Factors that affect the price of a bottle of wine

Question 1

Exlpain the purpose of soring wine in a bonded ware house, a practive that is often seen in the UK.
What is the purpose of this?

Answer 1

• In UK excise duty is payable on imported wines unless it is sored in a bonded warehouse.
• Importers/distributors can choose to pay duty on wines upon their entrance (storing them in their own facilities) or storing in the BW until someone wishes to buy.
• the purchaser will then cover the cost of taking the wine out of bond (duty).

PURPOSE: hiring space in BW costs $$$, but it means that retailers don’t neet to use their own to pay duty, which can aid cashflow.

Question 2

What are the risks involved with long-distance transportation of wine?

What do most wineries do to combat these risks?

Answer 2

Risks:
- broken bottles
- spoiled wine due to fluctuating temperatures, direct sunlught, excessive vibrations.

Wineries will use “Freight Forwarders” to combat these risks:

• Specialized in safely transporting wine, e. g. JF Hillebrand.
• Using highly specialized temp-controlled shipping containters in order to limit risk of loss or damage.
• Insurance against broken bottles or spoiled wine.
• More expensive than general multinational logistics companies.

Question 3

What costs are associated with transporting wine by ROAD?

When is this method of transportation used?

Answer 3

Road transportation:
- Efficient for short distances (e. g. Epernay - Brussels)
- Too expensive for long distances (e.g. Mendoza - NY)
- For short distances across water (e. g. English Channel or Irish Sea), Truck can easily move on and off ferry = quickest and cheapest way of moving goods through a port.

Question 4

What are the stages of factors that affect the price of bottle of wine, from vineyard to POS?

Answer 4

Factors affecting the price of a bottle of wine:
- Grape growing costs
- Winemaking costs
- Transportation costs
- Importation costs
- Sales costs
- Marketing costs
- Taxes
- Currrency fluctuations

Question 5

How does entering a conctract to fix the exchange rate help the wine industry mitigate the effects of currency fluctuations?

Answer 5

• retailers which do a lot of business in a particular currency will enter into a formal contract with a bank or an other supplier to puchase a given amount of currency at an agreed rate on a specifed date.
• even though rate may fluctuate, gives retailer certainty of fixed rate, allown them to budget accordingly.

Question 6

What vineyard establishment costs are involved with Animal/Pest/Fungus/Prevention?

Answer 6

PEst prevention:
- Animals: high fences, electric fences, netting
- Pests: pesticides
-Fungus: Fungicides

Question 7

What are the categories of winemaking costs?

Answer 7

Winemaking costs:
- Winery establishment
- Grapegrowing costs or the cost of bought-in fruit
- Labor
- Machinery/ equipment running costs
- Winery materials
- Water
- Electricity
- Maturation
- Packaging

Question 8

Using Champagne as an example, explain how scarcity of land can affect its price?

Answer 8

Scarcity of land:
- Land in prestigiours appellations, e.g. Champagne rarely comes on the market.
- When it does = sold to the higherst bidder.
- Land is finite: GI laws limit the geographic area in which wine can be produced under the Champagne AOP

Question 9

What vineyard establishment costs are involved with Weather Hazards?

Answer 9

Establishing windbreaks, anti hail protective mesh, frost protection (sprinklers, smudge pots, wind machines)

Question 10

What legal factors might influence producer’s decision on whether or not to enter a market?

Answer 10

As has already been seen, the cost of win

Question 11

How can appelation laws regarding maturation affect a winery’s cash flow?

Answer 11

• A large amount of money can be tied up in maturing stock.
• Though most wine is realeased 1-2 years after harvest, some appellation laws require greater aging requirements. e.g. Brunello di Montalcino DOCG 5 years aging total (2 in oak).

Question 12

Factors that affect costs associated with Labor?

Answer 12

Labor cors factors:
- Depends on size/topographical feature e.g much higher in steep Mosel Valley (hand harvesting) vs flat Central Valley of Cali.
-

Question 13

Identify the types of costs associated with vineyard Management

Answer 13

Vineyard Management costs:
- Labor
- Machinery and equipment running consts
- Vineyard treatments
- Water
- Electricity

Question 14

What costs are incurred due to Margin at POS?

Answer 14

Retailers must make profit to be financially viable.
- Specialist Retailers 30-50%
- Bars & restaurant closet to 66% i. e. 3x cost
- Profits are usualy higher on wines available by the glass, as once opened risk of spoilage before the bottle has been emptied.

