The Chalice Wines

The Chalice WinesThe Chalice Wines

The Chalice Wine Group The Chalice Wine Group (CWG)(CWG) The group was owns two vineyards which is The group was owns two vineyards which is

Chalice and Cimarron, and one-half of a third in Chalice and Cimarron, and one-half of a third in Delta.Delta.

It owns three wineries which are Chalice, Cimarron It owns three wineries which are Chalice, Cimarron and Alicia, and owns Opera Valley for one-half of a and Alicia, and owns Opera Valley for one-half of a fourth which is operates for a distribution fee on fourth which is operates for a distribution fee on behalf of the joint venture owners.behalf of the joint venture owners.

CWG has a cross-investment with a prominent CWG has a cross-investment with a prominent French wine company for distribution in the US of French wine company for distribution in the US of its French and Chilean wines.its French and Chilean wines.

CWG also owns a one-half interest in a vineyard in CWG also owns a one-half interest in a vineyard in eastern Washington State with plans to build a eastern Washington State with plans to build a winery at this site. winery at this site.

Chalice Wine Group Chalice Wine Group structurestructure

CWGCWG

VineyardsVineyards WineriesWineries DistributorDistributor

100% owns100% owns shareholdershareholder

ChaliceChalice

CimarronCimarron

DeltaDelta

100% owns100% owns ShareholderShareholder

ChaliceChalice

CimarronCimarron

AliciaAlicia

Opera ValleyOpera Valley

French wine French wine companycompany

The Chalice Wine Group (CWG) The Chalice Wine Group (CWG) cont’cont’ Chalice is the flagship for CWG, Chalice is the flagship for CWG,

Chalice winery was founded in 1969 Chalice winery was founded in 1969 and went to public in May 1984. Until and went to public in May 1984. Until June, 1993 with the initial public June, 1993 with the initial public offering for Robert Mondavi Winery, offering for Robert Mondavi Winery, Chalice was the only publicly-held Chalice was the only publicly-held company in the United States whose company in the United States whose principle business is the production principle business is the production and sale of premium wines.and sale of premium wines.

The company is somewhat less The company is somewhat less effusive in describing its financial effusive in describing its financial results in the 1993 Annual Reportresults in the 1993 Annual Report

AssetsAssets SalesSales Net EarningsNet Earnings19901990 $49 million$49 million $14.2 million$14.2 million $650,000$650,00019911991 $68 million$68 million $15.0 million$15.0 million $58,000$58,00019921992 $70 million$70 million $17.3 million$17.3 million $(741,000)$(741,000)19931993 $74 million$74 million $18.3 million$18.3 million $(700,000)$(700,000)

The Project was coming up!The Project was coming up!

Bill Evanson, President and CEO of Chalice was Bill Evanson, President and CEO of Chalice was thinking; What does it cost them to make wines thinking; What does it cost them to make wines the way they do? Many of their specific costs the way they do? Many of their specific costs seem to get lost within their accounting system. seem to get lost within their accounting system. He suspect they understate some and overstate He suspect they understate some and overstate others.others. Who making money in this industry, and Who making money in this industry, and how do they do it? But this is a complex industry how do they do it? But this is a complex industry because every winery has a unique approach, because every winery has a unique approach, and every wines in different. And Chalice is a and every wines in different. And Chalice is a particularly complicated company. Would a particularly complicated company. Would a VALUE CHAIN ANALYSIS be meaningful, or even VALUE CHAIN ANALYSIS be meaningful, or even possible for this company in this industry?possible for this company in this industry?

