WSET Diploma D2 Exercises (Factors that Affect the Price of a Bottle of Wine)

Answer

There are seven main types of vineyard establishment costs: land costs, infrastructure costs, planting costs, land preparation costs, protection costs, machinery and equipment costs, and financing costs.

Land costs refer to the expense of buying or leasing the land where the vineyard will be established. These costs vary widely depending on environmental conditions and land scarcity, even within the same region.

Infrastructure costs include building access roads, installing irrigation systems in dry regions, and setting up deep drainage channels and pipework in poorly drained sites.

Planting costs cover the purchase and planting of vines, as well as the installation of trellising systems.

Land preparation costs involve surveying the land to assess its suitability for viticulture and clearing the site of vegetation, rocks, and other obstacles.

Protection costs include measures to guard against weather hazards—such as installing windbreaks, frost protection systems, and protective mesh for hail—as well as fencing and netting to deter animals.

Machinery and equipment costs refer to the expenses associated with purchasing or renting items such as tractors, sprayers, and harvesters. To avoid substantial capital investment, some producers choose to rent this equipment only when it is needed.

Financing costs relate to funding the capital expenditures required to establish a vineyard, including interest and loan repayments. In some countries, governments provide subsidies or tax incentives to support new vineyard projects.

Grading Criteria

• Land Costs
  • For identifying land costs as one of the main vineyard establishment costs, you get 1 point
  • For identifying that land costs involve the purchase or lease of land for vineyard use, you get 1 point.
  • For explaining that these costs vary depending on environmental conditions and land scarcity, even within the same region, you get 1 point.
• Infrastructure Costs
  • For identifying infrastructure costs as a category, you get 1 point
  • For stating that these include building access roads and installing systems like irrigation or drainage, you get 1 point.
• Planting Costs
  • For identifying planting costs as a main category, you get 1 point.
  • For explaining that this includes vine purchase and trellising system installation, you get 1 point
• Land Preparation Costs
  • For identifying land preparation costs, you get 1 point.
  • For explaining that they involve land surveying and clearing of vegetation or debris, you get 1 point
• Protection Costs
  • For identifying protection costs, you get 1 point.
  • For describing examples such as windbreaks, frost protection, and fencing against animals, you get 1 point
• Machinery and Equipment Costs
  • For identifying machinery and equipment costs, you get 1 point.
  • For explaining that this includes purchasing or hiring machinery like tractors and harvesters, you get 1 point.
  • For stating that some producers opt to rent this equipment when needed to avoid high capital investment, you get 1 point
• Financing Costs
  • For identifying financing costs, you get 1 point.
  • For explaining that these include interest and loan repayments for vineyard establishment, you get 1 point.
  • For stating that some countries offer subsidies or tax incentives, you get 1 point

Answer

There are seven main types of vineyard management costs: labor costs, machinery and fuel costs, supplies costs, vineyard treatment costs, water costs, electricity costs, and insurance and depreciation costs.

Labor costs refer to the cost of human resources required for vineyard operations. The amount of labor needed varies greatly depending on the vineyard’s size, topography, and other factors. There must be a balance between labor costs and the capital costs of machinery, depending on the availability and cost of labor. The type and quantity of labor required also vary throughout the year.

Machinery and fuel costs refer to the expenses involved in maintaining and operating machinery, including fuel. Supplies costs include items such as trellising repair materials, pruning shears, and gloves for workers.

Vineyard treatment costs refer to the use of agro-chemicals such as herbicides, fungicides, and insecticides. These costs can be reduced by adopting integrated pest management practices, though some traditional treatments (e.g., sulfur or Bordeaux mixture) may still be required.

Water costs include fees for extracting water from rivers or purchasing it from other sources, particularly in irrigated vineyards. Electricity costs cover the power needed for systems such as irrigation, bird scarers, and frost protection equipment.

Insurance and depreciation costs refer to expenses for insuring the vineyard against risks such as fire or flooding, and accounting for the depreciation of replaceable assets like tractors or trellising systems over time.

