Wine as a Luxury Good

8/2/2019 Wine as a Luxury Good

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Wine As A Luxury Good

Susan Williams - Business Environment

Business and Human Resources Management

The manufacturing of wine is believed to have been in existence "at least 7400years ago" (McGovern, 2003) and wine manufacturing in the United Kingdom

since the eleventh century. Currently, there are around "400 English vineyards" in

existence, producing around "2 million" bottles of wine per year

(www.google.co.uk). Misterioso Wines however, was founded 15 years ago as a

family business and the name simply means mystery in Spanish. It was so named

as its first tasters were said to have enjoyed the taste so much that they felt that a

secret ingredient had been added. This was felt to be a mystery as they could not

figure out what made Misterioso Wines so different in taste from any other wine

they have had.

Misterioso Wines however, has not been exempt from many factors that affect

different aspects of its existence, be it political, economic, social, technological,

environmental or legal. For the purpose of this paper, these factors will be

analysed using the PESTEL framework. The analysis using the above model

however will only focus on the main three factors that affect Misterioso Wines the

most. Theses are political, economic and social as they are the main determining

factors that shape its history and continuation.

POLITICALWine as a product does have a "social, economic and symbolic importance and this

without a doubt, gives it political relevance" (Charters, 2006). The way however,

that a Government chooses to treat wine as a consumer product, including both its

production and consumption, will vary considerably depending on its political

approach. With the recent Government change to the Conservative Party and even

with the previous Labour Government, both have publicly made it known that their

concern about binge drinking, anti-social behavior and public disorder has a lot to

do with alcohol consumption.

It was announced recently on the Channel 5 news bulletin as well as in theFinancial Times newspaper (November 2010) that the Government is proposing to

set a national minimum price for alcohol which, includes wines, beers and spirits

as part of a new strategy by the Government to tackle the afore mentioned drinking

issues. This effort to combat binge drinking by the Coalition Government plans to

use a formula first devised by Asda supermarket in which it is forbidden to sellalcohol below a certain price.


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Any retailer found to be in breach of the new rules would risk losing their license.The minimum price is calculated by adding the cost of duty and VAT on the

product. This move by the Government can be argued to be strategy of using

increased demand for alcohol as a way of boosting indirect tax revenues. This will

most definitely have a huge impact on Misterioso Wines as it will mean that sales

of its wine will most likely decrease within certain target groups. Misterioso

Wines is increasingly reliant on the different supermarket chains for its sales which

is the common trend within this sector as supported by a research conducted by

Morning Advertiser & Off License News which, found that "57% of young adults

buy their alcohol from supermarkets" (Mintel, 2010). Supermarkets however, have

the long-term strategy of discounting wine which, intensified as a result of the

recession. This move was welcomed by Misterioso Wines as it ensure that their

wines are reaching its consumer and generating income for them through ensuring

that their supplier prices are competitive.

Should the prices of its wines need to be increased this will mean that certain

groups of people with less disposable income will not be able to afford this and this

will ultimately affect it sale volume and share price. Within certain group such as

the more affluent and the youthful elderly, this may not have that much of an

adverse effect as they are known to be the ones with the most disposable income.As with most markets especially in the case of the product not being a necessity

good, as prices go up, its demand will diminish which, means that Misterioso

Wines will have to reduce its production capacity thus reducing supply and putting

the Companys survival at risk. Taking the above into consideration as well risingmanufacturing and raw material costs, a strong Euro, and low supermarket pricing,

Misterioso Wines profit margins will again be under pressure. In such a highlycompetitive market such as the wine industry, this could be detrimental.

The above is not the first instance in which, political decisions have affected

Misterioso Wines as 7 years ago, major reforms to the licensing laws wereintroduced through the implementation of the Licensing Act 2003, in which a

highly politicised content emerged and the public, media and professional raised

concerns again about alcohol consumption. This again highlighted alcohol-related

crime and disorder and the health implications of the national drinking patternswhich, was said to be linked to many health issues such liver diseases.


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Due to how much focus and emphasis was placed on this, wine sales plummetedand the Company had to effect new marketing strategies in order to continue its

business and this cost heavily. The Government in October 2008, increased the

"minimum wage to 5.80 an hour" (BBC Online, 05/2009). This was heavily felt

by Misterioso Wines as a lot of its employees are within that bracket of pay due to

the nature of the job they perform. This was highly received by its employees

however, as far as the Company was concerned, even though it was a morale boost

for its workers, it was going to be a financial burden that they could do without.