Value Chain AnalysisValue Chain Analysis

A value chain is a chain of activitiesA value chain is a chain of activities . . Products pass Products pass through all activities of the chain in order and at through all activities of the chain in order and at each activity the product gains some valueeach activity the product gains some value . . The The chain of activities gives the products more added chain of activities gives the products more added value than the sum of added values of all activitiesvalue than the sum of added values of all activities . .It is important not to mix the concept of the value It is important not to mix the concept of the value chain with the costs occurring throughout the chain with the costs occurring throughout the activitiesactivities . . A diamond cutter can be used as an A diamond cutter can be used as an example of the differenceexample of the difference . . The cutting activity may The cutting activity may have a low cost, but the activity adds much of the have a low cost, but the activity adds much of the value to the end product, since a rough diamond is value to the end product, since a rough diamond is significantly less valuable than a cut diamondsignificantly less valuable than a cut diamond . .

Visualization of Value ChainVisualization of Value Chain

CWG Distribution ChannelCWG Distribution Channel Each of its four California wineries is located in a Each of its four California wineries is located in a

different legally designated viticulture (grapevine different legally designated viticulture (grapevine growing) area.growing) area.

Each one is a separate profit center with its own Each one is a separate profit center with its own president.president.

The company’s wines are sold in specialty wine shops The company’s wines are sold in specialty wine shops and grocery stores, selected restaurants, hotels and and grocery stores, selected restaurants, hotels and private clubs.private clubs.

They even distributed via direct mail in those state They even distributed via direct mail in those state where it is legal.where it is legal.

Out if the USA, the company sells through the Out if the USA, the company sells through the traditional 3-tier system; maker, distributor, retailer.traditional 3-tier system; maker, distributor, retailer.

In Northern California, a wine distributor is used as a In Northern California, a wine distributor is used as a broker. In Southern California, CWG own distribution broker. In Southern California, CWG own distribution network.network.

Exhibit 1:Exhibit 1:California Winery Shipments California Winery Shipments

(000 Cases)*(000 Cases)*

Exhibit 2:Exhibit 2:Wine Production in Case Wine Production in Case

WquivalentsWquivalents

Exhibit 3: Exhibit 3: Consolidated Balance Sheets, The Chalice Wine Consolidated Balance Sheets, The Chalice Wine Group, Ltd. Group, Ltd. (Thousand)(Thousand)

The WineryThe Winery

Complex production processComplex production process Wine isn’t produced in a day or a month but yearsWine isn’t produced in a day or a month but years Various pools of periodic production costs must be Various pools of periodic production costs must be

allocated among many different wines from allocated among many different wines from different vintage yearsdifferent vintage years

CWG’s method was as straightforward as possible, CWG’s method was as straightforward as possible, given the complexity of the situationgiven the complexity of the situation

All costs were considered product costs and wound All costs were considered product costs and wound up as Costs of Good Sols for some particular wineup as Costs of Good Sols for some particular wine

Grape costs were easy to assign directly to Grape costs were easy to assign directly to particular winesparticular wines

Only the wines bottled in a year absorbed Only the wines bottled in a year absorbed the bottling costs for that year.the bottling costs for that year.

All wines held in bulk inventory absorbed All wines held in bulk inventory absorbed their relative proportions of winemaking their relative proportions of winemaking costs for that period.costs for that period.

All wines held in bottled inventory absorbed All wines held in bottled inventory absorbed bottle aging costsbottle aging costs

Exhibit 4 shows the yields and the product Exhibit 4 shows the yields and the product cost breakdown for 1991 Meritage White.cost breakdown for 1991 Meritage White.


Exhibit 4Exhibit 41991 Meritage White Product Costs1991 Meritage White Product Costs

Tons CrushedTons Crushed 89.1789.17Gallons of Juice Gallons of Juice FermentedFermented

14,7114,7133

Gallons AgedGallons Aged13,9813,98

44Gallons of Wine Gallons of Wine ProducedProduced

13,2513,2555

Cases BottledCases Bottled 5,5755,575

Production CostProduction Cost TotalTotalPer Per

CaseCaseGrapesGrapes $73,901$73,901 $13.26$13.26WinemakingWinemaking 117,486117,486 21.0721.07BottlingBottling 93,65793,657 16.8016.80Bottle AgingBottle Aging 8,9378,937 1.601.60

TotalTotal$293,9$293,9

8181 $52.73$52.73

The task now is to derive per case operating The task now is to derive per case operating profit for this wine, and the per case Return profit for this wine, and the per case Return on Assets (ROA).on Assets (ROA).