Grading Criteria

• Labor Costs
  • For identifying labor costs as a vineyard management cost, you get 1 point.
  • For explaining that it covers the human resources needed for vineyard operations, you get 1 point.
  • For stating that labor needs vary by vineyard size, topography, you get 1 point.
  • For stating that labor and machinery costs must be balanced depending on the availability and cost of labor, you get 1 point.
  • For stating that the type and quantity of labor required also vary throughout the year, you get 1 point.
• Machinery and Fuel Costs
  • For identifying machinery and fuel costs, you get 1 point.
  • For explaining that this includes the maintenance and operation of machinery, as well as fuel expenses, you get 1 point.
• Supplies Costs
  • For identifying supplies costs, you get 1 point.
  • For listing or giving examples like trellis repair materials, pruning shears, or gloves, you get 1 point.
• Vineyard Treatment Costs
  • For identifying vineyard treatment costs, you get 1 point.
  • For explaining that this includes agro-chemicals such as herbicides, fungicides, and insecticides, you get 1 point.
  • For stating that integrated pest management can reduce these costs, though some traditional treatments may still be necessary, you get 1 point.
• Water Costs
  • For identifying water costs, you get 1 point.
  • For stating that these include water extraction or purchase in irrigated vineyards, you get 1 point.
• Electricity Costs
  • For identifying electricity costs, you get 1 point.
  • For explaining that electricity is used for systems like irrigation, bird scarers, and frost protection, you get 1 point.
• Insurance and Depreciation Costs
  • For identifying insurance and depreciation costs, you get 1 point.
  • For explaining that this includes risk coverage (e.g. fire or flood) and accounting for the gradual loss in value of assets like tractors or trellising, you get 1 point.

Answer

There are nine main types of winemaking costs: grape growing costs or the cost of bought-in fruit, labour costs, machinery and equipment running costs, winery materials costs, water costs, electricity costs, maturation costs, packaging costs, and depreciation costs.

In the case of high-volume, inexpensive branded Chardonnay, grape growing or fruit purchasing accounts for up to 70% of the total production cost. However, due to high yields, low levels of intervention in the vineyard, and the use of mechanisation, the cost per bottle is relatively low.

Labour costs are modest, with a small number of skilled full-time staff and some seasonal workers for harvest. Machinery and equipment running costs include fuel and maintenance. Winery materials such as cultured yeasts, sugar for enrichment, and inert gases like carbon dioxide are used, but at low cost. Water is primarily needed for cleaning, and some wineries invest in water treatment systems to enable reuse. Electricity powers refrigeration, lighting, pumps and other systems. All these costs benefit from significant economies of scale, making the per-litre costs lower than in low-volume production.

Maturation costs are minimal, as wines are often not matured for long and are held in large, reusable stainless steel tanks. Expensive new oak barrels are not used; oak alternatives like chips or staves may be employed instead. A further advantage is the improved cashflow that results from the short maturation period, which reduces the time capital is tied up in stock.

Packaging costs are also low, as lightweight standard bottles and simple labels are used. Bottling lines are often shared or used efficiently thanks to large volumes, again lowering per-bottle costs.

Depreciation costs, such as for the eventual replacement of winery equipment, are spread over large volumes and thus have a minimal impact per bottle.

Grading Criteria

• Grape Growing or Bought-in Fruit Costs
  • For identifying grape growing costs or cost of bought-in fruit as a winemaking cost, you get 1 point.
  • For stating that it can account for up to 70% of total production cost, you get 1 point.
  • For explaining that high yields, low intervention, and mechanisation help lower the cost per bottle, you get 1 point.
• Labour, Machinery and Equipment Running, Winery Materials, Water, Electricity Costs
  • For identifying labour costs, you get 1 point.
  • For identifying machinery and equipment running costs, you get 1 point.
  • For identifying winery materials costs, you get 1 point.
  • For providing examples such as cultured yeasts, sugar for enrichment, and inert gases, you get 1 point.
  • For identifying water costs and stating that water is primarily used for cleaning (optionally including water recycling), you get 1 point.
  • For identifying electricity costs and stating that it powers refrigeration, lighting, pumps, etc., you get 1 point.
  • For pointing out that all these costs benefit from significant economies of scale, you get 1 point.
  • For concluding that this makes the per-litre costs lower than in low-volume production, you get 1 point.
• Maturation Costs
  • For identifying maturation costs, you get 1 point.
  • For pointing out that maturation costs is minimal, you get 1 point.
  • For explaining that this is because maturation is brief, typically in stainless steel, with no new oak, you get 1 point.
  • For pointing out that short maturation benefits cashflow by reducing capital tied up in stock, you get 1 point.
• Packaging Costs
  • For identifying packaging costs, you get 1 point.
  • For pointing out that packaging costs is minimal, you get 1 point.
  • For stating that lightweight bottles, simple labels, and efficient bottling reduce costs, you get 1 point.
• Depreciation Costs
  • For identifying depreciation costs, you get 1 point.
  • For explaining that these costs are spread over large volumes, minimizing impact per bottle, you get 1 point.

