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The Chalice Wines

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Page 1: Chalice Wines

The Chalice Wines

Page 2: Chalice Wines

Chalice Wine Group structure

Page 3: Chalice Wines

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

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

Page 4: Chalice Wines

The Project was coming up!

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

Page 5: Chalice Wines

CWG Distribution Channel

Each of its four California wineries is located in a different legally area.

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

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

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

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

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

Page 6: Chalice Wines

Exhibit 1:California Winery Shipments

(000 Cases)*

Page 7: Chalice Wines

Exhibit 2:Wine Production in Case

Equivalents

Page 8: Chalice Wines

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

Page 9: Chalice Wines

The Winery

Complex production process Wine isn’t produced in a day/month but years Periodic production costs must be allocated

among many different wines CWG’s method was as straightforward as

possible. All costs were considered product costs and

wound up as Costs of Good Sold for some particular wine

Grape costs were easy to assign directly to particular wines

Page 10: Chalice Wines

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

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

All wines held in bottled inventory absorbed bottle aging costs

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

The Winery

Page 11: Chalice Wines

Exhibit 4

1991 Meritage White Product Costs

Tons Crushed 89.17

Gallons of Juice Fermented

14,713

Gallons Aged13,98

4

Gallons of Wine Produced

13,255

Cases Bottled 5,575

Production Cost TotalPer

Case

Grapes $73,901 $13.26

Winemaking 117,486 21.07

Bottling 93,657 16.80

Bottle Aging 8,937 1.60

Total$293,9

81 $52.73

Page 12: Chalice Wines

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

The profitability analysis for one case of 1991 Cimarron Meritage White demonstrated the contribution of that wine to the overall financial performance of the Chalice Group.

Cimaron winery sold 37,205 casesTotal Revenue $2.7 millionDepreciable 4.9 million

The Winery

Page 13: Chalice Wines

The Vineyard

Cimarron Meritage White is a blend of Sauvigon Blanc and Semillion grapes, neither of which is grown at Cimarron Vineyard.

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

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

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

Page 14: Chalice Wines

Exhibit 5

Cost per Acre to Establish and Operate a Vineyard

Year

1 2 3 4 5 & Forward

Yield (tons/acre) 1.5 3.5 6

Total Planting Costs5,138 2,440

Total Cultural Costs60

9 1,062 1,216 1,317 1,317

Total Harvest Costs@$120/ton 180 420 720

Total Overhead Costs62

2 622 642 698 718

Total Cash Costs6369 4,124 2,038 2,435 2,755

Depreciation (see Exhibit6) 843 843

Total 3,278 $3,598*

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

Page 15: Chalice Wines

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 (*).

Page 16: Chalice Wines

Exhibit 7

History of California Grape Prices Per Ton

Variety (*)198

3198

4198

5198

6198

71988 1989 1990 1991 1992

Chardonnay (18%)

$980

$998

$904

$856

$922

$1,122

$1,225

$1,128

$1,122

$1,038

Cabernet (32%)

$467

$527

$533

$550

$631 $822

$1,032 $977 $918 $872

Zinfandel (56%)

$269

$253

$269

$340

$480 $817 $546 $391 $363 $434

Sauvignon Blanc (35%)

$487

$486

$441

$401

$414 $474 $571 $518 $541 $552

Semillon (73%)$21

5$26

0$21

0$24

5$25

4 $289 $311 $310 $328 $360

TTT TTTTTTTTTTT TT TTTTTTTTTTT TTTTTTTTT TTT TTTT TTT T TTTT TT TTTTT T TTT*

TTTTTTTT TT T T T T T1 9 9 2 .

Page 17: Chalice Wines

Sam assumed revenue for vineyard would be $812.36/ton

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

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

The Vineyard

Page 18: Chalice Wines

The Distributor Stellar wines is a typical East Coast wine

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

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

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

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

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

Page 19: Chalice Wines

Exhibit 8

Stellar Wines Financial Statements

(in Thousands)

Balance Sheets

December 31,

1992 1991

Assets

Cash $ 24 $ 9

Accounts Receivable 2,273 1,806

Inventory 6,500 6,592

Equipment (net) 108 105

Other 333 312

Total $9,238 $8,824

Liabilities

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

Accounts Payable & Accruals 1,735 1,544

Stockholders' Equity

Common Stock 10 9

Retained Earnings 2,540 2,477

2,550 2,486

Total $9,238 $8,824

Page 20: Chalice Wines

Income Statements

Year Ended December 31,

1992 1991

Sales $17,078 $15,389

Cost of Goods Sold 12,771 11,313

Operating Expenses 3,394 3,187

Interest Expense 425 507

Net Income Before Tax $488 $381

Exhibit 8 (cont.)

