Analytics Involving Pricing and Production
Winemakers and distributors experience many challenges, and I plan to share my thoughts in this page.
Pricing Wine Futures: Impact of Barrel Scores
Wine futures refer to the contract that the winemaker sells her/his wine while it is still aging in the barrel. In one of our studies, we provide a new model that determines the optimal price to release wine futures to the market, the optimal amount of wine to be sold in the form of futures (selling it advance, before the wine is bottled), and the optimal amount that should go into retail and distribution. In this work, the pricing decision, along with production and distribution decisions, rely on the barrel scores established by tasting experts. Our study shows empirically that wine futures improve profits of Bordeaux winemakers on average by approximately 10%. It estimates that establishing a wine futures market in the US can improve the profitability of the small winemakers by approximately 14-15%.
This study is featured in Wine Spectator:
A pdf copy of the Wine Spectator article is here: [Wine Spectator article].
Here is a short video describing the importance of wine futures for Bordeux winemakers as well as the small and artisanal winemakers in the US:
The full paper can be downloaded from:
Pricing Wine Futures and Bottled Wine: Impact of Weather and Market Fluctuations
This work examines the impact of weather and market fluctuations in determining the price of wine futures and how it evolves to bottle price. In his seminal work, Professor Orley Ashenfelter (Princeton economist) indicates that weather is a great predictor for aged wines, but young wine prices cannot be estimated through weather data. Our new work shows that we can estimate the price of wine futures and how they evolve into bottle prices. This information is then used to build a mathematical model that helps wine distributors in their selection of wine futures from the previous summer’s vintage versus bottled wine from two vintages ago. We demonstrate the financial benefit from using our model when compared to the traditional practice of buying only bottled wine.
Here is a copy of this paper: [download].
To assist media queries, we have the following video that explains our findings: https://www.youtube.com/watch?v=fsdWJtdvQoQ.
The Interaction between Downward Substitution and Pricing Flexibilities
Wine production is a challenging business due to the growth of grapes. Summer temperatures, the difference between cold and hot days, and diseases can influence not only the amount of grape crop but also the quality of the grapes.
In this study, we investigate the impact of the random proportion of high-quality and low-quality grapes in making wine. Winemakers typically deal with this issue by offering two products: a high priced premium wine catering to market segment that has consumers with higher willingness to pay, and a low-end wine that competes in a price-sensitive market segment.
Often price-setting and downward substitution flexibilities are perceived to be substitutes to each other. Our work shows that these two flexibilities can act like complementary flexibilities; specifically, price-setting flexibility can increase the utilization of the downward substitution flexibility. We are in the process of rewriting this work — a little patience, and we will have it done soon.
One of our favorite wineries in the Finger Lakes region is Heart and Hands Winery. And, we are always grateful for the opportunity to learn from Tom and Susan Higgins. Here is when Heart and Hands is featured in a CBS Morning show.