Answer

a) Air transport is the fastest option but also the most expensive due to the heavy weight of wine bottles, which increases fuel consumption. It is typically reserved for special situations such as sending high-value wines, competition entries, or urgent shipments like Beaujolais Nouveau destined for time-sensitive markets like Japan.

b) Road freight is commonly used for short distances, particularly at the beginning and end of the wine’s journey. It is highly efficient for direct deliveries from winery to destination over short routes, such as Epernay to Brussels. However, for long-distance routes like Mendoza to New York, it becomes prohibitively expensive. While ferry crossings can streamline the journey across small bodies of water, the overall cost of such multimodal trips can still be high.

c) Rail can offer a cost-effective alternative for mid- to long-distance transport, especially when using containerisation, which simplifies loading and unloading. However, if goods need to be loaded as individual pallets, costs can escalate quickly. Its value depends heavily on route infrastructure and access to rail services.

d) Sea transport is the most economical per kilometre for long-haul routes, such as from Australia to the UK. It relies entirely on containerisation and is ideal for bulk shipments. The main drawback is the slow delivery time—up to 40 days for intercontinental routes—which requires advanced planning to ensure timely stock availability during peak demand periods.

Grading Criteria

• Air
  • For identifying air transport as the fastest but most expensive method, you get 1 point.
  • For explaining that bottle weight increases fuel consumption and cost, you get 1 point.
  • For citing its use in high-value shipments, competition entries, or urgent needs, you get 1 point.
  • For giving a specific example like Beaujolais Nouveau to Japan, you get 1 point.
• Road
  • For identifying road freight as efficient for short distances, especially at journey’s start and end, you get 1 point.
  • For noting that road becomes expensive for long distances like Mendoza to New York, you get 1 point.
  • For mentioning ferry crossings and their limited cost benefits, you get 1 point
• Rail
  • For identifying rail as a cost-effective method for mid- to long-range transport with containerisation, you get 1 point.
  • For explaining that individual pallet loading increases costs, you get 1 point.
  • For noting dependency on route infrastructure and access, you get 1 point.
• Sea
  • For identifying sea transport as the cheapest per kilometre for long-distance shipments, you get 1 point.
  • For stating its reliance on containerisation and bulk shipping, you get 1 point.
  • For explaining the downside of slow delivery times (e.g. 40 days), you get 1 point.
  • For noting the need for advanced planning to ensure peak stock availability, you get 1 point.

Answer

Bulk transportation offers clear cost and environmental advantages. Since flexitanks and ISO tanks can carry more than double the volume of wine compared to bottles in the same container size, transportation becomes much more fuel-efficient and therefore cheaper and more eco-friendly. This method is particularly attractive for high-volume wines sold by supermarkets or major brands.

However, bulk transportation is only suitable for large quantities of the same wine, making it impractical for small-production or premium wines.

Bottle transportation, on the other hand, preserves the wine exactly as the producer intended, including its packaging, which can be an important aspect of brand identity and perceived quality. It is suitable for all types of wine, including limited editions and high-value products. However, it is significantly more expensive due to the weight of glass and the space required per unit. The risk of breakage and the environmental impact of transporting glass bottles are also higher.

Grading Criteria

• Bulk Transportation
  • For identifying bulk transportation as more cost-effective due to higher volume capacity (e.g. flexitanks/ISO tanks), you get 1 point.
  • For stating that bulk is more fuel-efficient and environmentally friendly, you get 1 point.
  • For linking this method to high-volume, low-cost wines or supermarket brands, you get 1 point.
  • For explaining the limitation to large homogeneous quantities (not suitable for small-lot wines), you get 1 point.
  • For clearly stating that premium or small-production wines are not suitable for bulk transport, you get 1 point
• Bottle Transportation
  • For identifying that bottle transportation maintains wine in its final presentation as intended by the producer, you get 1 point.
  • For highlighting that this preserves brand identity and perceived quality, you get 1 point.
  • For stating that bottle transport is suitable for all wine types, including high-value or limited editions, you get 1 point.
  • For explaining that it is more expensive due to weight and volume, you get 1 point.
  • For mentioning the increased environmental impact and risk of breakage, you get 1 point.