Question 15

How do different types of retail outlets icnur different costs of equipment and materials?

Answer 15

Vary considerably between different types of retail outlet
- Specialist wine retailer: at the very minimum, a till system, a fridge (if chilled wine is to be sold), shelving, display cabinets and cleaning equipment.
- Restaurant: will need much more, including kithcen and bar equipment, tablewere, and glasses. food service profits can help cover cost

Question 16

What are the initial costs associated with vineyard establishment?
How can these costs vary?
2 examples?

Answer 16

Initial cost relate to buying or renting the vineyard land
Price of land varies widely from one site to another, even within the same region.

e.g. Californial land prices in Napa Valley can be 10x higher than in the Central Valley

e.g Bordeax; land prices in most prestigious Medoc AOP’s can be 100X higher than generic Bordeaux AOPs

Question 17

How do labor needs/costs in the vineyard vary at different times of year?

Answer 17

Durin harvest:
- If by hand producer will hire a team of pickers, can be unskilled as harvesting procedure can be quicly taught.
- If machinery is used, number of staff can be reduced, but staff must be trained to operate equipment.
- Labor is cheap, but if scarce, workers can choose to work for highest bidder.

Question 18

Explain how fluctuations in currency can affect the cost of wine?

Answer 18

The constant fluctuation of the exchange rate between currencies can affect the price of the wine considerably.

• If the exporting country’s currency gains valye compared to that of the importing country = Importing will be more expensive and vice versa
• These small differences can become significant if the order is for a large number of bottles and can impanc on the profits which the producer or the buyer might earn.

Question 19

What are the costs associated with establishing a new vineyards?

Answer 19

Vineyard establishment costs:
- Surveying the land
- Site clearance
- Building acces roads
- Buying and planting vines
- Buying trellising materials
- Installing a drainage system
- Installing an irrigation system
- Protection against weather hazards
- Protecton from animal pests
- Buying renting machinery and equipment

Question 20

Wha winemaking costs are associated with maturation?

Answer 20

Costs of maturation:
- Storage if maturated at the estate
- Vessels (new oak can be expensive, oak alternatives e.g. staves/chips can save significantly)
- Labor needed to monitor maturation.

Question 21

What are the 3 categories of marketing costs?

Answer 21

Labor
Design and productio of bottles and labels
Marketing campaigns

Question 22

Hoe does trading in USD/EUR help the wine windustry mitigate the effects of currency fluctuation?

Answer 22

• producers in countries with unstable currencies prefer to trade in more stable currencies, e.g. USD/EUR
• if producers also purchase vineyard/winery materials in USD or Eur, minimizes the number of exchanges, less vulnerable to fluctuations in domestic currency

Question 23

What vineyard establishment costs are involved with buying machinery and equipment?

Answer 23

Machinery and equipment
- Tractors, spraying equipment, harvesting machines ( plus garages, sheds for them).
- Rented by smaller producers who cannot jistify the expense, especially if it’s only used once a year

Question 24

What kind of labor costs are involved in Marketing

Answer 24

• Larger producers = in-house marketing teams
• Smaller producers = external marketing team which is paid for services
• Producers may be members of industry association, e. g. consorzio in Italy, VDP in Germany, ora trade body, e.g Wines of Australia, Wines of S. Africa. These organiastions will help with marketing but are member funded, so $$$

Question 25

What costs are incurred in tems of delivery to the end consumer? What are some options available to retailers in terms of administering these fees?

Answer 25

Delivery to consumer is one of the most expensive elements of the supply chain - Heavy, fragile bottles / risk of breakage or spoilage in transit - End consumer will be expected to pay for delivery, but some retailers wsh to circumvent this. Options: - Fixed fees, knowing that it might ocst retailer more to deliver wine, depending on size of order. - Higher fees for delivery on specific days or at specific times. - Free deliviery for orders over certain amount of money, therefore fiving a discount without reducing price of wine.

Question 26

What are the different categories of sales costs?

Answer 26

Sales costs: - property costs - equipment and materials - labor - delivery costs - storage costs - margin at POS

Question 27

What winemaking costs are associated with labor?

Answer 27

- Usually a small staff number of skilled full-time staff. - Some casual labor may be needed during harvest time for unloading crates / moving equipment.

Question 28

What vineyard establishment costs are involved with drainage capabilities?

Answer 28

Installiong deep drainage channels and pipework.

Question 29

What vineyard management costs are associated with water usage?

