Vineyard industry

Introduction: Background information for Vineyard industry

A. Executive Summary

To fulfill his life-long dream, realize his self-value and make the next step in his corporate strategy, Passalacqua should buy the winery and quit his job at Turley. It will allow the opportunity to leverage his competitive advantage of producing wine and allow for vertical integration, to reach sustainable profitability and an NPV of USD 250.000 in 5 years.

B. Market analysis

A continuously growing consumption, represented by an increase in wine consumption of 50% between 2000 and 2017, suggests the market attractiveness.
The U.S. wine market size was estimated at USD 61.80 billion in 2017. The increasing penetration of the product on account of growing consumer preference for the low percentage of Alcohol by Volume (ABV) blends is expected to drive market growth. The availability of a wide range of products with multiple flavors across all categories and price points including popular, premium, and luxury segments is expected to drive the market growth over the forecast period.

The growing demand for the product through online distribution channels makes it easier for smaller wineries to reach customers across the U.S. thereby encouraging investors to enter this market. In 2016, over 760 new establishments have opened in the U.S. indicating favorable economic conditions, increasing the investments in the industry.

C. Industry analysis

The increasing availability of the product is the other major factor growing consumer preference for the product. Nail salon, movie theaters, bookstores, and even car washing stations along with some grocers such as Kroger, Wegmans, and Whole Foods serve food and on-premise wine in stores thereby promoting the consumption of the product.

Automated machinery is used at various stages of the harvesting and production processes, especially at larger producing facilities. Advancements in agriculture technology to use water and electricity efficiently, use of drone aircraft to irrigate crops and thermal & GPS sensors to collect data on all aspects of grapevine physiology is likely to enhance the product quality.

Major raw materials required for manufacturing include grapes and water. Also, manufacturers use berries, apples, cherries, palm, rice, colors, flavors, sugar, yeast, enzymes, and a range of other products in production. The premium quality of grapes is used as it determines the taste of the product on account of which, raw material costs equal to about 40% of overall industry revenue.

Fluctuations in grape supplies, oversupply or under-supply, caused by inclement weather, agriculture policy changes, and other factors have a significant impact on the operational costs. Producers also face challenges owing to unfavorable currency exchange rates and high logistics and raw material import costs.

Based on an industry analysis, the premium wine segment bears attractive growth prospects for Sandlands, and promising factors for future success include brand positioning and direct-to-consumer sales with the help of technologies.

D. Customer analysis

The modernization and increased consumption of alcohol are currently trending all across the world and have propelled manufacturers to introduce new and innovative alcoholic beverages in the market. Consumers are gradually shifting their preferences towards other alcoholic beverages such as beer, liqueurs, spirits, and others, owing to their low price offerings. This trend is set to pull the overall market and may hamper its growth in the future years. Nevertheless, manufacturers are intensively capitalizing to regain the consumers’ attention by launching different ABV products in the market.

The consumption of red wine was followed for many centuries in the past and is still trending. This is likely to expand this segment all across the world. It is associated with the offerings of several health properties such as powerful plant compounds and antioxidants. Several vitro studies have proven that everyday consumption of wine in a limited amount can help to improve the healthy lifestyle of consumers. On the other hand, it also ensures a luxurious appeal and easy availability to the consumers along with the offerings of health benefits. Thus, the combination of both beneficial as well as luxurious factors has resulted in the dominance of red wine in the global marketplace and are further expected to grow at a decent CAGR during the forecast period.

In the premium segment, the relevant customers who buy rather expensive wine emphasize the brand in their purchase decision.

E. analysis

A. For all wine market finance analysis

As evidenced by the bottom chart the $0-1.5m category strongly favors domestic sales. For the smaller producers, sales into the domestic market often appear more attractive at smaller scales with generally lower marketing and distribution costs, shorter cash cycles and no currency risk.
Similarly with wine export values growing past $1.7 billion, it is not surprising that larger wineries are targeting and capitalizing on export markets at scalable volumes when compared to that of the domestic market.

B. For sandlands finance analysis

Based on an investment examination considering 3 different scenarios and four critical variables, Passalacqua should invest in the Eastside Meat building, reaching an NPV of USD 250.000. Sandlands should focus on increasing the sales price and volume to guarantee the investment’s success.

F. SWOT

Sandlands should leverage its competitive advantage relating to its production of wine, including know-how and business relationships, to further strengthen its market position and enhance profit margins.

A SWOT analysis shows that Sandlands could optimize its business to leverage unused potential in terms of unserved demand and undervalued prices. Sandlands should deal with the challenge of reaching sustainable profits by focusing on scale and price increase. To succeed in a growth strategy, Sandlands should build on its strong reputation and further strengthen its brand and client relationships.

G. Porter’s 5 forces analysis

A Five-Forces analysis indicates a medium competitive level within the premium wine industry and the importance of brand and product offering, be well-connected within the supply chain, and using new technologies in the sales process.

The industry faces a medium-high threat of entrants. Whereas the premium wine market attracts entrants with high growth rates, entry barriers include capital and time investment, know-how, and relationship to distributors. Customer power is high due to the low switching costs. Distributors have more significant clout, especially on smaller wineries due to greater consolidation. The advance of technologies and e-commerce/internet increased customers buying options. In conclusion, the premium wine industry faces a medium competitive environment, which forces wineries to be on top of technological innovation and stand out in terms of branded products.

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