The profitability analysis for one case of 1991 The profitability analysis for one case of 1991 Cimarron Meritage White demonstrated the Cimarron Meritage White demonstrated the contribution of that wine to the overall contribution of that wine to the overall financial performance of the Chalice Group.financial performance of the Chalice Group.Cimaron winery sold 37,205 casesCimaron winery sold 37,205 casesTotal Revenue $2.7 millionTotal Revenue $2.7 millionDepreciableDepreciable 4.9 million 4.9 million


The VineyardThe Vineyard Cimarron Meritage White is a blend of Sauvigon Cimarron Meritage White is a blend of Sauvigon

Blanc and Semillion grapes, neither of which is Blanc and Semillion grapes, neither of which is grown at Cimarron Vineyard.grown at Cimarron Vineyard.

All the grapes for this wine are purchased from All the grapes for this wine are purchased from Pinnacle Vineyards, CWG’s partner in the Opera Pinnacle Vineyards, CWG’s partner in the Opera Valley Joint Venture.Valley Joint Venture.

Grape cost = $13.26 per caseGrape cost = $13.26 per case Exhibition 5 and 6 describe the costs and assets Exhibition 5 and 6 describe the costs and assets

involved in establishment and operation of 30 involved in establishment and operation of 30 acre vineyard in Sonoma Country as of the end acre vineyard in Sonoma Country as of the end in 1992.in 1992.

Exhibit 5Exhibit 5Cost per Acre to Establish and Operate a VineyardCost per Acre to Establish and Operate a Vineyard

YearYear

11 22 33 44 5 & 5 & ForwardForward

Yield Yield ((tonstons//acreacre)) 1.51.5 3.53.5 66

Total Planting CostsTotal Planting Costs5,15,13838 2,4402,440

Total Cultural CostsTotal Cultural Costs6060

99 1,0621,062 1,2161,216 1,3171,317 1,3171,317Total Harvest Total Harvest Costs@$120Costs@$120//tonton 180180 420420 720720

Total Overhead CostsTotal Overhead Costs6262

22 622622 642642 698698 718718

Total Cash CostsTotal Cash Costs63636969 4,1244,124 2,0382,038 2,4352,435 2,7552,755

Depreciation Depreciation ((see see Exhibit6Exhibit6)) 843843 843843TotalTotal 3,2783,278 $3,598$3,598**

** $3,598$3,598//Acre Acre = = $600$600//T T = = $9.59$9.59//case case [[62.5 cases per ton62.5 cases per ton]]

Exhibit 6:

Assets Required to Establish and Operate a 30 Acre Vineyard

Purchase Useful Salvage Annual

Investment Price (new) Life Value Depreciation

Land (30 plantable acres) 525,000

Vineyard Establishment[A] 339,374 22 0% 15,426

Reservior 30,000 30 0% 1,000

Buildings 15,750 30 10% 473

Drip Irrigation System 52,400 25 10% 1,886

Frost Protection System 40,300 25 10% 1,451

Shop Tools 10,000 15 10% 600

Pruning Equipment 1,200 10 10% 108

ATV, 4WD 6,500 5 10% 1,170

Tractor 29,900 15 10% 1,794

Duster 3,035 10 10% 273

Mower [B] 5,500 10 10% 495

Orchard Sprayer 4,560 10 10% 410

Weed Sprayer 2,000 10 10% 180

Pickup Truck 16,500 7 10% 2,121

Total Investment,with new Equip. 1,082,019 27,388

*Allowance for Used Equipment -24,598 -2,110

Total Investment,30 Acre Vineyard $1,057,421 $25,278

A) "Vineyard Establishment" is the accumulated cash costs for 1st 3 years,net of revenue earned in

year 3 using the price paid by Cimaron in 1991 as a proxy value for each tone produced.

