You have inherited the “Old Winery” from your grandfather, a winery which has been family owned for five generations and can be dated back to the 16th century.
Half of the eleven hectares are used to grow white grapes, the other half to grow red grapes. They are grown in the conventional way, i.e. they are not organically farmed and certified. The vine stocks are in a good condition regarding age and care. Overall, only ¼ of the harvest is made into wine by the winery itself; the rest is sold.
Your grandfather never wanted to change the image of the winery and left the managerial and administrative task to a young and energetic wine-maker. Due to the not so well-known brand , the demand for the “Old Winery” wine is currently rather low.
You do not intent to run the winery operatively, given your limited knowledge of wine making, but find the idea of owning a winery exciting. Your plan is to give the winery some fresh impetus.
The case is divided into three main tasks. The aim of the first is to estimate the yield of the winery in order to gain a first understanding of the specificities of the wine making process. For the second task the interviewee will quantify the costs of running the winery based on a business case and compare these to the market. Measures to increase the profitability should be discussed. The third task consists of developing an image and marketing strategy, to sell a higher priced wine to “Generation Y” customers, i.e. persons in their late 20s or early 30s.
Short Solution (Expand) (Collapse)
1. Estimation of the yield
The interviewee should estimate the number of wine bottles at 0.75 l which can be produced each year from the winery’s grapes. A creative approach and a logical calculation is more relevant here than obtaining the exact numbers.
Calculation of the annual number of wine bottles from the “Old winery”:
- Grapes per hectare of vine
- Vines per area: approx. 2 m vines per 2 x 2 m² = 4 m² (left image)
- Quantity of grapes per vine length: approx. 3 kg of grapes per m vine (right image)
- Quantity of grapes per area: 2/4 m/m² x 3 kg/m = 1.5 kg/m²
- Converted to one hectare (1 ha = 100 x 100 m² = 10,000 m²):
1.5 kg/m² x 10,000 m²/ha = 15,000 kg/ha
- Wine per hectare of vines
- Wine yield from grapes: approx. 0.5 l wine per 1 kg grapes
- Wine per hectare: 0.5 l/kg x 15,000 kg/ha = 7,500 l/ha = 75 hl/ha
- Wine bottles from 11 hectares of the winery
- Possible wine production: 7,500 l/ha x 11 ha = 82,500 l
- Possible wine bottling: 82,500 l / 0.75 l/bottle = 110,000 bottles
Information that can be provided upon request:
- One hectare corresponds to the area 100 x 100 m².
- 1 kg of grapes yields usually between 0.4 and 0.8 l of wine. For a small and semi-professional winery, such as yours, yields are rather below average.
- 1-meter of vine provides about 3 kg of grapes for wine production
2. Business Case for the Old Winery
The interviewee should estimate the price per bottle required to cover the costs of operating the winery. These costs should include necessary investments as well as the annually recurring costs. First, all relevant necessary investments should be stated in a structured way and their inclusion in the price of the bottle explained. Second, the annually recurring costs should be presented in a structured way. Estimating of the individual cost buckets is not necessary. Finally, the interviewee should classify the price per bottle compared to the market prices and identify measures to increase the profitability of the winery.
To structure the analysis and discussion, the interviewee could use the following value chain:
Necessary Investments – no calculation required:
- Technical upgrade for cultivation and harvesting
- Additional wooden barrels to increase capacity
- Technical upgrade for in-house vinification and bottling process
- Improved design and appearance of the winery for sale (e.g. building, office, tasting room)
- Simple and rather old equipment for cultivation, harvesting, vinification and bottling is available.
- The capacity of the available barrels suffices only for the currently produced amount of wine
- Currently no direct retail sale at the winery occurs
Inclusion in the price per bottle – no calculation required:
- Depreciation over several years, depending on invested item
- Expenditure in credit or cash
- For simplification, we do not consider any interest payments, as the money can be borrowed from your uncle. He wishes a steady repayment of the money over the next 15 years –meaning a depreciation over 15 years.
