D2.C1. Factors that Affect the Price of a Bottle of Wine – Supply and Demand

Question 1

What are the major factors which affect the price of the wine?

Answer 1

• Supply and demand
• Cost of growing the grapes
• Cost of production
• Cost of getting it to the end consumer

Question 2

What happens when supply of wine exceeds demand?

Answer 2

• 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

Question 3

What happens when demand of wine exceeds supply?

Answer 3

• Prices are likely to increase
• Some consumers may be willing to pay higher prices for some wines
• Some consumers may not be willing to pay more and may simply switch to another wine or a different drink category altogether

Question 4

What are the major factors which affect the supply and demand of wine?

Answer 4

• Social
• Economic
• Legislative
• Political

Question 5

What are the social factors which affect the supply and demand of wine?

Answer 5

• Changes in consumption habits
• Changing consumer preferences
• Changing in reputation
• Changing in spending patterns

Question 6

How did the global wine consumption changed since 2000?

Answer 6

It increased rapidly in the first part of the 2000s. However, it began to fall back again after the global financial crisis of 2008

Question 7

Which categories of wine became popular in the last decade?

Answer 7

• Rosé and sparkling wines
• Sparkling wine consumption has increased an average of 3 per cent annually between 2002 to 2018

Question 8

In which countries, wine consumption is falling or static?

Answer 8

In the ‘traditional’ wine-drinking countrie

Question 9

In which countries there have been significant drops in wine consumption?

Answer 9

France and Italy

Question 10

In which countries wine consumption is increasing?

Answer 10

• In 2011, the USA overtook France and Italy to become the country with the largest wine consumption worldwide
• Wine consumption has also increased significantly in China

Question 11

What is the main reason for the increase in wine consumption in China?

Answer 11

• China has a growing middle class and one way this group can show their improved wealth and status is by moving from local drinks to wine
• Whilst China has domestic wine production, many middle-class people aspire to drink imported wines

Question 12

What are the possible reasons for the decrease in wine consumption?

Answer 12

• Younger people drink less wine
  + This may be partly because they regard wine as old-fashioned
  + They are also spending less time in bars, preferring to contact their friends via social media
• Health concerns: There is an increasing awareness of the negative health effects of alcohol
• Changes in life style:
  + Less time for longer meals
  + Consuming alcohol during the working day is being increasingly forbidden by employers or not being regarded as socially acceptable
• Reduced availability of cheap wine: Various steps have been taken to reduce over production like pull schemes

Question 13

How do the preferences of the costumers change over time?

Answer 13

• In recent years, for example, rosé has become extremely popular, especially in the USA
• Prosecco sales in markets such as the UK and USA have increased significantly
• Due to the health issues there is also increased demand for lower-alcohol wines
• Drinkers are turning away from fortified wines (15–22% abv)
• Another style of wine which has gone out of fashion is medium-sweet German wines, such
  as Liebfraumilch

Question 14

What and who can increase the reputation of a wine?

Answer 14

• Good reviews from leading wine
  publications and critics (such as Wine Spectator in the USA or Jancis Robinson)
• Online influencers
• Key opinion leaders (KOLs)

Question 15

What does ‘price-sensitive market’ mean?

Answer 15

They are the countries like Germany and UK, where many consumers are unwilling to pay more than the lowest price possible for the style of wine they want to buy

Question 16

What are the options for producers for the price sensitive markets?

Answer 16

• Compete within a reduced price range
• Not to sell wine in that market

Question 17

What are the strategies of producers in price sensitive markets in order not to lose their customers?

Answer 17

• They may not pass on increases in production costs to consumers for fear of losing sales to competitors
• Some producers hope to avoid that problem by building up ‘brand loyalty’ for their product as part of their marketing campaigns

Question 18

What is ‘premiumisation’?

Answer 18

This means that consumers are increasingly willing to pay more for individual bottles of wine, often because they are buying less wine by volume

Question 19

What are the main economic factors that affect the demand for wine?