Another relevance to this point with Misterioso Wines was that this wage increase

was to be factored somehow into the end price of the wines to ensure that theywere not operating at a loss in terms of the ratio between wages and retails price.

ECONOMIC

The United Kingdom amongst many other countries has recently and in some

cases, is still experiencing the difficulties, borne from the recession. This has

without a doubt influenced what, how and why consumers spend as many

consumers do not have much money to their disposal to spend on luxury products

such, as wine. According to Mintel however, "the recession has accelerated the

problems for wine, rather than being the root cause" (Mintel, June 2009)

The state of the economy and its consequences has affected a lot wine consumers,

as some have lots their jobs, been made redundant and in some cases, Companies

have gone into administration. This is reflective in the fact that during the past

year and a half, Misterioso's Wines has had a somewhat average performance. The

afore mentioned point also had a added on effect as due to its somewhat average

performance, it was not able to maintain its staff level and therefore, had to make a

few if its permanent staff redundant. A pay freezer was also effected across the

board in order to minimise costs which, was understood by the remaining staff but

went a long way in diminishing morale. The poor state of the economy also

hindered expansion plans that we in the pipe line. Due to the uncertainty facing

the economy as well as interest rate, the investors that were meant to come into

partnership with Misterioso Wines decided against it as they felt that the timing

was not appropriate.


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Misterioso Wines also experienced further difficulties with it exporting side of thebusiness due to the weakening of some currencies against others in terms of the

exchange rates as well as Customs and Excise duties on alcohol. Another factor

that Misterioso Wines is also considering is the effect that the proposed VAT

increase to 20% in Jan 2011 will have on the Company. The economic down turn

also brought about a rise in fuel costs, which, was an additional overhead cost for

the Company as this had not been factored into its expenses allocation. Misterioso

Wines is produced in the United Kingdom however, some of its products such as

its bottles, fermentation equipment and wine racks are sometimes sourced outside

of the UK. This aspect of the business has also seen a change as the price

fluctuation as certain commodity markets has been shaky. The rise in inflation is

also being considered at Misterios's strategic level as there are concerns of the

impact that this could have on another possible minimum wage increase as well as

the cost of raw materials. Misterioso Wines by all means wants to avoid

permanent additional expenses as its "Corporation Tax of 21%" set by the

Government is higher than it has ever been and this has been the case for the past 3

years. On a more positive note however, it has come to the attention of the

Company Managers that this is projected to be reduced to 20% in 2011" which,will be welcoming new to the Company's board (H M Revenue & Customs, 2010)

SOCIAL

Some researchers have argued that "alcohol consumption has been in decline since

2004" and that it is somewhat a result of changing attitudes in relation to alcohol

(Mintel, 2010). This can be seen as a positive statement as within certain

demographics, wine consumption has not decreased in the slightest. The point

however, that Misterioso Wines cannot debate is that now more than ever,

consumers are considering the health risks associated with alcohol. This also

relates to the idea of healthy living which, is constantly being discussed and

debated via television, radio and the internet. This issue however, has not affected

Misterioso Wines as much as it has for example, vodka or brandy. This is due to

the fact that for a very long time and currently still the case, wine consumption has

had a long cultural belief that its intake in moderate quantities is good for ones

health.


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This has been said to possibly help prevent heart disease due to the antioxidantsfound in it. This is said to work by way of increasing levels of good cholesterol

and protecting against artery damage. "Red wine in moderation has been shown to

be beneficial for the heart, but in this case the relationship was stronger for white

wine" (Holger 2002). This can be further supported by (Charters 2006) who states

in his book, Wine & Society that "wine taken in moderation, has been considered a

health-promoting beverage since the time of Hippocrates, the father of medicine"

The Company's Board has also during one of its monthly meeting discussed the

fact that another issue it faces is that as consumers, we are social beings andtherefore, are apt to trying out new products. This can be supported by Steve

Charters who argues that "wine is moving from being the sophisticated elite drink

or everyday bulk beverage to a lifestyle product, so the focus of the modern

consumer is evolving (Charters 2006). This can be related to the fact that

consumers are also experimenting by trying out alternative drinks that are available

in the market. People are said to living longer with there being a continuous

growth in the population of the youthful elderly. Due them being the ones with the

most disposable income and with social trends changing, Misterioso Wines has not

suffered a loss with this target market as they are its main consumers.

It was recognised early on that some consumers buy on the basis of emotions and

especially when they like and can relate to the person advertising the product.

