D2C01 Factors Affecting Wine Supply and Demand

Question 1

Explain the ‘perfect world’ balance in supply and demand.

Answer 1

Producers can

• sell all the wine they make
• at the price which covers the cost of production, and
• pays a dividend to any shareholders, and
• finances future investment and
• delivers a profit.

Consumers are

• able to buy the wine/style they want
• a price they are willing to pay.

Question 2

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

Answer 2

• Higher competition among producers/retailers for market share
• Competition will drive prices down.

Question 3

Explain the effects when demand of a particular product exceeds supply

Answer 3

• Prices are likely to increase.
• Perceiving that there are no alternatives,
  
  • some consumers may be willing to pay higher prices for some wines.
  • others, not willing to pay more may switch to another wine or a different alcoholic drink altogether.

Question 4

What factors affect consumer demand for wine?

Answer 4

• Social factors - consumption is dropping
• YOUNGSTERS PREFER SPENDING on HEALTHY LIFESTYLE than CHEAP REPUTATION*
• Economic factors - strength of economy, strength of currency, changes in the market
• Legislative & Political factors -
  
  • laws prohibiting/limiting consumption;
  • Taxation on alcohol manufacture;
  • international trade & excise duty;
  • Gov policy to reduce consumption
  • Laws such as GI / PDO which restrict production by region/variety/maturation rules

above are all connected, not tb considered in isolation

Question 5

Describe the 7 social factors which are causing a decline in wine consumption

Answer 5

• Younger people drink less (fashion/trend & other beverages take preference)
• Health concerns, strengthened by negative aspects of alcoholism and Gov restrictions
• Lifestyle changes - no drinking at lunch (inappropriate to work afterwards) and less time taken for long, social meals
• Reduced availability of cheap wine
• Changes in preference - rise in Spkl wine cons in EU and USA; inc in Rose cons in USA, move to drier options not sweet; and health concerns ~ lo-alcohol
• Change in reputation - social media/ influencers; reviews from wine critics may result in loss of reputation (or opposite)
• Change in spending patterns - DE is price conscious; USA by contrast is undergoing premiumisation (they will pay more for less winen of higher quality)

Question 6

Wine consumption:

Top 5 countries and respective vol in mhl.

Answer 6

1. USA 33 - rising
2. France 26.8 - flat/falling
3. Italy 22.4 - flat/falling
4. Germany 20 - flat/falling
5. China 17.6 - rising

Question 7

Comment on USA status as largest cons of wine globally

Answer 7

• Overtook France and Italy in 2011
• Increasing globalisation of food & drinks industry
• Increased & improvements in wine production in USA’s domestic market

Question 8

Comment on increased wine consumption in China

Answer 8

Growing middle class - status conscious, more prestige in drinking fine or high quality wine than local alcoholic bev.

• At first primarily French wines
• Now increasingly buying from Australia and Chile, profiting from bilateral trade agreements.

Question 9

How did consumer wine preferences change in recent years?

Answer 9

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

Question 10

Define ‘price-sensitive markets’

Answer 10

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)

Question 11

What economic factors will influence the demand for wine?

Answer 11

Strength of the economy

• Higher disposable income = more money for wine, perhaps better wine and vice versa. Lower earners often drink beer.

Fluctuations in currency exchange

• Importing with a weak currency could make wines too expensive and local wines will be favoured by the price sensitive consumer.
• A producer operating in a weak currency country pays more potentially for barrels/packaging/closures, but will benefit by a product that is competitive in the export market.

Changes to the market

• New products and new producers enter the market constantly, and price sensitive consumers will switch easily especially if a producers wine cannot be found on the shelf.
• Additionally a new product brought in might force a price adjustment on the other products if they wish to remain competitive.

Question 12

Name the 5 legislative and political factors influencing demand

Answer 12

1. Laws prohibiting or limiting the sale of alcohol
2. Government policies to reduce alcohol consumption
3. Taxation
4. International Trade (Import/Export)
5. Wine Law

These factors vary from country by country and those working in the wine industry should always be aware of those which are relevant to any markets with which they may be dealing.