B) Last 6 items can be purchased uesd @ an average og 60% of new costs. Allowance is made above (*).

Exhibit 7Exhibit 7History of California Grape Prices Per TonHistory of California Grape Prices Per Ton

Variety Variety *( )*( ) 19819833

19819844

19819855

19819866

19819877 19881988 19891989 19901990 19911991 19921992

Chardonnay Chardonnay ((18%18%))

$98$9800

$99$9988

$90$9044

$85$8566

$92$9222

$1,12$1,1222

$1,22$1,2255

$1,12$1,1288

$1,12$1,1222

$1,03$1,0388

Cabernet Cabernet ((32%32%))$46$46

77$52$52

77$53$53

33$55$55

00$63$63

11 $822$822$1,03$1,03

22 $977$977 $918$918 $872$872

Zinfandel Zinfandel ((56%56%))$26$26

99$25$25

33$26$26

99$34$34

00$48$48

00 $817$817 $546$546 $391$391 $363$363 $434$434Sauvignon Sauvignon Blanc Blanc ((35%35%))

$48$4877

$48$4866

$44$4411

$40$4011

$41$4144 $474$474 $571$571 $518$518 $541$541 $552$552

Semillon Semillon ((73%73%))$21$21

55$26$26

00$21$21

00$24$24

55$25$25

44 $289$289 $311$311 $310$310 $328$328 $360$360 * The percentages in parentheses represent the premiums paid to Sonoma County g * The percentages in parentheses represent the premiums paid to Sonoma County g ii i i i i i1 9 9 2 . ii i i i i i1 9 9 2 .

Sam assumed revenue for Sam assumed revenue for vineyard would be $812.36/tonvineyard would be $812.36/ton

Although grape cost of $9.59 per Although grape cost of $9.59 per case for this vineyard represented case for this vineyard represented an improvement over the $12.99 an improvement over the $12.99 the winery was paying nowthe winery was paying now

Should they change it’s make/buy Should they change it’s make/buy policy on grapes for this wine?policy on grapes for this wine?

The VineyardThe Vineyard

The DistributorThe Distributor Stellar wines is a typical East Coast wine Stellar wines is a typical East Coast wine

distributor.distributor. In 1992 the company sold 225,000 cases of wine, In 1992 the company sold 225,000 cases of wine,

roughly 50% imported and 50% domestic.roughly 50% imported and 50% domestic. Stellar’s product cost for Cimaron Meritage White Stellar’s product cost for Cimaron Meritage White

includes $2.25/case to cover freight from California includes $2.25/case to cover freight from California and state tax of $1.56/case.and state tax of $1.56/case.

A wine distributor sells wine to both “on-premise” A wine distributor sells wine to both “on-premise” accounts and “off-premise” accounts.accounts and “off-premise” accounts.

Since most of CWG’s off-premise wine sales occur Since most of CWG’s off-premise wine sales occur in a relatively small premium wine shops, it was in a relatively small premium wine shops, it was decided that this type of business should provide decided that this type of business should provide the final piece of the value chainthe final piece of the value chain

Exhibit 8Exhibit 8

Stellar Wines Financial StatementsStellar Wines Financial Statements

(in Thousands)(in Thousands)