Stellar Wines Financial Statement

(in Thousands)

Page 21: Chalice Wines

The Retailer

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

As grocery chains and discount clubs have gained market share,

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

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

Page 22: Chalice Wines

Exhibit 9 contains selected financial information for Riverside for 1992.

As with the distributor, a case is a case. So one way of assigning operating

expenses and assets among the cases sold is equal weight.

The Retailer (cont.)

Page 23: Chalice Wines

Exhibit 9Riverside Wine Company, 1992

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

($235,333 of inventory)

The Retailer (cont.)

Page 24: Chalice Wines

Overall Value Chain

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

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

Page 25: Chalice Wines

Winery Costs Revisited

Sam knew the production cost of $52.73/case from Exhibit 4 was a very crude aggregate average cost.

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

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

Page 26: Chalice Wines

Exhibit 10

Winemaking Cost-ABC Approach

1991 1992

Stage 1 $285,000 (1) $268,000

Stage 2 571,000 559,000 (2)

Stage 3 57,000 56,000

TOTAL $913,000 $883,000

*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 1992

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

(2) Including $154,900 of barrel depreciation

Winery Costs Revisited (cont.)

Page 27: Chalice Wines

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

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

Exhibit 11Bottling Cost--Per Case

Cost Category Average Cost ABC Cost for Meritage White

Labor 1.16 .75Supplies .07 .07Bottles 6.43 5.00Corks 2.39 2.39Capsules 1.19 1.19Labels 1.99 1.50Wooden Boxes .55 0Taxes 3.02 3.02

TOTAL 16.80 13.92

Page 28: Chalice Wines

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

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

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

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

Page 29: Chalice Wines

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

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

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

Page 30: Chalice Wines
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Lyford Winery

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

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

The brand name was sold to a French company.

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

Page 33: Chalice Wines

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

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

Exhibit 13:

1991 Lyford Meritage White

Product Costs per Case

Bulk Wine Cost $ 9.26

Bottling 2.28

Corks 2.37

Capsules 1.16

Labels 0.70

Bottles 4.60

Lyford Overhead & Supplies 2.02

Wine Tax 3.02

Total $25.41

Page 34: Chalice Wines

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

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

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

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

Page 35: Chalice Wines

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

*Lyford Winery—The Value ChainSales 45Costs ?Margin ?Assets ?ROA ?

Page 36: Chalice Wines

Price to Distributor 45.00+ Freight & Taxes + 3.81Delivered = 48.81

Price to Retailer (/.75) = 65.00

Price to Consumer (/.75) = 86.67 = ~7.22/Bottle

(~$7.50 with sales tax)

Page 37: Chalice Wines

Exhibit 14: The Value Chain—1991 Cimarron Meritage White

(per case)Vineyard

Revenue 12.99 P/S = 0.26Operating costs 9.59 S/A = 0.685Margin 3.49 ROA = 0.184Assets 18.97

WineryRevenue costs 72.57 P/S = (0.32)Grapes 13.26 S/A = 0.551 Winemaking 47.33 ROA = (0.174) Bottling 13.92 Bottle Aging 1.60 SG&A 19.32 Margin (22.86) Assets 131.70

DistributorRevenue 114.32 P/S = 0.19Wine Cost 76.38 S/A = 2.78Operating Cost 15.08 ROA = 0.56Margin 22.86Assets 41.06

Retailer Revenue 142.46 P/S = (0.016)Wine Cost 114.32 S/A = 2.93Operating Costs 29.65 ROA = (0.031)Margin (1.51)Assets 48.68

+$2.7 handling cost+$2.7 handling cost

+$2.25 handling cost+$2.25 handling cost

+1.56 tax+1.56 tax

Page 38: Chalice Wines

The Overall Value Chain

Revenue 342.34 P/S = 0.0055 Profit 1.89 S/A = 1.424 Assets 240.41 ROA =0.0079

Page 39: Chalice Wines

Vineyard, CWG is paying way more that the industry average price for grapes. If it paid the industry average price, there is a potential an incremental $5.o per case profit. Should it keep on sacrificing profit for quality?

The cost to establish and operate a vineyard is $9.59 per case, whereas CWG is paying $12.99 per case, plus handling. It has to decide if it will continue to buy grapes or start growing grapes.

Winery Product costs were assigned equally to various wines when no two wines were the same. This was done based on the average cost system. ABC analysis better reflected the winemaking, bottling costs than average costing did.

The winery is unprofitable, losing $22.86 per case. CWG has a lot of money tied up in inventory. The winery has 4.9 million in depreciable assets, while Lyford winery has virtually no capital assets.

Page 40: Chalice Wines

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

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

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

Page 41: Chalice Wines

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

The Lyford Wines Value Chain

Page 42: Chalice Wines

Thank you !!