Answer 29

Irrigation: paymanet to authorities for right to extract water from river/purchased from elsewhere. In dry years proce of water can rise, making irrgation to expensive and grape growin unprofitable.

Question 30

What does the price of land reflect in terms of its characteristics?

Answer 30

The price of land reflects; - The potential to produce high-quality fruit - The name/specificity of the appellation itself (e.g. Bordeax AOP vs Pauillac AOP) - The scarcity of the land

Question 31

What winemaking costs are associated with packaging.

Answer 31

Packaging associated costs: - Bottling line purchase: might be more cost-effective to outsorce bottling as it is usually only used once a year. -Materials: bottles, closures, labels, cartons, pallets. Heavy/ unusually shaped bottles, elaborate labels (embossed/textured paper) costs more. - Labor also required to run bottling line, packege wine, design labels ( and even bottles)

Question 32

What are the 2 categories of grape growing costs?

Answer 32

1. Costs of establishing a new vineyard 2. Ongoing costs of managing the vinayrd and growing grapes.

Question 33

What vineyard establishment costs are involved with surveing land?

Answer 33

Checking suitability for viticulture and appropriate grape varietal choices (satellite imaging and soil samples may be involved).

Question 34

How does fixing the pice in currency of importer at date of ordering help those in the wine industr mitigate the eefects of currency fluctuations?

Answer 34

- Shifts currency risk to producer from retailer, so producer may charge a premium. - Usually, prices are set in currency of producer = cartainty of how much $ they will receive - Retailers prefer this method, so they can work oiut retail prce according to amount paid. - Not agreeing on price means subsequent changes in egchange rate coud result in paying higher or lower prices on delivery

Question 35

What vineyard establishment costs are involved with establishing an irrigation system?

Answer 35

Irrigation system: - Buying reservoirs, pipes, pumps, sprinler, dripper systems - Drilling boreholes, laying pipes, installing pumps for underground water

Question 36

What vineyard management costs are associated with vineyard treatments?

Answer 36

Conventional: - Herbicides, pesticides, fungicides. - Usage can be reduced using integrated pest management. Organic/Biodynamic: - Smaller amounts of traditional treatments (sulfur/Bordeaux mixture)

Question 37

What winemaking costs are associated with brought-in fruit?

Answer 37

- Costs of buying the grapes - Vary significantly according to the quality of the grapes, the grape variety and the vintage - If a winery has to meet a low price-point, it could blend cheaper varieties (e. g. Airen, Ugni Blanc, Colombard or Semillon) with a more expensive variety (e.g. Chardonnay) to redyce the production costs.

Question 38

What is a distributor's Margin and how is this calculated?

Answer 38

The margin is the percentage of the revenue from of a wine that is kept as profit by the distributor. FEE (added onto cost) devided by REVENUE e.g. if cost of wine to distributor is 10$ and they add a 1 $ fee, then margin is 1/(10+1)= 9.09% margin.

Question 39

What cossts are involved with property costs? What are the two main options?

Answer 39

Propertu costs: - Premises, esp. restaurants/bars tend to be in prime location which are most expensive - Decorating/furnishing to suit image - Running costs maintenance, security, water, energy, insurance - Online only retailers: costs be less expensive, away from city centers. Two options: - Lease = cheaper initially, may be forced to move out, more flexibel - Buying = high capital costs, can be funded via loan or mortgage.

Question 40

What vineyard management costs are associated with machinery/equipment?

Answer 40

- Machinery fuel - Machinery maintenance - Vineyard materials (replacement/vines/trellising).

Question 41

What winemaking costs are associated with electricity usage? What can be done in order to conserve electricity usage?

Answer 41

- Significant amounts of electricity are needed for refrigeneration, ventilation, presses, pumps, lighting. - To save on these costs, some stages generate their own electricity (e.g. with solar panels)

Question 42

How can a vineyard site's reputation affect land prices?

Answer 42

Good reputation > more demand > higher wine prices> higher land price e.g. California; Napa Valley (more $$$) more known for producing grapes from which premium-super premium wines are made vs Central Valley (less $$$) more associated with bulk wine.

Question 43

How do different types of retail ooutlets icur different cost for storage?

Answer 43

Individual bars, restaurants and shops - Will usually store their wine on the premises. - They may invest in expensive wine fridges to keep the wines at a constant cellar temperature. - In some cases a lack of storage space means they have to keep the wine in external storage until it is needed, icurring additional costs for the storage space and transporting the wine to and from it. Larger chains (especially of supermarkets and shops) - Have centralised werehouses where the wine is stored ( often in a cheaper easily accessible out of town location) and then distributed to branches as and when needed

Question 44

What retail costs are ivolved with labor?