Therefore, Misterioso Wines decided to latch onto the clever marketing trend of

using celebrities to endorse and advertise its wines. This gave it a much needed

boost with its sales as it was then deemed by its emotional consumers to be the

"happening" drink as certain celebrities were drinking it. Following on from this,

Misterioso Wines also recently managed to secure a deal with a number of caf's

around the county with regards to supplying their wines. This was as a result of

trying to tap into the recent upsurge in caf culture that has caught on in the UntiedKingdom. This has served the Company well as the caf owners are always

requesting for more stock due to customer demand.


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In conclusion and borrowing from Evelyne Resnick, who stated that "from thevineyard to the glass, wine is a cultural, emotional and commercial product and

that it has value, both real and virtual". Furthermore, that "wine is about taste,

pleasure, people and places" (Resnick, 2008). Will all of the above factors

discussed in this paper propel it or bring its demise, well, no one knows except

maybe the wine drinker who will choose to buy it opt for alternative drinks.

Ultimately, wine or any other product for that matter relies on consumers for its

existence.

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This paper's sole focus has been on analysing Misterioso Wines as a luxury good in

today's climate. Particular emphasis has been placed on the different elements that

play a shaping role by utilising the PESTEL framework. For the purpose of this

appendix, all factors relating to the PESTEL framework will be analysed and this

will also aim to highlight the opportunities and threats that affect the wine industry.

Political

As the United Kingdom has an unwritten constitution and is a democratic country,

its Government of the day can change its laws depending on its political approach

and ideologies. This however, will depend on whether there is political stability or

not. The current and previous Governments have had a lot of input into creating

laws that target and aim to deal with the effects of binge drinking, anti-social

behavior and public disorder as a result of alcohol consumption. The Governmentof the day drives economic decisions including interest rates, taxation changes,

economic growth, inflation and exchange rates. These issues, without a doubt have

had a great impact on Misterioso Wines as an organisation. Further to this, with

the United Kingdom being a member state of the EU, the opportunity is present for

Misterioso to tap into and expand its market base into markets that are readily

available due to the treaty.

It is worth however, bearing in mind that this will also pose some threat in terms of

exchange rates, exporting costs as well as ensuring that its wine can supersede

what is readily available in these exports countries in terms of quality and price.

Further to the above and as recently reported in the Independent newspaper, the

Government is proposing to set a minimum floor price on alcohol which, is to

include the price of duty and VAT.


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The reasoning behind it is also that it will minimise the amount of alcohol beingconsumed as it would then not be so cheap to buy and also that the levy on alcohol

retailers will help to pay for emergency and alcohol-related services.

Economic

The United Kingdom including many other countries on a global scale are still

experiencing difficulties with the recession or issues borne out of it.

Manufacturers are sharing these difficulties too as due to inflation rises, material

costs have risen thereby increasing their overheads costs. The wine industry is not

exception as some of its products such as bottles, fermentation kits etc are

purchased outside of the United Kingdom. Inflation also provokes higher wage

demands from employees and raise costs which, with Government interventions, in

some cases, can be effected through the minimum wage increase. This is another

factor that organisations will also need to factor into their costing as ultimately;

employees are required for wine production as it is not a product that can solely be

operated by technology. The afore mentioned points are overheads that will haveto be factored into the retail price of the finished product. In such competitive

times, this could be detrimental to any organisation. Further to this, unemployment

and redundancies are a common factor nowadays and with so many people not

having much disposable income, luxury items are not on the priority list of many.

On a flip side of this argument however, certain demographic areas that hold a

greater number of the youthful elderly, the opposite may be true. Most wine

manufacturers do not only retail within the United Kingdom and will export to

different countries. The buying power of international retailers therefore, will beaffected as most will be taking a cautious approach to investments. Therefore, in

some cases, there buying power will be minimise as a contingency plan in order to

retain more capital in case of the economic recession not coming to an end soon

enough.


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Further to this, if interest rates are high, most investment plans that were in placewould most likely not be ventured into as because it will costs more to borrow and

increase the overall amount to be paid back and this will to be an attractive option

to investors. Once buyers reduce their buying levels, this will impact heavily Wine

manufacturers as these companies firstly, will not be able to sell existing stock and

ultimately, this means that they cannot produce more. Not producing more means

that the workforce, equipment etc. are not being used to their full capacity. This

again will have a negative effect on Wine Companies as it will still have ongoing

overheads to pay for such as staff wages, storage and advertising costs, as well asother costs involved within its manufacturing process.