Answer 19

• Strength of economy
• Fluctuations in currency exchange
• Changes to the market

Question 20

How does the strength of economy affect the demand for wine?

Answer 20

• In a recession, wine consumers are likely to trade down to cheaper wines or switch to other, less expensive alcoholic drinks. For example, during the recession following the 2008 financial crash, demand for Champagne shrank whilst that for other, cheaper sparkling wines grew
• 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

Question 21

Fluctuations in currency exchange affect primarily which type of markets?

Answer 21

Price sensitive markets

Question 22

What are the options of the producer, if a wine-exporting country’s currency gains value compared to that of the importing country?

Answer 22

• Keep the price stable and risk losing sales
• Decrease the price of the wine and lose profit

Question 23

What are the options of the producer, if the exporting country’s currency loses value against that of an importing country

Answer 23

• Keep the price stable, which should boost sales
• Increase the price and improve profits for future investment

Question 24

What is the downside to a weak currency for a wine producer?

Answer 24

It costs producers more to import equipment and supplies, such as barrels, corks and yeast, which may offset any additional profits

Question 25

Can a weak currency be an advantage for wine export?

Answer 25

The wines were very competitively priced on the global market, which can boost sales just like it happened for Argentinean wines in early 21st century

Question 26

How does the changes in market affect the demand for wine?

Answer 26

• If a product disappears from a particular market, the demand for similar products may increase
• If supply is limited for a wine, it may also be possible to raise prices
• 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
  comtitive or look to alternative markets

Question 27

What are the main legislative and political factors that affect the demand for wine?

Answer 27

• Laws prohibiting or limiting the sale of alcohol
• Governmental policies to reduce the alcohol consumption
• Taxation
• International trade
• Wine laws

Question 28

What are the examples of governmental policies that limits the sale of alcohol?

Answer 28

• Alcohol sale is completely prohibited in a number of countries
• Some countries have state-owned monopolies in countries such as Sweden, Norway and Canada
• The three-tier system in USA
• Minimum legal drinking age
• Limiting the sales of alcohol to particular hours of the day

Question 29

Why is excessive consumption of alcohol is a concern in many countries?

Answer 29

• Illness and injuries caused by regular or heavy drinking are placing an increasing strain on health services
• Drunkenness is seen as a significant factor in criminal behaviour

Question 30

What are the examples of governmental policies to reduce alcohol consumption?

Answer 30

• 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
• The Scottish government is the first to introduce ‘minimum unit pricing. The minimum price of an alcoholic drink is GBP 0.50 per unit (75clx12%x0.5 =4.5 GBP)
• The blood alcohol concentration (BAC) limit varies between different countries, but tends to move in a downward direction

Question 31

What are the effects of imposition of taxes and duty on alcoholic drinks?

Answer 31

• Higher prices may reduce the consumption
• It is a major revenue generator for many governments

Question 32

How can level of duty varying between different categories of drink can influence demand? Give an example.

Answer 32

In the Republic of Ireland the large difference between the excise duty on still (EUR 3.19/bottle) and sparkling wines (EUR 6.37/bottle) has greatly reduced the demand for sparkling wine

Question 33

What is the aim of a country if it decreases the duty? Give an example

Answer 33

To make certain categories more competitive. In 2008, the government of Hong Kong abolished excise duty on wine altogether with the aim of becoming the ‘wine trading hub’ of East Asia

Question 34

What are the aims of custom duties (trade tariffs)

Answer 34

• Revenue generation
• To encourage the sale of domestic rather than imported goods

Question 35

How can trading relations between countries can affect the international trade? Give examples

Answer 35

• Some non-member states (such as South Africa and Chile) have entered into trade agreements with the EU, as a result of which they enjoy tariff-free or reduced-tariff trade, giving wines from those countries a competitive edge over those from Australia
• Since the UK has now left the EU, it may be able to negotiate free-trade arrangements with other countries, such as Australia, which could make Australian wine comparatively cheaper than EU wine
• US/China trade war
• Wine imports into Russia have fallen considerably due to various trade embargos imposed for political reasons on Russia and by Russia