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the psychology of successful trading

#Winemaking: Business Approaches To Loss Of #Wine Production

Consider a situation where a producer has many loyal customers and sells all the wine that they make, where suddenly the volume they have to sell is greatly reduced as a result of undesirable external factors (such as catastrophic weather destroying much of their grape crop). If they seek to maximise revenue and minimise losing loyal customers, what are some of the tactics they might apply?

  • It would generally be prudent to store some wine for two reasons
    • Handling production outages such as the above-mentioned circumstances
    • If the wine can benefit from ageing, then some should be stored in any case since this will maximise value (though potentially at the cost of some temporary cash-flow issues)
    • Any such reserves of wine can be used to smooth out production between years in which there is a positive or negative difference between target and actual production
    • However, the question implies that all wine is sold and so it may also all have been sold in prior years, with the consequence that there are no reserves available
  • Since 100% of the production appears to have been allocated to “loyal” customers, then there is no way of providing the desired amounts of wine to all customers who are loyal — if any customers are casual, they should be the first to lose their allocation
    • This suggests an approach whereby the winery should rank its customers by loyalty
    • Loyalty means that a customer has bought a large quantity of wine for many years
    • A loyalty figure of merit could therefore be calculated by finding the product of cases bought and years for which they are purchased; however, the simplest way might be to find the total of cases each customer has bought in the last yen years
      • This should also be adjusted for recency — it would be a mistake to give the same loyalty score to one buyer who took 10,000 cases ten years ago and nothing since and to a second buyer who took 10,000 cases last year and says they will do the same in future — this can be done by dividing the cases bought by the number of years since they were bought
      • This algorithm produces a rank order of loyalty which can now feed in to allocation decisions
  • The first task is to contact all customers and explain the position in terms of lost production
    • The initial aim here is to find out if any customers have alternative supplies of a reasonably similar product
    • This could be supplemented by the winery seeking to proactively identify alternative suppliers — who could be located in any major global wine location — to see if those suppliers have product/excess product 
    • The winery could open discussions with this other producer about supplying existing customers — however, a major risk here is that customers remain with the alternative supplier in future years
    • Therefore consideration should be given to actually purchasing alternative supplies and thus retaining client contact
    • Funding will be required for such an operation — banks can be approached but if the winery has crop insurance, this is a good application of such receipts.  If it does not have crop insurance, it should acquire some unless it is in sufficient funds to self-insure against this risk
  • The secondary aim is to “take the temperature” of clients
    • Are they extremely unhappy about the problem or do they sound philosophical about it since they are aware that agricultural products can not be produced in guaranteed quantities?
    • Any clients who have been loyal but are also understanding can be asked to defer their allocation for this year
    • This could be on the basis that they will receive bonus allocations next year if they so wish, or other ways could be sought to keep them happy
  • Alternative production methods
    • If the grape harvest has been significantly impaired by a specific shock such as hail in the exact vineyards owned/operated by the winery, there may still be other grapes available in the region from other producers or specialist growers
      • Buying grapes in could permit production to be reinstated
      • If the adverse conditions affected the entire region, this will not be a solution
    • If the adverse factors are different, there are likely to be ways of addressing them, which will cost
      • A loss of production facilities can be replaced with e.g. the hiring of a temporary bottling line
      • Loss of staff could be the issue — if any external reason causes the loss of pickers for harvest, alternatives can be sought — is the vineyard suitable for mechanised harvest?
      • If for example a global pandemic makes it impossible for workers to travel from traditional locations in CEE, then it might be possible to employ workers furloughed from other businesses during the pandemic such as HoReCa
  • The revenue maximisation question is secondary because revenue is to some extent already maximised: all of the wine available to be sold could be sold
    • One question then becomes whether any clients are prepared to pay more in order to receive an increased allocation
    • This is risky since it could appear to be price gouging, so maximum transparency with clients is needed — this should emphasis that the winery has certain fixed costs and a much reduced production this year, so it needs to charge more per bottle in order to survive
    • Clients who appear to be at least somewhat amenable to this could be offered some discounts or guaranteed priority in future years
    • In fact, this could be an opportunity to enter into long term supply contracts with top clients who will be guaranteed what production there is in a particular year