D2C02 Factors Affecting Wine Price Flashcards

1
Q

What are the high level typical factors contributing to the price of a bottle of wine?

A
  • Grape Growing
    • vineyard establishment
    • vineyard management
  • winemaking
    • winery establishment
    • vinification (labour, materials, fruit, water/electricity, packaging/closures)
  • transportation
  • marketing costs
  • sales cost (property, labout, equipment, storage, delivery, margin at POS)
    • retail
    • hospitality
  • importation cost (compliance, duties/tax, distributors)
  • currency fluctuation mitigations
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2
Q

Comment on key factors how vineyard establishment contrubutes to the price of wine.

A
  • vineyard establishment
    • land purchase
      • pruchase price of land (location, production potential, availability/scarcity, prestige of area (eg AOC)​
    • funding
      • own / bank (loan) / investors
      • government subsidies / tax incentives (China…)
    • land preparation
      • surveying (satelite imaging, soil samples)
      • irrigation/drainage/fencing for protection
      • clearing, trellising, planting materials
      • Machinery and equipment
      • access roads
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3
Q

Comment on key factors how vineyard management contrubutes to the price of wine.

A
  • Labour (perm/seasonal/skilled etc)
    • Type of vineyard and how much cb mechanised
  • Machinery & Equipment running costs, e.g. fuel and maintenance
  • Vineyard materials, e.g. replacing vines and trellising
  • Vineyard treatments, e.g. herbicides, fungicides, insecticides
  • Water, water extraction costs
  • Electricity, e.g. irrigation, bird scarers, frost protection equipment
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4
Q

What are typical initial costs of establishing the winery?

A

There are similar capital costs for establishing the winery as for setting up the vineyard:

  • land purchased (own / bank loan/ investors)
  • building the winery
    • equipment such as presses, tanks, pipes and pumps, refrigeration equipment , ?? bottling line
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5
Q

Comment on typical costs in winemaking / vinification?

A
  • Labour – some more, others less skilled
  • Machinery and equipment running costs
  • Winery materials
    (sugar for enrint, de-acidification agents, acid for acidification, cultured yeasts, carbon dioxide or other inert gasses, fining and filtering agents. )
  • Bought-in fruit - according to own vol grown (might be small in early years) and according to regulation allowance, poss for blending)
  • Water
  • Electricity
  • Maturation (actually takes up space, barrels?? cost, labour to monitor, ties up cashflow)
  • Packaging / closure (label design) (this is with or without the investment in a bottling line)
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6
Q

Comment on how transportation costs contribute to a bottle of wine?

A

Bottle or Bulk options

  • Freight forwarders chosen are likely to be specialists in wine transportation (JF Hillebrand)*
  • Heavy, easily broken, can be spoiled by mishandling (light/vibration), should be insured by one of the parties (normally freight forwarder)*

Most wine transported in bottle

  • Air - very expensive and very unusual, except samples, promotions, or extremely fine wine.
  • Land - quickest, safest and most cost efficient if routes are not too long.
  • Rail – Becomes favourable if containerisation is the method used, freight rates vary considerably depending on the route.
  • Sea -sometimes the only option. Becomes viable if consigment is >15000 bottles, has certain advantages if in bulk.

Bulk

  • Flexitank 24000l
  • ISO tank 26000l
  • Used for inexpensive as well as more expensive wines.
  • Advantages
    • lighter - for the same space 10000 bottled litres:24000 bulk litres
    • Cheaper, less fuel, more env friendly
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7
Q

Name the 3 costs other than transportation/insurance involved in importing wine to another country.

A
  • Custom duties & Taxes
  • Compliance with labeling laws
    • countries may have different labelling laws - means producer may need different labels per country (e.g. abv level in USA has a 1.5 unit margin - but not in EU where it must be indicated to nearest 1 or .5 unit)
  • Involving distributors
    • saves producers time to learn about all the different compliance requirements per country
    • leverage of local market knowledge and established client list
    • costs 5 - 25% margin added by Dist. - may be higher for hospitality than retail, and generally will exclude delivery
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8
Q

List the key costs of the Retailer (both on/off trade) which will impact the price of wine.

A
  • Property costs
    • location, running costs, equipment and display (if hospitality incl furnishings and decor)
    • A saving if retailer is online only (warehouse needed still)
  • Labour
    • slighly cheaper in retail (depends on specialist selling cap) and in hosp def more skill needed.)
    • Online needs web dev / maintenance
  • Equipment & Material
    • till, fridge, display, equipment, in hosp. the entire kitchen/bar
  • Storage costs
    • A concern for all but potentially less for hospitality
    • Keeping any stock off site adds additional transport costs
  • Delivery costs - vary according to distance
    • If offered, noted for online trade as a signficant topic
    • retailer may absorb some of the cost to stay competitive
    • may offer free delivery for order of specific value or qty
  • Margin at point of sale
    • Retailers normally add between 30 - 50% to cover all their costs and deliver a small profit
    • in hospitality it is closer to 66% to cover operating costs, as well as potential spoilage (remaining) if wine sold by the glass.
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9
Q

What are thecosts associated with marketing which can add to the price of a bottle of wine?

A
  • Labour.
  • Design and production of bottles and labels.
  • Marketing campaigns.

To be studied in detail in later decks.

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10
Q

Duties on imported goods can be paid several ways. Using a bonded warehouse might offer some advantages (UK scenario). Explain.

A
  • Duty not paid on wine arrival in receiving country.
  • wine is stored in a bonded warehouse and released when someone wants to buy it.
  • That customer pays the cost of taking the wine out of bond, including the duty payable.
  • Whilst hiring space in bonded warehouse costs money, it means the importer does not need to pay duty out of their own funds which can help their cashflow situation.
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11
Q

Legal factors may impact on a producer’s decision whether or not to enter a particular market. Explain

A

Following legislative requirements add to cost

  • Taxes and Duties
    • May cause a producer not to enter if too high to remain competitive
  • Trade Barriers / Subsidies / Trade Agreements
    • Trade Agreements between countries result in their products being more favourably priced than others - e.g. EU agreements with Chile/SA
  • Minimum pricing - might tip the scale on affordability in the given market segment.
  • Labelling Laws - maybe too onerous and discourage a producer
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12
Q

Explain how exchange rates can impact on the profits which the producer or the buyer might earn; and describe the ways in which this issue can be mitigated.

A

Fluctuation in exchange rate can negatively impact an export/import transaction. Mitigate as follows

  • Options
    • This means that the producer must set aside the agreed volume of wine for a specific value of currency and, at an agreed time, the retailer may decide whether or not they want to take it.
  • Fixing the price in the currency of the importer at the date of ordering
    • Producer carries the risk
    • Retailers prefer as this gives a fixed point for selling price calculation
  • Buying currency to cover specific orders - requires inhouse skill, likely only at the bigger companies (not speculation)
  • Entering a contract to fix the exchange rate - with a bank, will be for a fixed sum which is payable even if currency strengthens
  • Trading in USD/EUR - because they do not fluctuate vastly in general
  • Opening a foreign currency account in a local bank
  • Opening an account in an overseas bank
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