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Summary WSET D2 Diploma Wine Business 2024
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Comprehensive summary of the textbook D2 Wine Business updated for 2024/2025 Diploma WSET exam.
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D2:WINE BUSINESS
If business is defined as any activity or enterprise entered into for profit, then wine business is the activity of
making and selling wine for profit:
• Profit is the amount of money or surplus remaining after total costs are deducted from total income
(revenue)
NET PROFIT (the “bottom line”) = SALES – COSTS
The profit margin is the percentage of sales that has turned into profit.
• Loss is where costs are greater than total income;
• Costs include both costs of production, sales and marketing, transportation and taxes and duties payable,
and the cost of any promotions or incentives given to sell the wine.
, 1. FACTORS THAT AFFECT THE PRICE OF A BOTTLE OF WINE
SUPPLY & DEMAND
There are many factors that influence the price a consumer is asked to pay for a bottle of wine, e.g. costs of
growing the grapes, producing the wine and getting it to the end consumer – however, the price of wine is also
determined by the concept of supply and demand:
¾ Supply is the amount of a good or a service available for sale;
¾ Demand is the willingness of consumers or businesses to buy a good or a service.
As an agricultural product, wine production levels are subject to factors such as weather, e.g. in 2013, uncommonly
high spring and summer rainfall in the usually arid Castilla-La Mancha increased the volume of wine produced in Spain to 45.3M hl –
in contrast, in 2017 spring frosts in much of Europe produced the lowest global volume production of 50 years.
When demand exceeds supply, prices are likely to increase: while consumers may be willing to pay higher prices
for some wines (generally if they perceive that there are no alternatives available), for other wines consumers
may not be willing to pay more and may simply switch to another wine or a different drink category altogether.
1.1. FACTORS THAT INFLUENCE THE DEMAND FOR WINE
SOCIAL FACTORS
1) Changes in Consumption Habits
Global wine consumption increased rapidly in the first part of the 2000s. However, it began to fall back again
after the global financial crisis of 2008 as many consumers reduced their spending on non-essential products à
although wine consumption has not regained the volume levels seen before the financial crisis, the popularity of
certain categories such as rosé and sparkling wine (3% annually 2002 – 2018) has increased significantly in the
last decade.
Ø Consumption has been increasing in countries where wine drinking has not historically been a major part of
the culture à in 2011, the USA overtook France and Italy to become the largest wine consumption country
worldwide, thanks to increasing globalisation of food and drinks industry and improvements in wine
production in the domestic market.
China has increased its wine consumption, thanks to a growing middle class whose one way of showing their
improved wealth is by moving from local drinks to wine (aspirational wines) – increasingly looking outside
France, e.g. Australia and Chile whose wines benefit from a bilateral trade agreement.
Ø Wine consumption is falling or static in the “traditional” wine-drinking countries – possibly due to:
a) Younger people drinking less wine: partly because they regard wine as old-fashioned and have turned
to other alcoholic drinks (e.g. gin), but also they are spending less time in bars (e.g. UK), preferring to
contact their friends via social media.
b) Health concerns due to increasing awareness of the negative health effects of alcohol, also spread by
health-related government campaigns or policies (e.g. Loi Evin in France).
c) Changes in lifestyle: 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 is being increasingly
forbidden by employers or no longer regarded as socially acceptable.
d) Reduced availability of cheap wine to reduce over-production, resulting in smaller volumes of these
wines being available – some consumers may have switched entirely to other cheaper alcoholic or non-
alcoholic drinks.
2) Changing Consumer Preferences
o In recent years, for example, rosé has become extremely popular, especially in the USA.
o Similarly, Prosecco sales in markets such as the UK and USA have increased significantly – if supply does
not increase to meet demand, prices will rise; however, the increase in the area covered by Prosecco DOC
has increased supply and limited price rises.
o Due to health issues, there is also increased demand for lower-alcohol wines, turning away from fortified
wines, and drier styles, putting out of fashion medium-sweet German wines, such as Liebfraumilch.
3) Changes in Reputation
As the reputation of a region, producer or even an individual wine grows, demand will increase and producers
may be able to justify higher prices:
1. Leading wine publications and critics
2. Online influencers and key opinion leaders
3. Presence in popular culture: film, TV, music lyrics, celebrity lifestyle news
4. Influence of peer opinions and behaviour
2
, 4) Changes in Spending Patterns
Price-sensitive markets: in some countries, e.g. Germany and UK, many consumers are unwilling to pay more
than the lowest price possible for the style of wine they want to buy. In contrast, markets such as USA are
willing to pay above the minimum price in order to buy a wine that they perceive to be of better quality than the
cheapest option on offer.
In price-sensitive markets, producers are often reluctant to pass on increases in production costs to consumers
for fear of losing sales to competitors – some producers hope to avoid it by building “brand loyalty” as part of
their marketing campaigns.
In recent years, there has been a trend for “premiumisation” in the USA and even UK, where consumers are
willing to pay more for individual bottles of wine, often because they are buying less wine by volume.
ECONOMIC FACTORS
Cost of Wine – Willingness to Pay
1) Strength of the Economy
Sales of wine will change with the level of consumer disposable income, which, when it falls, brings wine
consumers to trade down to cheaper wines or switch to other, less expensive alcoholic drinks (e.g. following the
2008 crash, demand for Champagne shrank while that for other, cheaper sparkling grew).