Answer

There are five main types of sales-related costs in the wine industry: property costs, labour costs, equipment and material costs, storage costs, and delivery costs.

Property costs refer to either purchasing or leasing retail space. The more prime the location, the higher the cost. Whether buying or leasing, businesses must invest in decorating and furnishing the premises to reflect their brand image. Additionally, ongoing operational expenses such as maintenance, security, utilities, and insurance are common, while others—like commercial property taxes and waste disposal—vary by country.

Labour costs vary depending on the type of establishment. Specialist wine retailers and fine dining restaurants require highly skilled staff, which can significantly drive up these costs. Employees often need training to deliver expert service and demonstrate in-depth wine knowledge—particularly in fine dining settings, where sommeliers play a key role. This level of expertise inevitably adds to overall labour expenses.

Equipment and material costs include essential items such as a till system, refrigeration units, shelving, display fixtures, and cleaning supplies. Restaurants also require kitchen equipment, bar tools, glassware, and increasingly, advanced wine preservation systems to keep open bottles fresh for by-the-glass service.

Storage costs differ depending on the scale of the retailer. Independent stores may invest in high-quality wine fridges to maintain cellar temperature, while larger chains, like supermarkets, often use centralized warehouses located in more affordable areas, adding costs for inventory management and redistribution.

Delivery costs are significant when shipping wine to end consumers. Wine is heavy and fragile, making it more expensive to transport than many other goods. There is always a risk of breakage or spoilage during transit, further contributing to the overall delivery expense.

Grading Criteria

• Property Costs
  • For identifying property costs as a main sales-related cost, you get 1 point.
  • For explaining that they include buying or leasing premises, and that prime locations incur higher costs, you get 1 point.
  • For mentioning additional ongoing expenses (e.g. maintenance, utilities, insurance, local taxes), you get 1 point.
• Labour Costs
  • For identifying labour costs as a category, you get 1 point.
  • For stating that fine dining and specialist retailers require skilled staff (e.g. sommeliers), you get 1 point.
  • For explaining the need for staff training to ensure wine expertise and service quality, you get 1 point.
  • For concluding that this level of expertise inevitably adds to overall labour expenses, you get 1 point.
• Equipment and Material Costs
  • For identifying equipment and material costs as a cost category, you get 1 point.
  • For providing examples such as tills, fridges, shelves, and cleaning tools, you get 1 point.
  • For adding restaurant-specific needs like kitchen equipment or wine preservation systems, you get 1 point.
• Storage Costs
  • For identifying storage costs, you get 1 point.
  • For explaining that small retailers may invest in wine fridges for cellar conditions, you get 1 point.
  • For noting that large retailers use centralized warehousing with added redistribution costs, you get 1 point.
• Delivery Costs
  • For identifying delivery costs as a sales expense, you get 1 point.
  • For explaining that wine is heavy and fragile, thus expensive to ship, you get 1 point.
  • For pointing out risks like breakage or spoilage during transport that add to costs, you get 1 point.

Answer

a) Marketing Costs refer to the expenses involved in promoting wine to both consumers and the trade. These include salaries for marketing personnel, advertising campaign costs, the design and production of labels and promotional materials, event sponsorship, and providing sample bottles at trade fairs or tastings. Larger producers often have in-house marketing teams, while smaller producers typically join industry associations or generic trade organizations that market members’ wines collectively. Participation in these bodies may require annual fees or sales-based levies. Additionally, producers usually bear the cost of sample bottles and price promotions, especially in large retail settings.

b) Importation Costs encompass more than just transportation and include customs duties, taxes, and costs associated with meeting the destination country’s labelling requirements. For instance, labels might need to be modified to reflect local alcohol disclosure rules or include mandatory health warnings. Producers exporting to multiple countries may need to create different label versions, which increases production complexity and cost. Many producers hire local distributors to manage importation, navigate local regulations, and handle logistics, but these distributors charge a margin that ultimately raises the final price of the wine.

