Australis Research Solutions

The Grape Harvester for all Terrains The new range of Braud grape harvesters is equipped with a transverse levelling system which will compensate for slopes up to 30%. Increased stability is ensured by the fact that the front wheel cylinders are directly linked and for security a safety valve is operated when needed. Minimum working height can be pre-set and the ground clearance beneath the chassis can be varied over 600 mm by means of a hydraulic system controlled from the operator's platform. The Saphir range grape harvesters are fitted with a heavy-duty hydrostatic transmission with a hydraulic pump powered directly by the main engine. The unique Anti-Skid system eliminates the risk of wheel slippage. If the front wheel would tend to spin, the pressure in the return line of the hydraulic oil to the rear wheel will increase, thus increasing the speed of the rear wheel matching automatically the speed between the front and rear wheel to avoid wheel spin. The direct connection in the hydraulic circuit between the front and rear wheels allows for this effect.

New machines like this cost around $500,000, but you can pick up good quality used machines for as little as $50,000. Moreover, they do the work of 100 people!

Topic 7

Week 8

Costs of production

Questions

Hints

Explain the effects that the increased production of wine in countries such as South Africa and Chile is having on the world wine market, illustrate with a diagram. Explain how the measures that are discussed in the article will affect the operations of firms, use a set of cost curves to illustrate these changes. Is this good advice? Discuss how the measures discussed in the article are affecting the Australian wine industry. Is this good advice? How will mechanical harvesting affect the operations at Duloc? Does your analyses change if Matthew and Zoë lease (not rent or buy in contract harvesting services) rather than buy a harvester? Can you suggest any other strategies that Matthew might pursue to improve profits? Derive the total product and total cost curves of Duloc and the derive the average fixed costs curve, the average variable cost curve, the average total cost and the marginal cost curves for Duloc. Explain how the Law of Diminishing Marginal Returns to the Fixed Factor of Production is related to the shape of the ATC and the AVC curves for Duloc. Reflecting on your answers to questions 6 and 7, how might firms reduce their ATC in the short-run, will these changes affect the marginal cost curve? Using a Demand and Supply model for labour, can you explain why wages are rising in the Southern Vales? What are economies of scope and how can they help a firm like Duloc to increase profits. Illustrate with some examples.

Draw a firm/market diagram and use it a basis for analysis. Draw a firm market diagram and use it a basis for analysis. Be clear about the effects on AVC, AFC, ATC and MC. Base your answer on a consideration of the conditions for entry and exit in the market structure that best describes the wine making operations at Duloc. Draw a firm market diagram and use it a basis for analysis. Be clear about the effects on AVC, AFC, ATC and MC. Be sure to be thinking like an economist with respect to fixed costs when you answer the second part of this question and not like an accountant. So, start with exploring both definitions of fixed costs. Answer to this type of question usually focuses on reducing AVC, but you should be looking for more creative solutions. Derive these curves from first principles, i.e. paraphrase and understand the textbook. You do not need to collect any data. Keep this discussion nice and general. The key think is to understand the relationship between these curves. Again keep this discussion general and draw both sets of curves, perhaps think in terms of labour productivity explaining the shapes of these firms. This question is asking you to think about the relationships between AVC and AFC and ATC and MC in the short-run. Illustrate you answer with a labour market model and think about the demand and supply factors operating in this labour market. Especially the relationship between the wine industry and the labour market, derived demand? Start with a definition of economies of scope and then link this definition to the AFC, AVC, ATC and MC curves. Think about how this concept may help recession proof a firm. Illustrate with cost curves.

Topic 8

Week 9

Equilibrium
Taste of the grape to come from famous user of hops.
By MEREDITH BOOTH.
The Advertiser 25 September 2003
CARE for a glass of Coopers chardonnay? Adelaide's Coopers Brewery is considering adopting its own wine label.

The company, best known for its sparkling and pale ales, was passively eyeing potential wine opportunities, executive chairman Glenn Cooper said.

He said the family-owned brewer had "always taken things carefully" and the addition of actual wine to the range could take two years.

"If we were to go into the wine area, it would definitely be at a premium top-image end," Mr Cooper said. "We would look to market that along the same lines that we market pale and sparkling ales."