2) Fluctuations in Currency Exchange can significantly affect the demand for imported wines:
a) Keep the price stable and risk losing sales as the product represents less value
Wine-exporting country’s currency gains
The producer can: for money in the importing market
value to that of the importing country
b) Decrease the price of the wine and lose profit
a) Keep the price stable, which should boost sales as the product represents
Exporting country’s currency loses value better value for money in the importing market
The producer can:
against that of an importing country
b) Increase the price and improve profits for future investments
The downside of a weak currency, however, is that it costs producers more to import equipment and supplies,
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.
3) Changes to the Market
If a product disappears from a particular market, supply decreases à this will create opportunities for the
competition, which could increase their sales, and prices can possibly raise.
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.
LEGISLATIVE AND POLITICAL FACTORS
Government policy on alcohol consumption may change over time and laws may be passed at either a national
or local level to implement that policy.
1) Laws Prohibiting or Limiting the Sale of Alcohol
¾ The sale of alcohol is completely prohibited in a number of countries.
¾ Sales are tightly controlled: through state-owned monopolies (e.g. Sweden, Norway and Canada) or
through the three-tier system (e.g. USA). This inevitably limits supply and increases prices.
¾ Alcohol freely available: minimum legal drinking age and specific hours of the day.
2) Government Policies to Reduce Alcohol Consumption
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.
• Loi Evin (1991, France) has greatly restricted the advertising of alcoholic drinks;
• The Scottish government is the first to introduce “minimum unit pricing” to reduce the availability of
cheap alcohol;
• Most countries impose a limit on the amount of alcohol that can be consumed before a person drives a
motor vehicle, by checking the BAC (blood alcohol concentration).
3) Taxation
The imposition of taxes and duties on alcoholic drinks may reduce consumption and provide a major revenue
generator for many governments.
Sales tax (value added tax – VAT) applies to alcoholic drinks in the same may as other products and it’s paid at
the point of sale – many countries also impose specific excise duties or taxes on alcohol that are payable at the
point of manufacture.
3
, Because the level of duty usually varies between different categories of drink, it can influence demand1.
While governments tend to increase duty over time, sometimes they reduce it to make certain categories more
competitive: Hong Kong, 2008, abolished excise duty on wine altogether with the aim of becoming the “wine
trading hub” of East Asia, with the result of a massive increase in auction sales of fine wines.
4) International Trade
The value of wine exports has more than doubled during the last 15 years – trading relations between countries
can fluctuate over time, affecting demand:
o Custom duties (trade tariffs) on imported goods: they can be both a form of revenue generator and the
basis of a protectionism policy intended to encourage the sale of domestic goods.
o Tariff-free or reduced-tariff trade: some states enter into trade agreements, giving wines from those
countries a competitive edge over others.
Argentina, early 2010s: trade restrictions were imposed that affected also imports of winery equipment, significantly increasing wine
production costs, and the government imposed also restrictions on foreign ownership of land, significantly slowing down the foreign
investment that had played an important role in its rapid growth.
o Embargo: extreme form of protection for which a country bans imports from or exports to a particular
country à 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.
5) Wine Laws
Increasing global creation of Geographical Indications (GIs) as many consumers are drawn to wines from a
particular GI, either because they have enjoyed wines from there in the past or because of its strong reputation:
§ Increase recognition and demand for wines from that regions
§ Allow producers to increase their prices
Producers outside the EU are rarely subjected to PDO limitations, leaving them free to react more quickly to
changes in wine consumers’ preferences and maintain demand for their wines.
1.2. FACTORS THAT INFLUENCE THE SUPPLY OF WINE
PRODUCTION
The amount of wine produced will clearly have a strong impact on the level of supply.
1) Area under Vine
Generally speaking, the greater the size of vineyard plantings, the greater the volume of wine that can be
produced: it is estimated that, globally, 90% of vineyards are used for wine production:
§ The majority of China’s vineyards are devoted to table grapes – although has the second largest vineyard
plantings, its wine production is comparatively small (7th – 10th largest producer).
Vine pull schemes By the mid-1980s, EU wine production was much greater than demand, creating a surplus that came to be known
as the “wine lake” à governments and EU started paying growers to pull up poor quality vines (e.g. southern
France, Italy and Spain) with the result that several hundred thousand hectares of EU vines were pulled up.
EU restrictions on planting Part of a broader policy to reduce wine production – since 2016 member states have been able to authorise
new vineyards planting of up to an annual growth of 1% of vineyard area already planted.
Conversion of vineyard In many parts of the world wine grapes are a low value agricultural crop à the fall in vineyard area in the USA
land to other uses has been part of a strategy to combat over-supply; a proportion of vineyards have been converted to grow
almonds and pistachios / in Madeira as property development / in Santa Clara Valley for business
Abandonment of rural This is reducing the available workforce and in some cases leaving family-run estates with no-one to take them
areas over. Generally speaking, rurual economies are suffering from a lack of labour and investment.
2) Human factors
A decline in vineyard area need not result in reduced production: e.g. average production in Spain has increased despite
the area under vine decreasing à the relaxation of laws banning irrigation of vineyards in Spain, which means that areas that were
previously not able to support vines are now viable, and the increased use of more modern, higher density planting have increased
production in certain areas, which has offset the reduction in the area under vine.
Also, modern techniques have made it possible to produce a greater amount of healthy grapes which, coupled
with modern winemaking technology, has resulted in a greater volume of higher-quality wines that can be
produced at a retail price which consumers are willing to pay.
3) Natural factors
Variations in weather conditions can also have a significant impact on the volume of wine produced à Europe
is particularly susceptible to vintage variation and, because over a half the world’s vineyard area is located there,
bad vintages will have a major impact on global wine production:
1
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 wines.
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