Analyzing the Factors That Drive Wine Sales in Sweden a Regression Analysis
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DEGREE PROJECT IN TECHNOLOGY, FIRST CYCLE, 15 CREDITS STOCKHOLM, SWEDEN 2016 Analyzing the Factors that Drive Wine Sales in Sweden A Regression Analysis IDA PALMGREN EMMA SOC DESCHAECK KTH ROYAL INSTITUTE OF TECHNOLOGY SCHOOL OF ENGINEERING SCIENCES Analyzing the Factors that Drive Wine Sales in Sweden A Regression Analysis IDA PALMGREN EMMA SOC DESCHAECK Degree Project in Applied Mathematics and Industrial Economics (15 credits) Degree Progr. in Industrial Engineering and Management (300 credits) Royal Institute of Technology year 2016 Supervisors at KTH: Thomas Önskog, Jonatan Freilich Examiner: Henrik Hult TRITA-MAT-K 2016:27 ISRN-KTH/MAT/K--16/27--SE Royal Institute of Technology SCI School of Engineering Sciences KTH SCI SE-100 44 Stockholm, Sweden URL: www.kth.se/sci Sammanfattning Det h¨arkandidatexamensarbetet i till¨ampadmatematisk statistik och industriell ekonomi har analyserat vilka faktorer som ¨okar l¨onsamhetenf¨orvinproducenter p˚aden svenska vinmark- naden. Denna rapport har till¨ampats˚av¨alett kvantitativt som kvalitativt tillv¨agag˚angss¨attf¨or att besvara de uppsatta fr˚agest¨allningarna.F¨oratt finna de signifikanta faktorer som p˚averkar f¨ors¨aljningenav vin har en en linj¨arregressionsmodell till¨ampats.Regressionen har baserats p˚a data h¨amtad fr˚anSystembolagets f¨ors¨aljningsstatistikfr˚an2015. Vidare har en analys utf¨ortsur ett ekonomiskt perspektiv, baserat p˚ateorier av fr¨amstHumphrey och Kotler, f¨oratt identifiera den optimala marknadsf¨oringsstrateginsom kan ¨oka l¨onsamhetenf¨orvinproducenter. Resultaten av den kvantitativa analysen har visat att det finns m˚angaolika faktorer som p˚averkar f¨ors¨aljningenav r¨ottoch vitt vin. F¨orde r¨odavinerna ¨arde mest framst˚aendefaktorerna smaktyper och vissa druvor som ¨okar f¨ors¨aljningen.F¨orde vita vinerna ¨arfaktorerna smaktyper och ursprungsland. Lika f¨orde b˚adavintyperna ¨aratt antal butiker ¨okar f¨ors¨aljningensamtidigt som priset p˚averkar f¨ors¨aljningennegativt. Resultatet av den kvalitativa analysen har belyst vikten av att f¨orst˚avilken marknad man handlar i och vilka verktyg man har till sitt f¨orfogandevid marknadsf¨oring. Anv¨andningen av teorier s˚asomSWOT-analys och 4P:n ¨aren viktig del i att kunna ¨oka sin f¨ors¨aljning och l¨onsamhet.Sammanfattningsvis b¨orn¨amnasatt en kombination av b˚adeden kvantitativa och kvalitativa analysen kan erbjuda vinproducenter en stor insyn i den svenska vinmarknaden, s˚av¨alsom erbjuda de r¨attaverktygen f¨oratt ¨oka sin f¨ors¨aljning. Abstract This thesis is a combined study of applied mathematical statistics and industrial engineering and management implemented to analyze and determine the success factors in the Swedish wine market to increase the profitability of wine producers. Hence, this thesis applied both a quantitative and qualitative approach to address this aim. From a mathematical perspective, a linear regression model was applied on red and white wine to identify how wine characteristics affect the number of bottles sold. The regression is based on data obtained from Systembolaget, consisting of the sales statistics from 2015. From an industrial engineering and management perspective, the theories of Humphery and Kotler and Armstrong are applied on the wine market to obtain further sources of profitability for the wine producers. The results of the quantitative analysis showed that there are different factors affecting the sales of red and white wine. For red wine the most important positive factors were taste category and certain grapes. For white wine the success factors were taste category and country of origin. Common for both red and white wine were that the number of stores increased the sales, while the price impacted the sales negatively. The results of the qualitative analysis revealed the importance of understanding target market and customer as well as having a distinct value proposition. Furthermore, the usage of theories, such as SWOT analysis and the 4Ps, demonstrated the significance of using different types of tools to increase sales and profitability. To conclude, a combination of the quantitative and the qualitative analyses this thesis presents, may offer the wine producers a greater insight to the Swedish market, and as well the proper tools to increase their sales. Contents 1 Introduction 1 1.1 Background . .1 1.2 Aim .............................................1 1.3 Research Questions . .2 2 Mathematical Theory 3 2.1 The Multiple Regression Analysis Model . .3 2.1.1 Definition and Terminology . .3 2.1.2 Dummy Variables . .4 2.1.3 Important Assumptions . .4 2.1.4 Ordinary Least Squares Estimation . .5 2.2 Reducing the Model . .5 2.2.1 Akaike Information Criterion . .5 2.3 Model Validation . .6 2.3.1 Linearity . .6 2.3.2 Normality . .6 2.3.3 Heteroscedasticity . .6 2.3.4 R2 and Adjusted R2 ................................7 2.3.5 Hypothesis Testing . .8 2.3.5.1 F -Statistic and p-value . .8 2.4 Errors . .9 2.4.1 Multicollinearity . .9 2.4.2 Endogeneity . 