Mr Cooper said any potential wine brand would need already to have established a strong image as a premium product. Coopers already is selling premium home-winemaking kits in Canada and has a small market for the kits in Australia.

Meanwhile, sales of Coopers pale ale have jumped 26 per cent this financial year but Mr Cooper said there was no underlying reason why.

The ale's popularity had increased in regional South Australia, Darwin, Victoria and New South Wales - up between 26 and 30 per cent on the previous July and August.

"There was a huge increase in people outside of Adelaide, with country areas now putting it on tap," Mr Cooper said.

Volumes in Victoria were likely to climb from two million litres to three million litres this financial year while Sydney drinkers had recorded a 30 per cent increase so far this year, from four million litres sold last financial year. Sales of Coopers draught were "okay", Coopers light sales were under pressure from Cascade and Hahn light brews and pale ale sales had taken about 1.5 per cent from sparkling ale volume sales, he said.

"If you take the overall beer volumes in Australia, which were down by 3 per cent, we ended up nearly 3 per cent above the previous year," Mr Cooper said.

The company's new Regency Park brewery, operating since January, had almost triple the production capacity of the former Leabrook site and was producing in line with overall volume growth of 3 per cent.

The weather over the past two summers has been “average” and so the South Australian wine industry, including the Southern Vales, has had time to recover from the disastrous (bumper) crop of 2002. However, things have not returned to the halcyon days of the late-1990s. The massive plantings of the late-1990s have all matured and so supply in the Southern Vales has increased substantially. On the demand side, exports have slowed due to the high Aussie dollar and increased competition from low cost (and thankfully from the perspective of the Southern Vales) low quality wines from emerging new producers such as South Africa and Chile. To make matters worse, some eastern states wineries are importing bulk Chilean wine to put into their casks, in reference of bulk wines from the Southern Vales. Also on the demand side, wineries are finding that retail prices are falling as a result of the increased oligopolisation of the Australian retail beer, wine and spirits market and the reliance of big supermarket chains in the UK and the USA as the driver of exports. As a consequence, wine prices are falling, except at the very premium end of the market, profits are falling and producers are all looking for different ways to reduce costs and so restore profits.

Zoë has been following these market trends more closely than Matthew and she is concerned about the threat from overseas competition. Zoë is of the view that they do not represent a direct threat to Duloc, but she feels that the indirect effects of these emerging producers should not be under estimated. At the last board meeting of Duloc Pty Ltd, she urged Matthew to seriously think about ways to reduce costs and increase demand. She again urged Matthew to abandon hand harvesting and begin using mechanical harvesting. Harvesting is a major cost and this would reduce overall costs substantially. However, Matthew asked for time to consider this proposal as it may have “operational implications”, “whatever that means” thought Zoë. Matthew also stated that this proposal sounded like a simple bean counter approach to the problem and that he expected Zoë to come up with something a bit more innovative.
Over the past few years Zoë and Matthew have continued to plant their remaining paddocks to vines. This process has now been completed and consequently Duloc now has a total of 315 acres planted to grapes. Working on the basis of five tonnes per acre (the long run historical average production at Duloc) Duloc is now producing about 1,600 tonnes of grapes per year, the equivalent of 1.1 million litres of wine or 1.6 million bottles. Even so, it appears that the wine making facilities that James acquired as scrap metal from Harry’s still has some excess capacity. So, Zoë has developed an innovative solution, buy extra land or vineyards in order to increase capacity and so make better use of their fixed costs.

Topic 8

Week 9

Equilibrium

Questions

Hints

How could small wineries like Duloc counter the market power of Coles and Woolworths? How does the exchange rate affect the market for Australian wines? How do increased exports of wine affect the exchange rate? How would a recession affect the wine industry, would all market segments be affected equally? Why are brewers entering the wine industry? Illustrate with a firm/market model. Explain the logic underlying Zoë’s proposal to increase the size of Duloc. Illustrate your answer with firm/market diagram. If you were a wine industry consultant who had been asked by Zoë and Matthew about what type of operation they should acquire, how would you advise them? Explain how market adjust if the price is (a) too high and then (b) too low. How would building an icon band at Duloc affect its cost structure? Should Matthew and Zoë build an icon brand. Is increasing the size of Duloc the only way to increase profits, what other actions could Matthew and Zoë put in place?