Balance SheetsBalance Sheets

December 31,December 31,

19921992 19911991

AssetsAssets

CashCash $$ 2424 $$ 99

Accounts ReceivableAccounts Receivable 2,2732,273 1,8061,806

InventoryInventory 6,5006,500 6,5926,592

Equipment Equipment ((netnet)) 108108 105105

OtherOther 333333 312312

TotalTotal $9,238$9,238 $8,824$8,824

LiabilitiesLiabilities

Note Payable, BankNote Payable, Bank $4,953$4,953 $4,794$4,794

Accounts Payable & AccrualsAccounts Payable & Accruals 1,7351,735 1,5441,544

Stockholders' EquityStockholders' Equity

Common StockCommon Stock 1010 99

Retained EarningsRetained Earnings 2,5402,540 2,4772,477

2,5502,550 2,4862,486

TotalTotal $9,238$9,238 $8,824$8,824

Income StatementsIncome StatementsYear Ended December Year Ended December

31,31,

19921992 19911991

SalesSales $17,078$17,078 $15,389$15,389

Cost of Goods SoldCost of Goods Sold 12,77112,771 11,31311,313

Operating ExpensesOperating Expenses 3,3943,394 3,1873,187

Interest ExpenseInterest Expense 425425 507507

Net Income Before TaxNet Income Before Tax $488$488 $381$381

Exhibit 8 (cont.)Exhibit 8 (cont.)

Stellar Wines Financial StatementStellar Wines Financial Statement

(in Thousands)(in Thousands)

The RetailerThe Retailer

Riverside Wide Company is one of Riverside Wide Company is one of Stellar’s best customers.Stellar’s best customers.

As grocery chains and discount clubs As grocery chains and discount clubs have gained market share,have gained market share,

Many small premium wine shop have Many small premium wine shop have been driven out of business.been driven out of business.

However, at the top end of the business However, at the top end of the business there remains a demand for service and there remains a demand for service and selection that is difficult to provide in a selection that is difficult to provide in a high volume setting.high volume setting.

Exhibit 9 contains selected Exhibit 9 contains selected financial information for Riverside financial information for Riverside for 1992.for 1992.

As with the distributor, a case is a As with the distributor, a case is a case.case.

So one way of assigning operating So one way of assigning operating expenses and assets among the expenses and assets among the cases sold is equal weight.cases sold is equal weight.

The Retailer (cont.)The Retailer (cont.)

Exhibit 9Exhibit 9Riverside Wine Company, 1992Riverside Wine Company, 1992

Total SalesTotal Sales $1,889,916$1,889,916Cost of Goods SoldCost of Goods Sold $1,412,000$1,412,000Operating CostsOperating Costs $438,134 $438,134Profit (before tax)Profit (before tax) $39,782$39,782Cases SoldCases Sold 14,776 14,776Total AssetsTotal Assets $719,261 $719,261

($235,333 of inventory)($235,333 of inventory)

The Retailer (cont.)The Retailer (cont.)

Overall Value ChainOverall Value Chain

Sam and Bill stepped back to consider Sam and Bill stepped back to consider what the numbers meant, and what were what the numbers meant, and what were the strategic implications for Chalice.the strategic implications for Chalice.

Sam put the profitability for the four Sam put the profitability for the four participants in this value chain together participants in this value chain together to determine the overall profit margin and to determine the overall profit margin and the overall return on assets for the the overall return on assets for the industry on every case of 1991 Cimarron industry on every case of 1991 Cimarron Meritage White sold to consumers in Meritage White sold to consumers in retail wine shops.retail wine shops.

Winery Costs RevisitedWinery Costs Revisited Sam knew the production cost of Sam knew the production cost of

$52.73/case from Exhibit 4 was a very $52.73/case from Exhibit 4 was a very crude aggregate average cost.crude aggregate average cost.

Upon careful reflection, he concluded Upon careful reflection, he concluded that the winemaking process can be that the winemaking process can be viewed as involving three distinct stages:viewed as involving three distinct stages: Stage 1 (crushing, pressing and Stage 1 (crushing, pressing and

fermenting)fermenting) Stage 2 (fining, filtering, bulk aging)Stage 2 (fining, filtering, bulk aging) Stage 3 (preparation for bottling) Stage 3 (preparation for bottling)

Exhibit 10Exhibit 10Winemaking Cost-ABC ApproachWinemaking Cost-ABC Approach

19911991 19921992Stage 1Stage 1 $285,000 (1) $268,000 $285,000 (1) $268,000Stage 2Stage 2 571,000 571,000 559,000 559,000