10 3 Method 11 3.1 Data Pre-Processing . 11 3.2 Variable Selection . 11 3.3 The Initial Model: Red Wine . 13 3.3.1 Model Validation . 15 3.3.2 Evaluating the R2, F -statistic and p-value . 17 3.3.3 Reducing the Model . 17 3.4 The Initial Model: White Wine . 18 3.4.1 Model Validation . 20 3.4.2 Evaluating the R2, F -statistic and p-value . 22 3.4.3 Reducing the Model . 22 4 Results 24 4.1 The Final Model: Red Wine . 24 4.1.1 Model Validation . 25 4.1.2 Evaluating the R2, F -statistic and p-value . 28 4.2 The Final Model: White Wine . 28 4.2.1 Model Validation . 29 4.2.2 Evaluating the R2, F -statistic and p-value . 32 5 Discussion 33 5.1 Analysis of Results . 33 5.1.1 Red Wine . 33 5.1.2 White Wine . 34 5.2 Limitations . 36 6 Case Study 37 6.1 Introduction . 37 6.1.1 Aim and Purpose . 37 6.1.2 Research Question . 37 6.2 SWOT Analysis . 38 6.3 The Marketing Mix - The 4Ps . 39 6.4 Recommendations . 42 6.5 Criticism . 43 6.5.1 The Social Consequences of Marketing of Alcohol . 44 7 Conclusion 46 1 Introduction 1.1 Background Wine has quickly become an important part of the Swedish society, where many see wine as an essential part of cuisine, culture and social gatherings. This wine culture has resulted in a continuous increase in the amount of wine sold in Sweden over the last couple of decades. This growth has been most significant for wines above the retail price of 99 SEK (R¨ott¨orp,2014). Due to the high demand, the market has seen an increase in the number of wines on the market, creating a more competitive environment for wine producers. It is therefore imperative for wine producers to enhance their knowledge on what makes a particular wine popular. Dr. Steve Goodman from the University of Adelaide stated that it is not ultimately about a specific preference of wine, but what wine is readily available when the consumer demands it (Hebbeln, 2014). However, other studies stress that it is the combination of the wine's characteristics, such as aroma and taste, together with the bottle's design and label that are important for a consumer when choosing a particular wine (Bisson, 2002). It is therefore interesting to determine what factors are significant for the consumer. Even with the best knowledge it is hard for wine producers to affect the sales in Sweden since the market is regulated with only one retail outlet, known as Systembolaget. Systembolaget is a government monopoly for off-premise retail of all alcoholic beverages containing more than 3.5 % alcohol by volume. There are approximately 400 Systembolaget stores and the legal age limit for buying alcoholic beverages is 20 years. The purpose of this monopoly is not to increase sales, but to limit the social consequences associated with alcohol, such as health issues and violence (Systembolaget, 2016b). Along with this regulated market, Sweden has had a strict marketing policy on alcohol. Before 2003, there was a complete ban on it for many years. This marketing policy was then changed, in 2003, to a more liberal one, but it still includes many restrictions (IOGT-NTO, 2016). For example, the advertising of alcohol may not encourage people to drink and it cannot be directed at or depict people below 25 years of age (Riksdagen, 2010). Even with a limited allowance of advertisement, studies show that advertising can increase sales of alcohol between 5 to 8 % (Holder, 2008). Therefore it is interesting to analyze how wine producers can further increase the sales of their wines when applying an analysis of the market and marketing tools. 1.2 Aim The aim of this thesis is to analyze what factors drive the sales of red and white wine in Sweden. This will be done by obtaining a regression model that can predict the sales of a particular wine using its characteristics. These sales are restricted to the ones from Systembolaget and consists of 1 red and white wine. Furthermore, only wines above the retail price of 99 SEK are included in this analysis. This model will be relevant for potential new competitors as well as already established wine producers on the market. Recommendations and suggestions will be provided to wine producers who sell their wine in Sweden and question which factors are important and affect the amount of wine sold. Consequently, the prediction model obtained will serve as a guideline for wine producers on the market on how to create wines to optimize their future sales. Furthermore, a market analysis will be done and marketing theories will be presented to offer an an insight into potential strategies for wine producers to further increase their profitability.