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Salut LLC

November 2002

Business Plan Copy Number [01] This document is confidential. It is not for re-distribution.

Joseph Kita CEO, CMO, Director of Sales 524 North Burrowes Street State College, PA (814)404-2057 [email protected]

This is a business plan. It does not imply an offering of Securities.

1 Table of Contents

Executive Summary 1-1 Mission 2-1 Company Overview 3-1 Legal Business Description 3-2 Legal Forms Necessary 3-3 Product 4-1 The Market 5-1 Customer Profile 5-2 Marketing Plan 5-3 Sales Strategy 5-4 Distribution Channels 5-5 Advertising, Promotion, PR 5-6 Competition 6-1 Risk/Opportunity 7-1 Management Team 8-1 Capital Requirements 9-1 Sales Strategy 9-2 Exit Strategy 9-3 Conclusion 10-1 Appendix 11-1

2 A High Return Investment Opportunity in the Wine Industry

Executive Summary

Through marketing innovation in a competitive market, Salut LLC intends to capture an often overlooked segment of the wine market. There are 1250 wineries in the US with five companies accounting for nearly 60% of the market. These companies generally focus on a specific core wine consumer, which is characterized by specific demographic, psycographic, and behavioral characteristics. Rather than following the mold, Salut intends to target 21-35 year olds in the marginal and non-adopter markets, who have expressed an unmet need. By providing options in both quantity and variety, making the point-of- purchase decision easier, clearly differentiating our product among the masses, and promoting our product in an interactive business consumer fashion, Salut plans on being profitable company in year 2 of the business.

Through operational efficiencies, which break the norm of the industry, and a strong marketing plan Salute intends to be profitable with a high ROI, IRR, and explosive growth after year 4. One of the major barriers to market is the initial capital required to open a winery. Salute intends to outsource the wine production to a winery, which will private label Salute’s various brands. Functioning as a wholesaler without the capital-intensive investment of a winery, Salut has an immediate cost advantage over the competition. All logistics will be outsourced to a public warehouse to avoid the capital requirement of building, maintaining, and staffing a warehouse.

With marketing growing the top line at 60% per year and a very lean cost position, Salut is seeking $200,000 of angel capital seed money to get the business up and running. Salut will recognize positive profits in year two, gross margins of 53%, an IRR of 20%, a five year ROI of 46%, and a payback period of 4 years. At year 5, Salut will begin to recognize explosive growth as brand awareness is created and Salut begins to expand outside of it’s immediate Albany market. As Salut grows quickly through the growth cycle (years 5-7), the opportunity to sell the company or to continue and modify operations exists. In return for the $200,000 in seed capital, Salute is offering 50% of the company, an additional 20% of the company will go to bootstrapping investors, and the company as an incentive to current and future employees will retain 30%. The following table indicates the cash flow of Salut projected to 2007.

3 2003 2004 2005 2006 2007

Revenue $222,609 $463,917 $966,803 $1,762,965 $2,361,869 Gross Margin $117,599 $238,511 $482,964 $854,217 $1,107,883 Net Income -$15,892 $17,186 $84,187 $211,659 $341,224 Free Cash Flow -$15,892 $17,186 $84,187 $211,659 $341,224

2-1 Mission

Salut strives to provide all stakeholders with a unique and wholisitic opportunity by providing a quality product and memorable experience. Through marketing innovation, Salut intends to bring people together in a communal fashion to enjoy our wine amongst friends and family and redefine the way wine is perceived.

3-1 Company

The Salut company concept was conceived in October of 2002 and will be set up as an LLC. The nature of Salut’s business is acting as a wholesaler (BATF form 5100.24 section 6) of it’s own branded wine in the New York marketplace. Salute intends to outsource all product, packaging materials, and logistics, and focus on it’s core business strength of the integrated marketing communications of wine to the 21-35 year old segment that has an unmet need.

Salut’s principal offices will be located in Watervliet, NY and all products will be warehoused in the adjacent facility. Further offices will be erected as necessary to allow for efficient territory management and lean supply chains. New York is an attractive market due to minimal government control and state wine taxes as well as a host of exceptional wineries from which to outsource.

3-2 Business

Salut first and foremost is a wine marketing firm. We will initially outsource 4 wine varieties from Pleasant Valley Winery in Hammondsport, NY.

4 Pleasant Valley will private label the product in our bottles, labels, and packaging, which all will synergistically create a vary high level of point-of-purchase differentiation. Additionally, an active sales force will promote our wine in various eating establishments that tend to host our target demographic. Salut’s primary focus is on the price and promotion strategy of the wine as opposed to the actual product, which most wineries tend to focus upon losing sight and resources to support the marketing aspect.

Our company is at a concept/seed stage. At this point in time, some additional marketing forecasting tools such as surveys, focus groups, and personal interviews is a must to get the most accurate projections.