Clearly Zoë is hatching a plan that will offset the monopsony power of Coles and Woolworths by sidestepping the markets in which they operate or maybe she is thinking about other forms of product differentiation. If the Aussie depreciates the cost of buying Australian wine falls in terms of foreign currency. You need to think about the non-price determinants of demand and supply for the Aussie in the foreign exchange market, use the inverse approach to be safe. Link this question to the non-price determinants of demand. Then think about a firm might use the concepts of scope economies and price discrimination as part of recession proofing strategy. Why does any firm decide to enter a market, illustrate with a firm market diagram. Think in terms of the guiding function of prices. This is another application of the concepts of economy of scale. Matthew and Zoë are learning by doing, they think they can exploit economies of scale, but they do not yet know what their minimum efficient scale is. So they keep increasing production until ATC starts to rise. I would think in terms of fit with Duloc’s strategic direction. This needs to be a really rigours exploration of market forces, of how the Qs and Qd change in response to competition from buyers or sellers. Illustrate using Duloc’s cost curves as an analytical framework. You need to be clear about the difference between fixed costs and variable costs. An icon brand, by definition, would have very limited production that would not vary from year to year. Reflect on the market structure that they see themselves operating in and then think about ways to reduce ATC or to convert consumer surplus into producer surplus or to increase TR.

Topic 9

Week 10

Market structures

DRINKERS BENEFIT AS TOP BRANDS SELL AT HALF-PRICE Retail giants in wine price cutting battle.
By NIGEL AUSTIN.
16 August 2004 The Advertiser
WINE drinkers are the winners of a full-scale discounting war in Adelaide.

At the heart of the savage price-cutting is a struggle for market share between two retail giants, Coles Myer and Woolworths.

Some wines are being sold at half their recommended retail price.

Both companies have identified the liquor industry as a major growth area offering market share growth of 50 per cent within five years.

Price competition has become so fierce so quickly that the proprietors of smaller outlets fear they may be forced out of business.

Woolworths has become the fastest-growing wine retailer in South Australia after its recent acquisition of part of the Booze Bros chain and Le Grog liquor chain.

Woolworths and Coles Myer now each own 34 bottle shops in SA, although the former will own 41 when its purchase of Le Grog is finalised.

Coles is likely to hit back with more wine superstores such as its new Quaffers outlet at Unley, while Woolworths is planning to make provision for more bottle stores in its supermarkets.

The discount war has been heightened by some of the major wine producers also fighting for market share.

Southcorp Wines is offering wide discounts as it strives to boost market share and rationalise its huge brand portfolio.

BRL Hardy is offering some excellent quality wines at bargain prices.

Liquor Stores Association of SA president Martin Baily yesterday warned the wine market will become even tougher, with some retailers forced out of the industry.

Retailers who survived would eventually benefit from fewer players in the market.

"It opens doors for small retailers to take wine that supermarkets can't handle," he said.

Melbourne Street Fine Wine Cellars owner John Swanson said his strategy was to market exceptional wines from small winemakers which were not generally sold by the big chains.

They include products by such producers as Rockfords, Majella, Torbrek, Veritas, Greenock Creek, Turkey Flat, Castagna, Dalwhinnie and Somerfield.

But Skye Cellars owner John Mazzocato said the price war was severely hurting small family businesses and the industry needed to be regulated.

"This whole industry is falling about because Coles Myer and Woolworths are prepared to lose money to gain market share," he said.

"At the end of the day you've got to ask yourself how can the public companies likes Coles or Woolworths lose money to gain market share."

After many meetings and much debate Zoë has prevailed. Zoë and Matthew have decided to acquire the neighbouring farm, Farquaad, complete with its 300 acres of vines and its wine making facilities and other buildings. Farquaad is also 320 acres in size and for the first time since 1893 the originally surveyed square mile property (640 acres equals a square mile) that Samuel Barnes bought in 1838 is back in the hands of the Barnes family, albeit via Duloc Pty. Ltd. The history of Farquaad parallels that of Duloc. The only real difference is that bottled Farquaad wines tend to be aimed at the premium end of the market, while its flagons, casks and coolers are clearly aimed at the basic market segment. Essentially, Farquaad wines uses good quality grapes, they are not unlike those at Duloc in terms of age and varieties, to make poor quality wine. This synergy was an important factor in the decision to purchase Farquaad.