Answer 44

Labor costs: - Cost vaires according to skill level and type of outlet - Supermarket (low skilled staff, low labor costs) vs specialized wine retailers ( highly knowledgeable staff that can engage with customers and advise them) Bars& restaurant labor costs - higher than shops ( wait staff, cleaning staff). - Training staff is a significant business costs.

Question 45

Factors that affect vineyard management costs associated with labor?

Answer 45

Labor cost facotrs: - Depends on size/topographical features, e.g much higher in steep Mosel Valley (hand harvesting) vs flat Central Valley of Cali. - Viticultural choices: Organic/Biodynamic are more expensive due to additional procedures which must be carried out. - The country general labor costs: If labor costs are low and plentiful (e.g. Chile) less incentive to invest in equipment vs labor costs are high and scarce ( e.g. Coonawarra), machinery is better option.

Question 46

What winemaking costs are associated with winery establishment?

Answer 46

Winery establishment - Purchase land to build the winery. - Buying the equipment: presses, tanks, pipses, pumps, refrigeneration, bottling line

Question 47

What legal factors might influence a producer's decision on whether or not to enter a market?

Answer 47

The cost of wine can be affected by various types of lefilstation including - Taxes, duties, subsidies, minimum pricing - Trade barriers: If import duty is to high it might not be possible to sell the wine at a competetive price and simply choose to focus on other markets - Labelling laws: onerous labelling laws may put off new entrants to a particular market.

Question 48

How does opening a foreigh currency account in a local bank help the wine industry mitigate the effects of currency fluctuation?

Answer 48

- Buyer can open a foreign currrency account in local bank, therefore paying for goods directly in sellers currency. - foreigh currency still neds to be purchased, migh not be an effecient usage of funds to have large amounts of $ tied up in foreign $ - more useful when many processes are being conducted using the same currency e.g. equipment bought from Italy, manufacture in UK, selling in Germany = all euro transactions. - less useful whe good are bought in one currency and sold in another

Question 49

What are the CONS of a producer using a distributor

Answer 49

- distributors charge a fee which adds to final costs of wine. - delivery charges may levied on retailers/restaurants.

Question 50

What is the normal range for a wine distributor's margin? What factors affect the margin? Howcan a retailer/producer avoid having distrubutor margins added to their costs?

Answer 50

- differs from distributor to distributor, market to market, but typically 5-25% margin. - generally, selling to hospitality = higher cost and larger staff = higher margins cs retail sector. - margins can be avoided if retailer buys directly from producer, but not always legal and many find having a reiliable distributor is worth paying for.

Question 51

What are the PROS of a producer using a distributor?

Answer 51

- saves significant amounts of time need to lear abot the target/foreign market. - distributor already has knoledge, contancts and established network of potential retailers/ restaurants to sell to.

Question 52

What are the categories of costs associated with importation?

Answer 52

- Custom duties and taxes. - Labeling laws ( multiple labels needed for different markets) - Distributor costs.

Question 53

Ho do labelling laws affect importing costs?

Answer 53

Different territiories habe different labelling restrintions. therefore if the wine is to be sold in multiple markets, multiple labels will need to be made = more $$$ Examples: - EU: ABV must show the nearest whole or half unit - US: the ABV permits a 1,5% variance - US wine will have to be realabeled whe going into the EU market. US - requires a health warning on labels

Question 54

What is essential to correctly insured wine transportation? Who usually pays for it? What can a producer do to avoid dealing with transportation?

Answer 54

- It is essential that wine is correctly insured throughout its journey,, in case it is lost, damaged or spoiled. - It is usually the party sending the good that wille take the insuarance: - The winery will be responsible for ensuring the wine makes it safely to its distributor. - The distributor will then be reponsible for getting wine safely to retailers. - Using specialist wine freight forwarders (e.g. JF Hillebrand) lessens there risks + usually offer insuarance as part of service.

Question 55

How has the volume of wine transported in bulk changed in the past decade? What are the 2 methods of transporting wine in bulk?

Answer 55

Bulk wine shipping: - Large increase in the past decade - Still favored for cheaper wine (In 2019: 34% in volume but only 8% in value) - Increasing interest in transporting more expensive wines in bulk too Two methods: - Flexitanks (Flexible- Plastic) - ISO tanks (Non flexible - Stainless steel)

Question 56

What costs are associated with transporting wine by RAIL? When is this method of transportation used?