Question 13

Name some examples of laws prohibiting or limiting sale of alcohol

Answer 13

• completely prohibition - some countries
• Sales tightly-controlled:
  
  • state-owned monopolies
  • the USA’s three-tier system

limit the supply of wine and usually increase prices.

• Defining a minimum legal drinking age
• Limiting sales of alcohol to particular hours of the day/days of the week

Question 14

Give examples of Government Policy that restricts or reduces wine consumption.

Ostensibly why do they do this?

Answer 14

• France: Loi Evin 1991, restricted advertising of alcoholic drinks, considered a significant factor in the reduction in wine consumption in France.
• Scotland: the first to introduce ‘minimum unit pricing’ to reduce the availability of cheap alcohol. This established a minimum retail price to make it less affordable.
• Most countries impose a limit on blood alcohol level for drivers. Limits vary by country, but keep moving downward as countries try and reduce death and injury caused by drunk drivers.

Governments do this because In excess, alcohol causes

• Illness and injuries placing an increasing strain on health services
• drunkenness is seen as a significant factor in criminal behaviour.

Question 15

What do government taxation policies on alcoholic drinks aim for?

Answer 15

Taxation is another aspect of government policy

Taxes and duty on alcoholic drinks

• results in higher prices which may reduce consumption;
• however, this is a major revenue generator for many governments.
• influence consumber behaviour (may be a knock-on effect rather than objective)
  
  • (e.g. higher tax on Spkl W in Ireland) this may raise the demand for other styles)
  • HK example when excise duty was removed in an attempt to make HK the trade hub in East Asia for wines, resulting in massive increase in auctions on fine wines in HK.

Question 16

What are trade tarrifs? And why are they applied?

Answer 16

Trade tarrifs are customs duties on imported goods imposed by many countries.

• Both a form of revenue generation
• and a protectionism policy intended to encourage the sale of domestic rather than imported goods

Duties are paid on imported wines, ultimately results in higher price to consumer

EU is a free-trade area, in which countries can import/export to each other without duties. The EU also has trade agreements with SA and Chile, not with Australia, which influences how Australian wine competes in the market.

Question 17

What are the effects of a trade war?

Answer 17

• In many cases, trade wars can result in negative feelings among consumers and therefore, even when restrictions are lifted, consumers may continue not to buy these products out of a matter of principle.
• Eg - Trade war between US and China
• In extreme cases a government may place a ban on trade ( trade embargo) with a country for political or economic reasons (e.g. Russia)

Question 18

What can be the effects of creating a Geographical Indication (GI)?

Answer 18

• May increase recognition and demand for wines from a region
• allow producers to increase the price of their wines, if the PGI/PDO has a strong reputation.

Disadvantage

• the rules of the PDO may limit quantity, variety, production methods, maturation period - to influence quantity and quality of wines on the market
• this makes it more difficult for these producers to compete with other Regions where these strict rules are not imposed, and these regions can respond to changes in consumer demand much quicker.

for the above reason, “Vin de Pays” a concept started in France, but now found in all European regions, allows wine to be sold from a country, which has not necessarily complied with the PDO/PGI rules.

Question 19

Legal changes often come about relatively slowly, giving producers the time to adapt. However, sometimes sudden changes in legislation can have particularly significant effects.

Give an example of a legal change that had a direct and significant effect on wine sales?

Answer 19

For example, in China in 2012, the new leader, Xi Jinping, wanted to stop the practice of ‘lavish gifting’, the tradition of showing respect to business colleagues, customers or suppliers by giving gifts – the more expensive the better. These gifts often included super-premium priced wines, especially Bordeaux Premier Cru Classé and Grand Cru Burgundy. An Anti-Extravagance campaign was launched explicitly to prohibit the gifting to or consumption by government officials of luxury wines and spirits. As a result, demand for those wines dropped almost immediately.

Question 20

What are the top 5 wine producing countries (mhl)?

And how did they develop in recent years?