(2)(2)Stage 3Stage 3 57,00057,000 56,00056,000

TOTALTOTAL $913,000 $913,000 $883,000 $883,000

*The 1991 Meritage White vintage represented 18% of the wine made in 1991, 15% of stage 2 *The 1991 Meritage White vintage represented 18% of the wine made in 1991, 15% of stage 2 costs in 1992, and 28% of the wine prepared for bottling in 1992costs in 1992, and 28% of the wine prepared for bottling in 1992

(1)(1) Including Including $12,700 of barrel depreciation, because some white wines $12,700 of barrel depreciation, because some white wines are barrel fermentedare barrel fermented

(2)(2) Including $154,900 of barrel depreciationIncluding $154,900 of barrel depreciation

Winery Costs RevisitedWinery Costs Revisited (cont.)(cont.)

Sam also discovered that the $16.80 per case for bottling was a very Sam also discovered that the $16.80 per case for bottling was a very simple overall average allocation.simple overall average allocation.

Exhibit 11 shows a comparison of the average approach and the ABC Exhibit 11 shows a comparison of the average approach and the ABC approach to bottling cost.approach to bottling cost.

Exhibit 11Exhibit 11Bottling Cost--Per CaseBottling Cost--Per Case

Cost CategoryCost Category Average CostAverage Cost ABC Cost for Meritage WhiteABC Cost for Meritage White

LaborLabor 1.161.16 .75 .75Supplies .07Supplies .07 .07 .07BottlesBottles 6.436.43 5.00 5.00CorksCorks 2.392.39 2.39 2.39CapsulesCapsules 1.191.19 1.191.19LabelsLabels 1.991.99 1.50 1.50Wooden BoxesWooden Boxes .55 .55 0 0TaxesTaxes 3.023.02 3.023.02

TOTALTOTAL 16.80 16.80 13.9213.92

Third, Sam discovered that barrel Third, Sam discovered that barrel depreciation was a very complex issue, depreciation was a very complex issue, involving French oak barrels that had risen in involving French oak barrels that had risen in cost from $362 in 1988 to $650 in 1993.cost from $362 in 1988 to $650 in 1993.

White wines are both fermented (3 months) White wines are both fermented (3 months) and aged in barrels whereas red wines are and aged in barrels whereas red wines are fermented in tanks.fermented in tanks.

But, red wines are aged 2 years in the barrels But, red wines are aged 2 years in the barrels versus only 9 months for white whites.versus only 9 months for white whites.

Yet all barrels at the Cimarron winery are just Yet all barrels at the Cimarron winery are just depreciated, straight-line, over 4 years, with depreciated, straight-line, over 4 years, with barrel depreciation as 1 line item in barrel depreciation as 1 line item in winemaking cost.winemaking cost.

Of the $21.07 winemaking cost for the Of the $21.07 winemaking cost for the 1991 Meritage White, $4.03 (19%) was 1991 Meritage White, $4.03 (19%) was for barrel depreciation.for barrel depreciation.

Sam had no intuition about how a more Sam had no intuition about how a more accurate ABC assignment of barrel accurate ABC assignment of barrel depreciation would affect the $4.03 depreciation would affect the $4.03 number.number.

Exhibit 12 was constructed to estimate Exhibit 12 was constructed to estimate actual consumption of barrel cost, using actual consumption of barrel cost, using estimated market values and the actual estimated market values and the actual barrel usage plan for the 1991 Meritage barrel usage plan for the 1991 Meritage WhiteWhite

Lyford WineryLyford Winery

Sam was aware of Lyford Winery which had Sam was aware of Lyford Winery which had been founded in Sonoma County in 1981.been founded in Sonoma County in 1981.

It was constructed as a state of the art It was constructed as a state of the art winemaking showplace with no expense winemaking showplace with no expense spared in either the production of the wines spared in either the production of the wines or in the effort to build the brand in the or in the effort to build the brand in the marketplace.marketplace.

The brand name was sold to a French The brand name was sold to a French company.company.

Wine for the brand was sourced from the Wine for the brand was sourced from the bulk wine market.bulk wine market.