With wine consumption not being a basic necessity but rather a luxury item, it can

be argued that its procurement will possibly deteriorated however, this will differ

from place to place depending on its consumer type. It can be said for certain that

not all wine that is produced in the United Kingdom is consumed here. Wine

manufacturers will no doubt export some of their products and these will of course

attract Custom & Excise duties to be paid. Due to economic instability, this will

no doubt have an effect on the exchange rate between counties and this in effect,will be passed onto the manufacturer as part of their overheads.

Social

Wine consumption can in some cases, be described as a social product and thus, it

can be affected by cultural influences. Another factor that is to be considered is

that trends are forever changing and evolving and wine in some demographics, is

considered as a meal drink rather than an outing one. Celebrity endorsements is

also another factor that could be tied into this as most emotional consumers willwant to be with the "it" drinks that the famous are consuming. The social threats

however that these pose is that, we are constantly being overloaded with

information on the effects of drinking and from a medical view, how they

contribute to health issues such as obesity.


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In the same vein and for some consumers, this may not be a negative factor as eventhough the warnings come with the dangers of drinking, information is also being

presented on the health benefits of wine consumption when taken moderately.

Further to this, aattitudes to work and leisure as most people are now socially ever

more conscious of having a work/life balance. This in most cases involves

winding down at home at with a bottle of wine. This is also reflective in the fact

that due to lifestyle changes and disproportionate income distribution, those who

cannot afford to go out on social outings, are choosing to drink at home.

Technological

Technology has moved in bounds and leaps since wine manufacturing started.

This has enabled and improved research into its development, production and

quality. Further to this, the productions of materials have improved and its

marketing approach has developed in line with emerging technology and

competition. As with any manufacturing organisation, wine manufacturers have

greatly benefited from advancement in technology. This can be seen within in its

automated payroll systems as well as reducing transaction costs which, without the

aid of technology, would have taken many man hours to resolve.

Technology has also enabled manufacturers to discover new ways of making their

products better. These developments benefit consumers as well as the

manufacturers by helping them in providing desired products, improving quality

which, can lead to more innovative products. This can be seen within the newtrend that has evolved in organic wine manufacturing. This has taken off and

thanks to technology as well as the fact that no pesticides are used in the growth of

the grapes. Further to this, advancements in technology has led to better packaging

and bottling which, makes it more attractive and eye catching to consumers.

Technological advancement also brought with it, online shopping which, is part of

our everyday fabric nowadays. This enables consumers to purchase directly from

manufacturers which, benefits the consumer especially in the case of wine

enthusiast as they will be able to buy rare wines as collectables.


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Further to this, this has also aided vineyard owners to be able to added additionalbusiness ventures to their wine production. This being for example amongst many,

The Three Choirs Vineyards where consumers are offered accommodation

overlooking the vineyards, a tour of the vineyards, wine tasting sessions in the

winery, a opportunity to adopt a vineyard etc and all of this can be arranged via

their online reservation systems (www.three-choirs-vineyards.co.uk). All of the

above, I dare say, would not have been possible without the existence or

advancement of technology. Advancement of this factor has also helped in

providing easy to use processes such as stock inventories which would have been

time consuming manually, online credit/debit card payments etc.

Environmental

Wine, being a produce of agriculture, will no doubt be affected by environmental

factors such as the weather and climate change as in order to produce good grapes

to be harvested, the land being used will need to be conducive to grape growing.

Vineyards require large ground areas and needs a lot of watering in order for the

crops to grow. Temperature changes will also have an impact on the growing of

crops as in some areas, we have recently experienced are still experiencing inextreme climate changes in the United Kingdom.

We have experienced above average weather for some summer months which,

possibly may not be very conducive for plants to grow and flourish. As

organizations as well as individuals are becoming more and more aware of major

climate changes occurring due to global warming, this is constantly being brought

into the forefront of decision making. Organisations with the wine industry being

no exception, are now more than before, considering their corporate social

responsibility and the image they portray with regards to how they operateespecially where it concerns environmental issues. In light of the afore mentioned

points, the desire and need to protect and sustain the environment is and becoming

an issue at the forefront of most producers and consumers. Another factor that can

be related to this issue is the fact that these and most goods need to be transported

from the manufacturer to the supplier and then to the consumer.
http://www.three-choirs-vineyards.co.uk/http://www.three-choirs-vineyards.co.uk/


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This causes pollution in the air which, has been at the heart of environmentalcampaigners arguments Road transport accounts for 22% of total UK emissions

of carbon dioxide (CO2) the major contributor to climate change

(environmental-protection.org.uk). Interestingly enough however, some may argue

that the above may not and will not affect wine manufacturing at all. This however,

is debatable depending on what side of the fence you are sitting on.

