The Chalice WinesThe Chalice Wines

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$ 9.26

BottlingBottling 2.28 2.28

CorksCorks 2.37 2.37

CapsulesCapsules 1.16 1.16

LabelsLabels 0.70 0.70

BottlesBottles 4.60 4.60

Lyford Overhead & SuppliesLyford Overhead & Supplies 2.02 2.02

Wine 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 distributors for $45.00 per case, with a target retail price of $7.50 per a target retail price of $7.50 per bottle.bottle.

*Lyford Winery—The Value Chain*Lyford Winery—The Value Chain

SalesSales 4545

CostsCosts ? ?

MarginMargin ? ?

AssetsAssets ? ?

ROAROA ? ?

Price to DistributorPrice to Distributor 45.0045.00

+ Freight & Taxes+ Freight & Taxes + 3.81 + 3.81

DeliveredDelivered = 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 = 0.261P/S = 0.261Operating costs Operating costs 9.59 9.59 S/A = 0.685S/A = 0.685Margin Margin 3.40 3.40 ROA = 0.179ROA = 0.179AssetsAssets 18.9718.97

WineryWineryRevenue costsRevenue costs 72.5772.57 P/S = (0.315)P/S = (0.315) 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 = 0.200P/S = 0.200Wine CostWine Cost 76.3876.38 S/A = 2.784S/A = 2.784Operating CostOperating Cost 15.0815.08 ROA = 0.557ROA = 0.557MarginMargin 22.8522.85AssetsAssets 41.0641.06

Retailer Retailer RevenueRevenue 142.46 142.46 P/S = (0.011)P/S = (0.011)Wine CostWine Cost 114.32 114.32 S/A = 2.927S/A = 2.927Operating 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 = 0.005P/S = 0.005 ProfitProfit 1.881.88 S/A = 1.424S/A = 1.424 AssetsAssets 240.41240.41 ROA =0.008ROA =0.008

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

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

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

The winery is unprofitable, losing $22.86 per The winery is unprofitable, losing $22.86 per case. CWG has a lot of money tied up in inventory. The case. 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 (55.7%) in the value chain.(55.7%) 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 .8%. There numbers suggest that this is is .8%. There numbers suggest that this is not a profitable business.not a profitable business.

The Lyford winery has virtually no capital The Lyford winery has virtually no capital assets beyond leased offices and warehouse space assets beyond leased offices and warehouse space and working capital this enables it to have a high and working capital this enables it to have a high ROA of 100%. Lyford winery also purchased its ROA of 100%. Lyford winery also purchased its processing service from customs suppliers, and processing service from customs suppliers, and all of the services required to bring the product all of the services required to bring the product form the bulk wine market to distribution was form the bulk wine market to distribution was also purchased form custom winemaking also purchased form custom winemaking operations. This resulted in a low product cost of operations. This resulted in a low product cost of $25.41 and a margin of $13.5 per case. Lyford $25.41 and a margin of $13.5 per case. Lyford winery shows an alternative, more profitable winery shows an alternative, more profitable approach towards winemaking. Lyford’s value approach towards winemaking. Lyford’s value chain suggests that CWG might be better off chain suggests that CWG might be better off outsourcing some of its activities and reliving on outsourcing some of its activities and reliving on custom suppliers to keep its product cost low. custom suppliers to keep its product cost low.

The Lyford Wines Value The Lyford Wines Value ChainChain