Exhibit 13 gives the per case cost structure for one of Lyford’s more Exhibit 13 gives the per case cost structure for one of Lyford’s more recent releases, a 1991 Meritage White.recent releases, a 1991 Meritage White.

The final blend was 85% Sauvignon Blanc, 13% Semillon, and 2% The final blend was 85% Sauvignon Blanc, 13% Semillon, and 2% White Muscat.White Muscat.

Exhibit 13:Exhibit 13:1991 Lyford Meritage White1991 Lyford Meritage White

Product Costs per CaseProduct Costs per Case

Bulk Wine CostBulk Wine Cost $ 9.26$ 9.26BottlingBottling 2.28 2.28CorksCorks 2.37 2.37CapsulesCapsules 1.16 1.16LabelsLabels 0.70 0.70BottlesBottles 4.60 4.60Lyford Overhead & SuppliesLyford Overhead & Supplies 2.02 2.02Wine TaxWine Tax 3.02 3.02

TotalTotal $25.41$25.41

The product costs shown in this exhibit The product costs shown in this exhibit tell nearly the entire story of this wine.tell nearly the entire story of this wine.

The “winery” has virtually no capital The “winery” has virtually no capital assets beyond leased office and assets beyond leased office and warehouse space and working capital warehouse space and working capital (assume 30% of sales).(assume 30% of sales).

An allocation of marketing expenses An allocation of marketing expenses added only about $1.09 to the per case added only about $1.09 to the per case cost of the wine.cost of the wine.

Leased space and equipment added Leased space and equipment added about another $5 per case.about another $5 per case.

Lyford sold the wine to wholesale Lyford sold the wine to wholesale distributors for $45.00 per case, with a distributors for $45.00 per case, with a target retail price of $7.50 per bottle.target retail price of $7.50 per bottle.

*Lyford Winery—The Value Chain*Lyford Winery—The Value ChainSalesSales 4545CostsCosts ? ?MarginMargin ? ?AssetsAssets ? ?ROAROA ? ?

Price to DistributorPrice to Distributor 45.0045.00+ Freight & Taxes+ Freight & Taxes + 3.81 + 3.81DeliveredDelivered = 48.81 = 48.81

Price to Retailer (/.75)Price to Retailer (/.75) = 65.00 = 65.00

Price to Consumer (/.75) = 86.67Price to Consumer (/.75) = 86.67 = = ~7.22/Bottle~7.22/Bottle (~$7.50 with sales tax)(~$7.50 with sales tax)

Exhibit 14: The Value Chain—1991 Cimarron Exhibit 14: The Value Chain—1991 Cimarron Meritage WhiteMeritage White

(per case)(per case)VineyardVineyardRevenueRevenue 12.9912.99 P/S = 0.26P/S = 0.26Operating costs Operating costs 9.59 9.59 S/A = 0.685S/A = 0.685Margin Margin 3.49 3.49 ROA = 0.184ROA = 0.184AssetsAssets 18.9718.97

WineryWineryRevenue costsRevenue costs 72.5772.57 P/S = (0.32)P/S = (0.32) GrapesGrapes 13.2613.26 S/A = 0.551S/A = 0.551 WinemakingWinemaking 47.3347.33 ROA = (0.174)ROA = (0.174) BottlingBottling 13.9213.92 Bottle AgingBottle Aging 1.60 1.60 SG&ASG&A 19.3219.32MarginMargin (22.86) (22.86)AssetsAssets 131.70 131.70

DistributorDistributorRevenueRevenue 114.32 114.32 P/S = 0.19P/S = 0.19Wine CostWine Cost 76.3876.38 S/A = 2.78S/A = 2.78Operating CostOperating Cost 15.0815.08 ROA = 0.56ROA = 0.56MarginMargin 22.8622.86AssetsAssets 41.0641.06