Grading Criteria

• Marketing Costs
  • For identifying marketing costs as expenses related to wine promotion, you get 1 point.
  • For listing key components such as salaries, ad campaigns, labels, and promo materials, you get 1 point.
  • For including events like sponsorships or trade tastings and providing samples, you get 1 point.
  • For noting that larger producers have in-house marketing teams, you get 1 point.
  • For explaining that smaller producers often rely on trade associations or generic marketing bodies, you get 1 point.
  • For mentioning membership fees or levies required to join such organizations, you get 1 point.
  • For stating that sample bottle costs and price promotions are typically paid by producers, especially in retail, you get 1 point.
• Importation Costs
  • For identifying importation costs as more than just transport, including duties and taxes, you get 1 point.
  • For explaining that these costs include compliance with local labelling laws (e.g. alcohol disclosure, health warnings), you get 1 point.
  • For pointing out the need for multiple label versions for different markets, which raises cost and complexity, you get 1 point.
  • For stating that local distributors are often used to manage regulations and logistics, you get 1 point.
  • For explaining that distributors charge a margin, affecting the final price of wine, you get 1 point.

Answer

Fluctuations in currency exchange rates can significantly affect the cost of wine in international trade. When a producer sells wine in one currency and the buyer pays in another, changes in the exchange rate between the time of order and the time of payment can cause unexpected costs or savings.

One method is using options, where the importer reserves a quantity of wine or currency at a fixed price. At a later date, they can choose whether or not to proceed with the purchase based on the market situation. This provides flexibility but may come at a higher price, especially for smaller buyers who lack negotiating power.

Another approach is fixing the price in the importer’s currency at the time of ordering. While this shifts currency risk to the producer, it gives the buyer price certainty. Producers may charge a premium for this service, but it helps importers better manage retail pricing and profitability.

Buying currency in advance for a specific order is another way to lock in rates. This requires expertise and resources, so it’s usually done by larger companies. It ensures that funds are available at the expected cost and shields the buyer from future fluctuations.

A more formal method is entering a forward contract with a bank to purchase a set amount of foreign currency at a fixed exchange rate on a future date. This provides full certainty and allows precise budgeting, though the importer must follow through regardless of how the market moves.

Many producers and importers choose to trade in stable currencies, such as USD or EUR, to avoid exposure to volatile exchange rates. This simplifies transactions and reduces currency exchange frequency.

Lastly, opening a foreign currency account can allow payments in the seller’s currency. While useful in some multi-country operations within the same currency zone, it offers limited advantages when buying in one currency and selling in another, and requires careful financial planning.

Grading Criteria

• General Understanding
  • For explaining that currency fluctuations impact wine cost between order and payment time, you get 1 point.
  • For identifying that this can result in unexpected costs or savings in international transactions, you get 1 point.
  • For identifying the management methods as options contracts, fixing the price in the importer’s currency, buying currency in advance, forward contracts, using stable currencies, and foreign currency accounts, you get 1 point each, for a total of 6 points.
• Options Contract
  • For explaining that options allow the buyer to reserve wine or currency at a fixed rate and decide later whether to execute, you get 1 point.
  • For noting that this method provides flexibility but can be expensive, especially for small buyers, you get 1 point.
• Fixing Price in Importer’s Currency
  • For describing that fixing the price in the importer’s currency transfers risk to the producer, you get 1 point.
  • For explaining that this gives the importer price certainty but may result in a premium charge, you get 1 point.
• Buying Currency in Advance
  • For identifying that purchasing foreign currency in advance locks in the exchange rate, you get 1 point.
  • For explaining that this requires resources and is usually practiced by larger firms, you get 1 point.
• Forward Contract
  • For stating that a forward contract fixes an exchange rate for a future date with a bank, you get 1 point.
  • For mentioning that it provides certainty and budget control, you get 1 point.
  • For noting that the importer is obligated to follow through regardless of market changes, you get 1 point.
• Using Stable Currencies
  • For identifying the use of stable currencies like USD or EUR to reduce volatility risk, you get 1 point.
  • For stating that this reduces the need for frequent conversions, you get 1 point.
• Foreign Currency Accounts
  • For explaining that foreign currency accounts allow payment in seller’s currency, you get 1 point.
  • For stating that this is mainly useful within multi-country operations or same-currency zones, with limited broader advantages, you get 1 point.