Penfolds Wine Company Expansion: Demand Risk Analysis in China

This presentation analyzes the demand risks associated with Penfolds Wine Company's planned expansion into China. It begins with an overview of Penfolds' business, its product offerings (red and white wines), and the competitive landscape. The core of the presentation focuses on identifying and assessing the macroeconomic and socioeconomic factors that could impact demand for Penfolds' products in China. It explores suitable measures of economic activity, the impact of Chinese taxation policy, and the role of monetary policy, specifically the People's Bank of China's interest rate adjustments. Furthermore, it considers socioeconomic factors like literacy rates and their potential influence on consumer preferences. The presentation offers recommendations for mitigating demand risks and concludes with a regression model to quantify the impact of macroeconomic and socioeconomic factors. The analysis highlights the importance of understanding these factors for successful business ventures in foreign markets.

N A M E
I N S T I T U T I O N
D AT E
Data Modeling

Introduction
In this presentation, a data analysis on Penfolds wine company will be
presented.
The nature of the company will be explored
The different products and services it provides
Analysis will be done
A suitable measure of economic activity
Assessment of Monetary policy of China
Other socio-economic considerations
A chart showing adult literacy rate in China
Demand curve for products that have high degree of substitutability like
Wine
Recommendations
Implications of this analysis
Regression model
References

Nature of Penfolds Wine Company
Penfolds Wine Company is an entity that is based in
Sydney, Australia.
It was established in 1844 by Rawson Penfold who
moved into Australia as an emigrant.
Penfolds wine company is one of the oldest companies
that have been producing wines for the past centuries
since the time of its establishment in 1844.
In regards to Penfolds nature of business, the company
processes a multiple of ingredients such as wine
grapes, juices, acids, sugars, minerals, pulps, yeast as
well as tannis so as to produce wine (McKenna, 2012).

Nature of Penfolds Wine
Company..continued
Penfolds Wine Company falls under the
Treasury Wine Estates which is overall
controller and manager of wine companies in
Australia’s wine making industry.
In regards to Australia winemaking industry,
competition is present due to existence f rival
companies engaging in production of wine.
Penfolds Wine Company faces competition from
Jim Barry Rockford, D'Arenberg and Wynns as
far as customer base and market shares are
concerned.

Products of Penfolds Wine Company
Penfolds wine company engages in
production of a variety of wines .
These wines are categorized as Red wines
and White wines by Penfolds Wine Company.
Red wines products include; Red Blends,
Malbec, Pinot Noir, Syrah, Sangiovese and
Zinfandel among others.
White wines include; Pinot Gris, Riesling,
Moscato, Sauvignon Blanc and Chardonnay
among others.

Analysis
 Companies always engage in expansion of their businesses as a way
of boosting their revenues and market share.
 The above is attributed to the fact that companies always aim at
earning highest possible returns from their undertakings that
involve devotion of their resources.
 Penfolds wine company is aiming at realizing highest possible
returns from its undertaking by establishing a new manufacturing
plant in China by devoting its substantial financial resources.
 Some of the risks may include; potential demand, sustainability of
the supply and distribution chains by a company as well as the
capability of the target audience to afford the products that are to be
offered by a company.
 The proposal to create a new manufacturing plant in China, the
demand risks arising from macroeconomic performance of China are
likely to have a significant impact on this new venture.

Analysis continued..
A demand risk is the possibility for a loss arising from the
gaps between forecasted demand and actual demand.
 Demand risks are paramount for projects that require
investment of capital whereby supply chain, sales and
marketing decision are centered on forecasts on demand.
As a result, Penfolds’ decision to establish a new
manufacturing plant in China can be viewed as a capital
investment which is a subject to a demand risk (Anthony,
2011).
Therefore, the following analysis is about macroeconomic
elements that will need to be considered as far as
demand for Penfolds' products is concerned.

A suitable measure of economic
activity
Taxation policy of the Chinese government can be considered to be an
appropriate measure of economic activity by Directors at Penfolds wine Company.
Chinese government has undertaken an initiative to exempt foreign companies
from paying taxes on all profits that are reinvested into the nation’s economy.
The above tax policy is aimed at enhancing investments in China in spite of the
trade tensions with United States and other strong economies across the globe.
Tax exemption on reinvestments by foreign companies is applicable to all sectors
of China’s economy.
China is likely to realize significant increases in its overall output due to
increased events arising from the above tax policy on foreign entities
Penfolds wine company is likely to predict a high demand for its red and white
wines due to the tax exemptions on reinvestments.
These reinvestments are likely to increase the supply of Penfolds products in
China after the manufacturing plant has been established.
 Moreover, Clients are always attracted to a company that has high capability and
potential to maintain continue supply of its products so as to meet their demand
needs.

A suitable measure of economic activity continued…
However, a demand risk to Penfolds’ products is likely to arise
from the above Chinese taxation policy on reinvestments of
foreign firms.
Which is likely to cause deviations between forecasted and
actual demand.
Moreover, tax exemption on reinvestments of profits is likely
to attract new wine producing companies to enter into
China’s winemaking industry.
Also, existing foreign wine producing firms within China are
likely to modify their approaches so as to reap benefits of tax
exemption.
Esablishment of a manufacturing plant in China is likely to
face stiff competition from new and existing wine producing
firms.

A suitable measure of economic activity
continued…
 More so, stiff competition in an industry is associated with
negative effects on demand of products which greatly distorts
forecasted demand and actual demand of companies.
The above element is attributed to the fact that products
produced by rival companies are direct substitutes to each other.
Clients may be sensitive to price changes which are likely to
influence their demand of a given company’s products.
Due to competition, Penfolds’ products are subjected to the
demand risk of inconsistent demand from clients when pricing
strategies are changed by rival firms in winemaking industry.
 In the due course, Penfolds is likely to realize potential losses
due to deviations of forecasted demand from actual demand
because of competition and price changes.

Assessment of Monetary policy of
China
Central bank loans, Open market operation and bank rates are some of the
monetary policy instruments that are being used by People’s Bank of China
(PBOC).
The major aim of using the above instruments is to regulate the amount of money
in circulation as a way of achieving macroeconomic objectives.
 In regards to bank rates, PBOC always keeps changing its lending rates to its
commercial banks as a way of controlling the money in circulation.
For example, when PBOC wants to reduce the amount of money in circulation, it
increases its bank rates as a way of discouraging commercial banks from
borrowing.
Such a policy will mean that commercial banks will also increase their lending
rates which will discourage borrowing from the general public.
The above action reduce the purchasing power of the general public due to
reduced money in circulation and thus the demand for products is likely to
decrease.
On the other hand, any decreases in the bank rates by the PBOC will encourage
borrowing from commercial banks thus increasing money in circulation
(Xiaochuan, 2012).

Assessment of Monetary policy of China
Such a policy will encourage borrowing from the public
which means that their purchasing power will increase.
As a result, the overall demand for the products will
likely increase due to increase cash at hand among the
general public.
In regards to establishment of a new manufacturing plant
in China, there is need to find out the degree of
frequency that PBOC keeps changing its bank rates so as
to make demand forecast.
A demand risk will arise when the Directors at Penfolds
wine company make demand forecasts basing on
inaccurate findings on the frequency that the bank rate is
changed by the PBOC.