Retailer Retailer RevenueRevenue 142.46 142.46 P/S = (0.016)P/S = (0.016)Wine CostWine Cost 114.32 114.32 S/A = 2.93S/A = 2.93Operating Costs Operating Costs 29.6529.65 ROA = (0.031)ROA = (0.031)MarginMargin (1.51) (1.51)AssetsAssets 48.6848.68

+$2.7 handling cost+$2.7 handling cost

+$2.25 handling cost+$2.25 handling cost

+1.56 tax+1.56 tax

The Overall Value ChainThe Overall Value Chain

RevenueRevenue 342.34342.34 P/S = 0.0055P/S = 0.0055 ProfitProfit 1.891.89 S/A = 1.424S/A = 1.424 AssetsAssets 240.41240.41 ROA =0.0079ROA =0.0079

VineyardVineyard, CWG is paying way more that the industry , CWG is paying way more that the industry average price for grapes. If it paid the industry average average price for grapes. If it paid the industry average price, there is a potential an incremental $5.o per case price, there is a potential an incremental $5.o per case profit. Should it keep on sacrificing profit for quality?profit. Should it keep on sacrificing profit for quality?The cost to establish and operate a vineyard is $9.59 The cost to establish and operate a vineyard is $9.59 per case, whereas CWG is paying $12.99 per case, plus per case, whereas CWG is paying $12.99 per case, plus handling. It has to decide if it will continue to buy handling. It has to decide if it will continue to buy grapes or start growing grapes.grapes or start growing grapes.WineryWinery Product costs were assigned equally to various Product costs were assigned equally to various wines when no two wines were the same. This was wines when no two wines were the same. This was done based on the average cost system. ABC analysis done based on the average cost system. ABC analysis better reflected the winemaking, bottling costs than better reflected the winemaking, bottling costs than average costing did.average costing did.The winery is unprofitable, losing $22.86 per case. The winery is unprofitable, losing $22.86 per case. CWG has a lot of money tied up in inventory. The CWG has a lot of money tied up in inventory. The winery has 4.9 million in depreciable assets, while winery has 4.9 million in depreciable assets, while Lyford winery has virtually no capital assets.Lyford winery has virtually no capital assets.

DistributorDistributor The most profitable part of The most profitable part of the value chain with a margin of $22.86 the value chain with a margin of $22.86 per case sold. It also has the highest ROA per case sold. It also has the highest ROA (56%) in the value chain.(56%) in the value chain.

RetailerRetailer Make a loss of $1.51 for every Make a loss of $1.51 for every case sold. It has the highest wine cost in case sold. It has the highest wine cost in the value chain, a big reason why it is the value chain, a big reason why it is unprofitable.unprofitable.

Overall value chainOverall value chain The overall total The overall total profit is $1.89 per case and overall ROA profit is $1.89 per case and overall ROA is .77%. There numbers suggest that this is is .77%. There numbers suggest that this is not a profitable business.not a profitable business.

The Lyford winery has virtually no capital assets The Lyford winery has virtually no capital assets beyond leased offices and warehouse space and beyond leased offices and warehouse space and working capital this enables it to have a high ROA working capital this enables it to have a high ROA of 100%. Lyford winery also purchased its of 100%. Lyford winery also purchased its processing service from customs suppliers, and all processing service from customs suppliers, and all of the services required to bring the product form of the services required to bring the product form the bulk wine market to distribution was also the bulk wine market to distribution was also purchased form custom winemaking operations. purchased form custom winemaking operations. This resulted in a low product cost of $25.41 and This resulted in a low product cost of $25.41 and a margin of $18.5 per case. Lyford winery shows a margin of $18.5 per case. Lyford winery shows an alternative, more profitable approach towards an alternative, more profitable approach towards winemaking. Lyford’s value chain suggests that winemaking. Lyford’s value chain suggests that CWG might be better off outsourcing some of its CWG might be better off outsourcing some of its activities and reliving on custom suppliers to keep activities and reliving on custom suppliers to keep its product cost low. its product cost low.

The Lyford Wines Value The Lyford Wines Value ChainChain

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