Author Information : Burak Kazaz (Whitman School of Management, Syracuse University)
Mert Hakan Hekimoğlu (Whitman School of Management, Syracuse University)
Scott Webster (W.P. Carey School of Business, Arizona State University)
Year of Publication : Manufacturing & Service Operations Management (forthcoming)
Summary of Findings : This paper determines how best a wine distributor can allocate monies between bottled wine and wine futures based on the fluctuations in weather and market, and shows that it would improve profits by approximately 21 percent by allocating funds to wine futures in addition to bottled wine.
Research Questions : 1. How would a wine distributor allocate its budget between bottled wine and wine futures?
2. How do fluctuations in weather and market influence the evolution of prices from futures price to bottled wine price, and the price evolution of young wines in general?
3. How do fluctuations in weather and market influence the wine distributor's selection of wine?
4. What is the financial impact of featuring wine futures in the wine selection of wine distributors?
What we know : Wine distributors often carry bottled wines, and avoid making investments in wine futures due to the fact that they do not have intimate understanding how wine prices evolve from the wine futures stage to bottled wine prices. By explaining the movement in prices with weather and market fluctuations, this work demonstrates how a wine distributor can determine the selection of fine wines, and how the firm can adjust when new (additional) weather and market information becomes available.
Novel Findings : The paper explains the price evolution of young wines with respect to weather and market fluctuations. While weather is significantly influential in explaining the price evolution from the futures price to the bottled wine price, it does not influence prices after the wine is bottled. Market fluctuations continue to be a significant explanatory factor in explaining price movements before and after the wine is bottled. It shows that a wine distributor can significantly improve its profits by investing in wine futures in addition to bottled wine. A numerical analysis shows an approximately 21 percent profit improvement, a benefit that increases as the wine distributor's degree of risk aversion increases.
Novel Methodology : Earlier research has explained how aged wine prices move with weather information, but failed to explain the impact of weather fluctuations in young wine prices. This work is the first of its kind in explaining the price evolution of young wines with weather and market fluctuations. Wine distributors often do not engage in the purchase of wine futures because of the lack of understanding in the price movements. This research builds confidence, and enables them to make investments in wine futures. It shows that wine distributors can improve profits by 21 percent. Risk-averse wine distributors would benefit even more than this figure.
Implications for Practice : This work is likely to inspire more academics and industry professionals to see how they can explain wine prices based on the movements of weather (between vintages) and market conditions. Further, it's likely to change the common practice for wine distributors. Distributors can now make investments in wine futures with confidence, and allocate budgets between wine futures and bottled wine.
Implications for Policy: NA
Implications for Society: Consumers and wine collectors can also use our analysis in order to understand the movements in young wine prices, and make better and informed decisions about their selections.
Implications on Research: This work is expected to inspire additional studies in explaining and predicting young wine prices based on the fluctuations in weather and market.
Full Citations : Hekimoğlu, M.H., B. Kazaz, S. Webster. 2016. Wine analytics: Fine wine pricing and selection under weather and market uncertainty, Manufacturing & Service Operations Management, forthcoming.
Abstract : This work examines a risk-averse distributor’s decision in selecting between bottled wine and wine futures under weather and market uncertainty. At the beginning of every summer, a fine wine distributor has to choose between purchasing bottled wine made from the harvest collected two years ago and wine futures of wine still aging in the barrel from the harvest of the previous year. At the end of the summer, after realizing weather and market fluctuations, the distributor can adjust its allocation by trading futures and bottles.
The paper makes three contributions. First, it develops an analytical model in order to determine the optimal selection of bottled wine and wine futures under weather and market uncertainty. The model is built on an empirical foundation in which the functional forms describing the evolution of futures and bottle prices are derived from comprehensive data associated with the most influential Bordeaux winemakers. Second, the research develops the structural properties of optimal decisions. It demonstrates that a wine distributor should always invest in wine futures because it increases the expected profit in spite of being a riskier asset than bottled wine. The researchers characterize the influence of variation in various uncertainties in the problem. Third, this study empirically demonstrates the financial benefits from using this model for a large distributor. The hypothetical average profit improvement in the numerical analysis is significant, exceeding 21 percent, and its value becomes higher under risk aversion. The analysis is beneficial for fine wine distributors as it provides insights into how to improve their selection in order to make financially healthier allocations.
This paper determines how best a wine distributor can allocate monies between bottled wine and wine futures based on the fluctuations in weather and market.