Other annual costs – no calculation required:
- Fixed costs
- Property tax
- Variable costs
- Labor costs
- Packaging materials
- Wooden barrels
Business Case for the cost calculation per bottle:
- Investments to be written-off over the next 15 years: 1,200,000 € / 15 a = 80,000 €/a
- Fixed costs and depreciation per year: 190,000 €/a + 80,000 €/a = 270,000 €/a
- Fixed costs and depreciation per bottle: 270,000 €/a / 110,000 bottles/a = 2.50 €/bottle
- Variable costs, fixed costs and depreciation per bottle:
7.30 €/bottle + 2.50 €/bottle = 9.80 €/bottle
Assessment of the price of 9.80 € per bottle:
- Dependent on customer segment
- Relatively high for supermarket wine
- The average price in Germany per 0.75 l bottle of wine across all customer segments is below 3 €.
Discussion on the various measures to increase profitability: The interviewee should first state the three key drivers volume, costs and price. Alternatively, the interviewee could state volume and margin as the two key drivers, yet margin should be further broken down into price minus costs. For each driver illustrative actions and the relevance of the driver should be discussed.
- Increase production volume: Limited potential given high variable costs
- Increase yield: Wine quality suffers
- Buy additional grapes: Quality control necessary
- Buy additional vines: Availability, costs, logistics to be assessed
- Buy additional usable land: Expensive and time intensive (Years)
- Increase use of fertilizers: Current trend more towards organic and sustainable farming
- Decrease costs per bottle: Discussion along the bar charts
- Investment and fixed costs with 2.50 € per bottle not key driver
- Leasing/renting equipment or sharing it with other wineries
- Variable costs key driver, particularly labor costs and packaging materials
- Less expensive harvesters from low-wage countries
- Cheaper packaging materials
- Process optimization
- Investment and fixed costs with 2.50 € per bottle not key driver
- Increase price per bottle:
- Price point relatively high for little known wine, as most of the grapes are sold directly
- Necessary to address customer segment who is willing to pay a price of over 10 € per bottle for a new wine brand
- Potential customer segment: Late 20s / early 30s (“Generation Y”)
3. Elements of an image and marketing strategy
The interviewee should develop key elements and concepts for an image and marketing strategy to address “Generation Y“ customers, being the most willing to pay more than 10 € for a bottle of wine. Customer needs of the segment should be understood first, before developing a strategy. Primarily required here are business judgement and creativity.
Needs/ characteristics of the customer segment:
- Authenticity/ Individuality
- Quality conscious
- Sustainability/ organic food certification
- Appealing design
- Direct approach over new media and social networks
- Customer experience/ involvement in the production process
Information that can be provided, although the interviewee is likely to be a “Generation Y” individual and should be able to assess people from his or her age group:
- “Generation Y” is the first „Digital Natives“ generation, i.e. population raised with the Internet
- “Generation Y” is less price sensitive and more quality-focused
- “Generation Y” values origin/ story of the product
- Sustainability plays an important role for the “Generation Y”.
Possible elements of an image and marketing strategy:
- Highlight of the long and personal history of the winery
- Documentation of the winery back to the 16th century
- Traditional winery, family-owned for five generations
- Physical / optical improvement of the “Old Winery”
- Winery should be perceived as dynamic and modern company with tradition
- Appearance improvements of the winery buildings (see Business Case)
- Organic food certification
- An "organic" certification could be useful
- Focus on quality/ appearance of the wines
- Production of quality wine
- New, modern labels/ bottles for the wines, possibly also individualized labels for smaller series upon customer request
- Use of new/ social media channels
- Activities in blogs and networks to present the winery online
- Sale and marketing through existing wine-Apps or by developing an own App
- Win over influencers or bloggers as brand ambassadors
- Establish direct contact with end-customers
- Use online-channels for sales and distribution, possibly through partnerships
- Organization of local events at the winery
- Experience the history and the production process
- Direct sale at the winery