3-3 Legal Forms to File

 Federal Wine Wholesalers Permit form ATF F 5100.24  Federal Special Tax Registration and Return ATF F 5630.5 - $500 annual federal tax for wine wholesalers  New York State Form MT-40 – Return Tax on Wine at $.19 / gal  New York State Form DTF-17 – Application for Registration as a Sales Tax Vendor  New York State Form TP-215 - Application for Registration as a Distributor of Alcoholic Beverages  New York State Form TP-229 - Financial Statement of Distributors of Alcoholic Beverages  New York State Wholesale Wine License WW303 – Authorizes licensee to sell liquor and wine at wholesale. Fee = $1320; Bond = $10,000 (1 year)

4-1 Product

Salut markets four varieties of wine, which are positioned and packaged to clearly indicate their meal accompanying characteristics. Each variety will be branded separately and fall under the Salut umbrella. Salut will function as a house of brands. Although majority will be a true varietal (Merlot, Chardonnay, White Zinfandel, Sangiovese) as defined by Title 27 CFR section 4.23 of the Bureau of Alcohol Tobacco and Firearms, it will not be branded as such. Rather, the labels will be comprised of brand names that subtly and humorously indicate the appropriateness of the wine with a specific meal. The intention is to make the purchasing decision painless, while creating brand recognition and awareness. The following varieties will be initially included in the Salut’ line and extensions may be amended as necessary to service an unmet demand.

. Brand Name Varietal Functional Attributes

5 Meat and Potatoes Merlot or Merlot/Cab Accompanies all red meat blend Sips With the Fishes Chardonnay Accompanies all Seafood, and freshwater fish Clucks and Squeals Dryer White Zinfandel Accompanies Pork and Chicken Pasta Sangiovese General accommodation all pasta sauces

Bottle size and design is an additional important factor in point-of- purchase decision. All Salut’ varieties will be packaged in 500 mL and 1000 mL bottles as opposed to the standard 750 mL bottle. Since our product will be promoted in a way to emphasize meal time consumption, it is important to know that the 750 mL bottle is often seen as too much for two people and too little for four. This factor not only brings attention to our size variations on the retail shelf but also gives the consumer a choice in the purchase situation.

Presently, our product is in an introductory/sample stage as we intend to sample and taste test the various wine varieties from the potential suppliers (Glenora Winery and Pleasant Valley Winery). To accurately purchase the correct wine, we tend to involve several sampling groups in the targeted 21-35 year old demographic to sample the wines in a mealtime setting. A 30 person, cross cultural sample will be invited to two separate wine tasting events, where a meal and the potential wines will be served. The sample will be given a brief introductory in how to taste the wine and then asked to vote upon the best accompanying wines to the various cuisine provided. In return for their responses, they get a free meal and an opportunity to sample and taste some wine.

The current critical factors affecting are products are determining the proper packaging and labeling to maximize point of purchase consumption and our dependency on the wine supplier. Focus groups will be used to help us determine exactly what it is that influences buying decisions of the target segment so that we can best position our product in the point-of-purchase decision event. To hedge our risks with suppliers, several may be selected each providing 1-3 of the fore mentioned varieties. Thus if one of the suppliers should have the misfortune of a poor yield, limited capacity, etc, Salut can fall back on the alternate supplier to fill the gaps created.

5-1 The Market

Salut is a wholesaler and marketer of domestic table wines. The total 2001 wine market was valued at $19 billion. Of this, 2/3 were domestic table wine, which is the product offered by Salut and equates to a $12.7 billion market (Standard and Poor’s). The top 5 wine marketers: E&J Gallo Winery,

6 Constellation Brands, The Wine Group Inc, Robert Mondavi Corp, and Beringer Blass Wine Estates hold 60% of the total market (Standard and Poor's). Additionally, imported wines account for $2 billion of the market. Since 1975, the market has grown at a 7.5% CAGR however this number is dependent on the current grape crop, which in recent years has caused for an increase in pricing (wineindustry.com). Additionally, per capita consumption is projected to increase at a 4.9% CAGR ( www.arec.wsu.edu/projects/winegrape.htm ). The increasing costs of grapes seem to have reached its zenith and is currently decreasing hence the 4-5% increases in annual operating profits.

Barriers to entry exist in the wine industry due to high taxation, intensive capital investments, and restricted advertising (Standard and Poor’s). Creating strong brand awareness, gaining market share, and being operationally efficient are the keys to succeeding in the industry.

Behaviorally the market is broken down into core, marginal, and non- adopters. Core consumers are defined as those that consume wine weekly, marginal consumers consume at least every 2-3 months and enjoy wine, and non- adopters, who drink wine on average once every 2-3 months but do not like wine. Targeting the marginal and non-adopters is key for Salut’s penetration. The following table profiles the various behavioral segments.

