countries (e.g. France, Germany)
  • Increasing in countries were wine has not historically been a major part of culture (e.g. USA, China)


What is the country with the largest wine consumption worldwide? And how did this change in recent years?

  • In 2011, USA overtook France & Italy to become the #1 consumer of wine
  • Last 20-30 years wine drinking became part of mainstream culture


Which 2 drivers helped wine drinking to become mainstream culture in the USA?

  1. Increasing globalisation of food & drinks industry 
  2. Increased & improvements in wine production in USA's domestic market


What drives the wine consumption in China? And what wine markets profit from this?

China has a growing middle class that wishes to show their wealth and status by drinking wine instead of local drinks.

At first they chose primarily French wines (above wine produced domestically).

Not they are increasingly looking elsewhere, for example Australia and Chile, profiting from bilateral trade agreements.


Name 4 possible reasons for the falling wine consumption (in traditional wine drinking countries)

  1. Younger people drinking less wine
  2. Health concerns
  3. Changes in lifestyle
  4. Reduced availability of cheap wine


Why do younger people drink less wine in many countries?

  • Wine is regarded as as old-fashioned
  • They have turned to other alcoholic drinks (e.g. gin is fashionable in Spain).
  • Younger people also spending less time in bars, preferring to contact their friends via social media. 


What 2 lifestyle changes cause decreasing wine consumption?

  • Busy, modern lifestyles mean that there is often less time for longer meals at which wine was traditionally drunk
  • Consuming alcohol during the working day (lunchtime) is being increasingly forbidden by employers


How did consumer preferences change in recent years?

  1. Rosé has become extremely popular, especially in USA
  2. Prosecco has become popular, e.g. in UK
  3. Sparkling wine is increasingly popular globally
  4. Increased demand in lower-alcohol wines due to health issues
  5. Decreased demand in fortified wine (15-22%) due to health issues
  6. Medium-sweet German wines gone out of fashion


What can positively change the reputation of wines?

  1. Good review from leading wine publications and critics
  2. Online influencers and key opinion leaders (KOLs) in some markets
  3. Presence of certain wines in popular culture, e.g. product placement in films, TV series, music lyrics or celebrity lifestyle news
  4. Influence of peer opinions and behaviour


Define 'price-sensitive markets'

Markets in which consumers are unwilling to pay more than the lowest price possible for the style of wine they want to buy.

(Examples are UK, Germany)


Define 'premiumisation' of markets

Markets in which consumers are increasingly willing to pay more for individual bottles of wine, often because they are buying less wine by volume.

(examples are USA and partly even the 'price-sensitive' UK)


How do some producers hope to avoid losing sales to competition in price sensitive markets?

By building up 'brand loyalty' for their products as part of their marketing campaigns.


What economic factors will influence the demand for wine?

  1. Strength of the economy
  2. Fluctuations in currency exchange
  3. Changes to the market


How will the strength of the economy influence the consumer demand?

Sales of wine will change with the level of consumer disposable income (i.e. the amount of money a person has after paying taxes):

When disposable income falls, as in a recession, wine consumers are likely to trade down to cheaper wines or switch to other, less expensive alcoholic drinks (e.g. beer or cider).

When an economy is growing, such as has been seen in China, disposable income increases and consumers are often willing to buy more expensive wine.


Explain the effect of currency exchange on wine demand.

If a wine-exporting country's currency gains value cf. the importing country, the exporter can:

- Increase the price of the wine, risking losing sales to another country.

- Keep the price stable and lose profit.


Conversely, if the exporting country's currency falls in value cf. the importing country, the exporter can"

- Lower the price of the wine, potentially boosting sales.

- Keep it stable, and improve profits for future investment.


What is the downside of a weak currency (next to the positive effect of an improved price advantage)?

The downside to a weak currency, however, is that it costs producers more to import equipment and supplies, such as barrels, corks and yeast, which may offset any additional profits.

Nevertheless, the recent boom in Argentinian wines can be traced back to the early 21st century when a weak peso meant the wines were very competitively priced on the global market.


Explain the effects if a product disappears from a particular market.

If a product disappears from a particular market, supply decreases. This will create opportunities for the competition, which could increase their sales.

However, the introduction of a 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.

On a very simple level, for example, if a supermarket has run out of Echo Falls White Zinfandel, demand for Blossom Hill White Zinfandel may increase (or vice versa). If supply is limited, it may also be possible to raise prices.


Name 5 legislative and political factors influencing demand

  1. Laws prohibiting or limiting the sale of alcohol
  2. Government policies to reduce alcohol consumption
  3. Taxation
  4. International trade (agreements)
  5. Wine laws

These factors vary from country by country.


Name some examples of laws prohibiting or limiting sale of alcohol

  • The sale of alcohol is completely prohibited in a number of countries.
  • Other countries permit sales but these are tightly-controlled: for example, by limiting the sale of alcohol to state-owned monopolies and the USA's three-tier system. Any such controls inevitably limit the supply of wine and usually increase prices. 
  • Even in countries where alcohol is freely available, there is usually a minimum legal drinking age and sales of alcohol are generally limited to particular hours of the day.


Why is excessive alcohol a concern in many countries?

Excessive consumption of alcohol is a concern in many countries. Illness and injuries caused by regular or heavy drinking are placing an increasing strain on health services and drunkenness is seen as a significant factor in criminal behaviour.


What is the Loi Evin?

In France, the Loi Evin introduced in 1991, has greatly restricted the advertising of alcoholic drinks and is considered a significant factor in the reduction in wine consumption in France.

However, as a result, France is not now regarded by other wine-producing countries as a market with growth potential for premium wines.


What policy did the Scottish Government implement to reduce alcohol consumption?

The Scottish Government is the first to introduce ‘minimum unit pricing’ to reduce the availability of cheap alcohol.

The minimum price of an alcoholic drink will be GBP 0.50 per unit.

Therefore, a 75cl bottle of white wine with 12% abv (i.e. 9 units as defined in the UK) must cost at least GBP 4.50. Bottles were previously available for as little as GBP 3.


What policies do countries implement to reduce death and injury in traffic?

Most countries impose a limit on the amount of alcohol that can be consumed before a person drives a motor vehicle.

The Blood Alcohol Concentration (BAC) limit varies between different countries but tends to move in a downward direction as countries try and reduce death and injury caused by drunk drivers.

For example, both New Zealand and Scotland have recently reduced the maximum BAC from 80mg/100ml to 50mg/100ml.

However, this is still higher than some countries: the maximum BAC in Norway and Sweden, for example, is 20mg/100ml.