Answer 20

1. Italy 47.5
2. France 42.1
3. Spain 33.5
4. USA 24.3
5. Argentina 13 (with Australia and Chile very close to this number)

All 6 ountries produced less in 2019 than in 2018, but USA and Argentia are overall on slightly increasing trend, where as European production is either flat or decreasing,

Question 21

Name 3 generic factors influencing the production levels of wine

Answer 21

1. Area under vine, such as establishing new vineyards
2. Human Factors, such as advances in viticulture and winemaking
3. Natural Factors, such as annual weather condition fluctuations

Question 22

Comment to the trend and changes in the Area under Vine in recent years?

Answer 22

The world total area under vine is in decline since 2002.

• In Europe area under vine has been reduced deliberately through (poor quality) vine pull schemes across Italy, France and Spain to bring production in line with demand. “Wine Lake”
• EU also restricts the establishment of new vineyards - 1% growth is permitted.
• Some vineyards have been converted to more profitable agriculture (Apples in Elgin SA; almonds and pistachios in USA)
• Some re-purposed for tourist development or as in Santa Clara Valley and Silicon Valley - developed into commercial centres.
• Some vineyards have been abandoned (young people move to the city, vineyards suffer from lack of investment and labour)

Question 23

What are the global top 5 countries measured by area-under-vine?

Answer 23

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

Question 24

What human factors have resulted in a greater volume of higher-quality wines that can be produced at a retail price which consumers are willing to pay?

Answer 24

• modern techniques such as better site selection, clonal selection
• improved canopy management and pest and disease control
• modern winemaking technology

In addition, although area under vine has reduced, irrigation rules have been adjusted for some areas (e.g. Spain) and this had made some vineyards more productive in that with irrigation they can plant more densely and increase their production of quality fruit.

Question 25

Comment on how natural factors can have a major impact on global wine production?

Answer 25

1. Variation in weather can impact production / vintages and as Europe has more than half the world’s vy area, a difficult vintage in Europe impact globally.
2. extreme weather is becoming more and more common (hail, drought, fires) and this is affecting all wine regions around the world, with lack of water being a serious challenge in many areas.

The impact of bad or extreme weather is that overall production is reduced, which leads to increase in price, which consumers may not be prepared to pay, if quality is also reduced.

Question 26

What is the one commonality between all worldwide Geographic Indications (GI)?

Answer 26

All of the GIs define where grapes can be grown for wines with specific geographical names, thus limiting the amount of wine that can be produced there (although GIs vary enormously in size).

Question 27

Comment on the supply of wine globally over recent years and the impact this has had on the market in broad terms.

Answer 27

Oversupply

• Global wine production has consistently exceeded global wine consumption.
• Some levelling off recently with growth in consumption USA and China
• and the limitations on production (vine pull schemes)

The impact of over-supply is that

• prices fall (as competition rises and alternatives are avail for cons),
• worst case scenario unsold wine finally sold at a loss (= less than prod cost)
• Results in some producers finding new markets/outlets
  
  • Supports use of distributors and their network of contacts/clients
  • Some producers bottle under different labels for on/off trade or different price points to avoid weakening the brand reputation of a quality product by reducing its price

Question 28

Describe the challenges for the producer if there is an undersupply of wine.

Answer 28

Unusual, but can happen (vintage related, e.g. 2017)

Not enough product means

• disappointing clients/consumers which might be lost if they switch brand or product
• strained business relationships.
• financial penalty or cancelation of contracts.

Generally excess of demand results in

• increased price (especially from prestigious AOC’s and PDO’s
• issue of wines to their main distributors on allocation.

Question 29

How do the larger suppliers respond to an undersupply of wine?

Answer 29

• Wine prod business more fragmented than other spirits/beers
• Very few large-scale producers
• The few large companies (E&J Gallo, Accolade Wines, Treasury Wines
  
  • normally offer wine at all price points/regions/varieties
  • therefore - either able to offer an alternative from within their portfolio. or,
  • faced with higher prices due to a decreased supply, they will sell these wines into less price-sensitive markets instead.