Legal

Wine manufacturing and consumption has not been free of Legal intervention andit can perhaps be argued that it probably attracts more intervention than other

product due to it being a product for human consumption. These laws have been

put into place to regulate and monitor the production and sale of wine. They serve

the fundamental purpose of ensuring that the correct wine making practices are

followed, such as ensuring that the Weights and Measures procedures are adhered

to etc. Following on from this, The Wine Regulations 2009 Act set particular

restrictions in place to ensure that certain criteria are met before any produced

wine, can be sold to retailers for onward retail to consumers. These include

ensuring that the total alcoholic strength of certain wines does not exceed themaximum of 15%. Further to this, that there is no indication of yeasts or bacteria

to spoil the wine etc and for producers who breach these regulation, penalty fines

are applied to their business (Lawtel, 2009). Health and Safety Laws were also

introduced to ensure that employees are protected at work and that adequate

protection is provided to minimise or avoid unnecessary incidents and accidents.

With the United Kingdom being a member state of the European Union, it must

follow EU laws about wine production, distribution and sale. These laws affect

growers, wine makers, wholesalers and retailers in this country.

The EU and United Kingdom also enforce the Competition Act 1998 which,basically prohibits agreements or practices that restrict free trading and

competition between businesses. Further to this, it also bans abusive behaviour by

a firm dominating the market, or anti-competitive practices that tend to lead to

such a dominant position. Practices controlled in this way may include pricegouging, refusal to deal and predatory pricing amongst other.


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This Law also serves to supervise mergers and acquisitions of large corporations,including joint ventures. Transactions that are considered to threaten the

competitive process can be prohibited altogether. Consumer Laws are especially

relevant in the Wine Industry as these are designed to protect customers against

unfair practices such as misleading descriptions of the product. This is especially

relevant in todays society as there are many fraudulent companies whose sole aim

is to pose as reputable wine manufacturers. They manufacturer substandard

beverages with non wine ingredients and colouring and pass these off as real wine

which, in some cases, can be harmful to the consumer. Employment Laws are also

relevant as to this industry as these cover areas such as redundancy, dismissal,

working hours and minimum wages. They aim to protect employees against the

abuse of power by employers who may find it acceptable to maltreat employees.


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Online Resources

Mintel Marketing Intelligence, Consumer Attitudes to Drinking UK, 2010,

oxygen.mintel.com

HOLGER, Schunemann Dr. (2002) Wine Good for lungs, BBC News, BBC Online.

news.bbc.co.uk/1/hi/health/1998633.stm

Minimum wage up to 5.80 an hour, BBC(2009). bbc News, BBC Online.

news.bbc.co.uk/1/hi/business/8045453.stm

Illumina Database

www.hmrc.gov.uk

www.three-choirs-vineyards.co.uk

environmental-protection.org.uk

Business Source Premier, UK Markets Heats Up, 2006

The Wine Regulations 2009, Lawtel

Books

RESNICK, Evelyne, (2008). Wine Brands, Success Strategies for New Markets, New

Consumers and New Trends, Basingstoke, Palgrave Macmillan

CHARTERS,Steve, (2006). WineandSociety: TheCulturalandSocialContextof a

Drink,San Diego : Elsevier, 2006.

HALL, Michael and MITCHELL, Richard (2008). Wine Marketing, A Practical

Guide, 1st

Edition, Amsterdam ; London : Butterworth-Heinemann
http://www.three-choirs-vineyards.co.uk/http://www.three-choirs-vineyards.co.uk/http://www.shu.eblib.com/patron/SearchResults.aspx?q=Winehttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Winehttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Societyhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Societyhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Societyhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Culturalhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Culturalhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Culturalhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Socialhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Socialhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Contexthttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Contexthttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Contexthttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Drinkhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Drinkhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Drinkhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Contexthttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Socialhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Culturalhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Societyhttp://www.shu.eblib.com/patron/SearchResults.aspx?q=Winehttp://www.three-choirs-vineyards.co.uk/


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Newspapers

BUSSEY, Katrine (2009). Alcohol minimum price recommended. (online). Article fronm

The Independent, last accessed 10th

November 2010 at:

http://www.independent.co.uk/news/uk/home-news/alcohol-minimum-price-

recommended-2066936.html

Bounds, Andrew (2010). Minimum price on alcoho hits snag (online). Article from

The Financial Times, last accessed at 1st

December 2010 at:

http://search.ft.com/search?queryText=minimum+price+on+alcohol&ftsearchType

=type_news

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Wine as a Luxury Good

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