Answer 56

Rail Transportation: - Cost vary due to lentght of jouner + route + method of loading goods. - Individual pallets: freight costs would be too high. - Containerization: the goods are loaded into a standard container which is lifted onto the back of a wagon

Question 57

What are the CONS of transporting wine in BULK?

Answer 57

CONS af transporting wine in BULK: - Only suitable for moving large volumes of the same wine, e. e. if vol is less than 15k cases = no cost advantage to bulk transport. - Suitable for supermarkets/major brands, but nor smaller-production wines.

Question 58

What winemaking costs are associated with winery materials?

Answer 58

- Sugar (for enrichment) - Deacidification agents (e.g. calcium carbonate) acid for acidification (tartaric acid) - Cultured yeasts - CO2, inert gases - Fining/filtering agents.

Question 59

How does buying currency to cover specific orders help the wine industry mitigate the effects of currency fluctuation?

Answer 59

- only viable for larger companies which have the in-house skills necessary to manage currencies in this way. - currency is purchased in order to cover wine purchase contracts; not considered speculation!

Question 60

What are the PROS of transporting wine in BULK?

Answer 60

PROS of transporting wine in BULK: - Much ligher to transport than in bottles - Much more efficient: A standard shipping container can hold around 10,000 litres of bottled wine, whereas the largest flexitanks can carry up to 24,000 litres of wine in bulk and ISO tanks can hold up to 26,000 litres of wine in bulk. - Siggnificantly reduces fuel used = cheaper and more environmentally friendly.

Question 61

In terms of labor costs, how do different categories of restaurant compare with each other?

Answer 61

Non destination restaurants: Low labor costs, staff will not necessarily need to know much about wine. Casual dining: Medium labor costs, more skilled and knowledgeable staff than NDR. Fine dining: High Labor costs. Very high skilled staff. Head sommelier selects wine list, offers detailed advice regarding wine selctions to guests.

Question 62

What vineyard establishment costs are involved with site clearance?

Answer 62

Removing vegetation, large rocks, etc.

Question 63

What costs are associated with transporting wine by SEA? When is this method of tranportatio used?

Answer 63

Sea transportation: - Cheapest method for long distances, e.g. from USA, S. America, Australasia > EU. - Continerization is essential. - Downside is slow e. g. Australia - UK ~ 40 days, so timing of pre-ordering must be considered.

Question 64

What costs are associated with transporting wine by AIR? When is this method of transportation used?

Answer 64

Cost dependent on weight. Heavier = more fuel = more expensive Very expensive so only used in special circumstances: - Samples for competitions, trade/consumer fair - Very high value wines - Where deadlines are important, eg. BEaujolais Noveau for Japanese market.

Question 65

What are the different methods that those in the wine idustry can use to mitigate the effect of exchange rate fluctuations?

Answer 65

Methods used to mitigate the effect of exchange rate fluctuations: - Options - Price fixing in currency of importer at date of ordering. - Buying currency to cover specific orders. - Entering contract to fix exchange rate. - Trading in USD/EUR - Opening a foreigh currency account at local ban.

Question 66

What are Capital costs? Where can the funding come from?

Answer 66

Capital Costs are those incurred in first establish a business. Fundind: - Personal wealth - Loand (interest and pepayments must be cactored into LT biz plan) - Investors (Which may want samo form of managing involvemnt/profits) - Some countires offer tax incentive or lump sum contributions to encourage the stablishment of vineyards.

Question 67

How do options help those in the wine industry mitigate the effects of currency fluctuations?

Answer 67

- key strategy in 'currency hedging' - importer can take an option /reserve on a certain amount of wine @ agreed price. - producer sets aside agreed vol, importer will then decide if they want it or not. decision to take or not based on exhange rate, market conditions - risk for producer because may result in unsold stock, so higher price may be charged - however, its usually larger importers who have negotiating power to dictate such arrangements - possible to take an option on certain amount of currency at an agreed price, rathen than stock - can be used to mitigate the effect of currency fluctuations

Question 68

What vineyard management cosrs are associated with electricity usage?

Answer 68

Irrigation systems, bird scanners, frost protection, equipment.

Question 69

How does openining an account in an overseas bank help the wine industry mitigate the effects of currency fluctuations

Answer 69

- all the same pros/cons as opening foreign currency account in local bank PLUS: banking regulations vary from country to country; time must be taken to ensure that rules are thoroghly understood.