Zoë and Matthew have decided that the Farquaad brand is not an asset and that it needs to be removed from the market as quickly and as quietly as possible. So, the inventory of wines that they have acquired with the purchase of Farquaad is to be disposed of at the best possible price, that is so long as the marginal benefit exceeds marginal costs, and a new brand is to be developed. Zoë and Matthew have decided to name the new brand Sea Eagle. Sea Eagle wines are to be made by Matthew and his staff at Duloc and the wine making facilities at Farquaad are to be mothballed. Zoë has estimated that Duloc has sufficient excess winemaking capacity to process the entire 1,500 tonne production of Farquaad Wines. The entire inventory of Farquaad Wines is to have their labels removed and then sold as cleanskins in the basic market segment. The inspiration for this strategy was the takeover of Quelltalter wines by Wolf Blass in 1987.
Two different marketing strategies will be developed in order to further differentiate the Duloc and Sea Eagle brands. Duloc will still produce ultra-premium wines, which will continue to be sold through the cellar door and by specialty wine stores. Sea Eagle wines will be positioned in the super premium segment. These wines will have longer production runs and they will not be sold through the cellar door in order to avoid brand dilution. They will be sold through smaller independent retail chains such as Sip ‘n’ Save and Thirsty Camel in order to avoid the monopsonistic activities of Coles and Woolworths. The premium market segment will be serviced by clean skins. Zoë and Matthew have decided to withdraw for the basic market segment altogether. Reluctantly, Matthew has agreed not to pursue plans to enter the icon segment of the market.
The acquisition of Farquaad by Duloc solves one set of questions, that is, how to increase production in order to lower costs. However, it has created another set of problems. As all of the wine making, management and administration activities of the merged organisation will be centralised and performed at Duloc, all of the buildings and most of the capital (including the wine making facilities) at Farquaad are surplus to requirement.

Topic 9

Week 10

Market structures

Questions

Hints

How does the acquisition of Farquaad lower production costs at Duloc and does it have any other impacts on the profit function at Duloc? Do you agree with the decision to withdraw from the basic market segment? If you were asked, what would you suggest as the best way to dispose of the stock of Farquaad wines? How do you think that the plant, equipment and buildings at Farquaad should be used. Do you think that there is any difference between the price elasticity of demand between young and old wine drinkers? Do you think that there is any difference between the price elasticity of demand between young and old smokers? What market segment would you target a basic wine at, explain your answer. The wine industry is still expanding, driven largely by increased exports, if another new export market was to open up, how quickly can wineries respond to the resultant increase in demand? How quickly can vineyards respond to the resultant increase in the derived demand for grapes. Another factor that is underpinning the increased demand for Australian wine is growing incomes, both in Australia and in our export markets. What would happen to wine sales if the US economy slipped into recession? Would each market segment discussed in the Introduction be affected in the same way? What is the market structure of the Australian wine industry? How does Duloc fit into this structure?

Look at both the short-run and the long-run ATC curves, but you might also like to think about price discrimination. This is another third order price discrimination questions. This is yet another third order price discrimination questions. Think about the relationship between MB and MC and remember that it can be very expensive to dispose of large amounts of wine legally. Ask yourself, given all the competitive pressures is it time for Duloc to exit the wine industry? If so, what industry could they easily enter, think in terms of economies of scope and the fixed costs (i.e. the capital) they own. You need to explain the differences in PED, if there are any and illustrate with yacht diagram. You need to explain the differences in PED, if there are any and illustrate with yacht diagram. Think in terms of PED and the determinants of PED. This question is asking you to think about the shapes of the supply curves for both grapes and wine, are they the same shape? If not why not? Again use price discrimination and scope economies as the basis of recession proofing strategies. .Read the Introduction to this case study and the oligopoly notes appended to the end of this case study.

Topic 10

Week 11

Factor markets