Profile of Consumer Segments (www.winemarketcouncil.com) Segment Demographics Attitudes Consumption 63% female, majority (51%) 79% prefer wine to Special occasions, after 40 year old +, live in suburbs, alternative, 92% say work, weekday dinner 85% Caucasian, avg annual “encourages friendly (69%), red wine (48%), Core (19.2 million income = $78,100 atmosphere”, 38% wine is white wine (41%), blush people) formal, wine (11%), 45% spend $6.00-$9.99 per 750 mL, 33% spend $10.00 - $14.99 64% female, majority (49%) 57% prefer wine to Special occasions, away are 30 – 49 years old, live in alternative, 83% say from home, white wine suburbs, Caucasian, avg “encourages friendly (46%), red wine (35%), annual income = $63,800 atmosphere”, 50% wine is blush (19%), 32% spend Marginal (28.9 million formal, confusion over $6.00 - $10.99, 23% spend people) wine selection, food $10.00 - $14.99 pairings, misinformed about packaging, serving and keeping 45% female, majority 21-29, Not determined Not determined Non-Adopter (63.5 live in cities, Caucasian, avg million) annual income = $57,600

Four price segments are currently recognized for wine ( > 7% alcohol by volume) and are based on price per 750 mL. They include: jug wine (<$3.00),

7 popular premium ($3.00-$7.00), super premium ($7.01-$14.00), and ultra premium (>$14.00). The consumption of wine tends to stay pretty constant through economic recession and economic growth however consumers tend to purchase less premium products during recession times as disposable personal income decreases (Standard and Poor’s).

5-2 Customer Profile

Salut is specifically targeting the 21-35 year old demographic that makes up approximately 20% of the US population or approximately 56.2 million people. Even further, Salute’ will initially create brand awareness in NY prior to extending the products into other states. NY has an average (~ 18.5%) 21-35 year old population yielding a market size of 3.7 million people (New York State Data Center). It should also be noted that in 1999 the 21-24 year old age bracket increased for the first time in two decades and is expected to contribute an additional 1% to beer gains over the next several years. Beer tends to be the favored beverage of this age group (Standard and Poor’s). Marginal and non- adopters make up majority of this age group and tend not to consume wine due to brand image, lack of knowledge, serving and keeping misunderstandings.

5.3 Marketing Plan

Before anything else is considered, Salut will conduct market research to determine the trial and retention rates of the targeted consumer. Through the use of focus groups comprised of the targeted segment, salute will determine what drives consumer purchases decision from both a trial and retention aspect. Additionally, we will then be in a position to better understand the wine price / quality payoff thus allowing us to price even more accurately so as to maximize profits. Surveys will also be conducted in order to reach a higher quantity of respondents most efficiently and to determine the magnitude of importance of each attribute of our product. Given our immediate research and assumptions are correct, the following plan outlines our strategy.

To keep logistical cost to a minimum and create brand awareness, Salut intends to geographically expand from it’s central Albany location once certain benchmark are achieved. Appendix 1 indicates the total US, New York, and immediate target market, which is the accumulation of the individual counties listed. The market is even further segmented by age and domestic table wine. Salut plans to gain 1%, 2%, 3%, 5%, 5% in years 1-5 respectively. Once Salut reaches the 3% market share level, Salut will expand marketing and if need be logistical operations to another geographic location, which would be representative of the first geographic location (approximately 5 million 21-35 year olds). Once we reach a 5% market share in each region, our goal is then to maintain this share and commit the necessary resources to other regions. It is our

8 impression that this strategy will allow us to faster progress through the learning curve and become optimally efficient. Sales personnel will be added accordingly to sustain and maximize growth.

Lean costs allow Salut to price very competitively in the super-premium market segment. With COGS of $1.87 and $3.10 for the 500 and 1000 mL bottles respectively, Salut can recognize a gross profit of 53% by pricing to retailers at $4.00 and $6.50 for the 500mL and 1000 mL bottles respectively.

Salut’s initial recipe for success is to alter the image of wine from a “formal” perception to a “casual” perception by creating strong, unique, and favorable brand associations to various Salut brands. All packaging and promotion will fill in the gaps with regard to the concerns marginal and non-adopters have including: food pairings, serving size indicated on package, 2 different bottle sizes, and clearly differentiated packaging. The goal is to make purchase very user friendly.

5.4 Sales Strategy

Direct selling is another key promotional aspect of our product. A sales force comprised of outgoing, young, and attractive wine connoisseurs will promote our product at the point of consumption. By proactively promoting our wine in specific restaurants that tend to host our researched demographic, the sales force will be trained to make the meal occasion memorable through subtly entertaining the tables of restaurant patrons while offering those over 21 a sample glass of Salute’s wines. In addition to the samples administered, the restaurant would feature both the 500 mL and 1000 mL bottles of wine that evening at a discounted price, while the sales rep reinforces the communal connotations of sharing wine with a meal. It is at this point that the memorable product, packaging, and sales person’s antics create the overall experience.

5.5 Distribution Channels

One barrier to entry that exists in the wine industry is the initial capital- intensive investment in processing, packaging, and shipping. By outsourcing product and warehousing, keeping a lean supply chain, and eliminating a middleman, Salut has a very good cost position. The following schematic illustrates a typical wine supply chain.

Winery Wholesaler Retailer Consumer

9 Winery – The manufacturer of the wine itself. Salut will outsource and have the wineries private label for Salut. Currently Pleasant Valley Winery, Hammondsport, NY and Glenora Winery, Dundee, NY are potential suppliers offering wine at approximately $5.00 / gallon plus an additional handling and packaging fee of $2.50/ case.

Wholesaler – Salut’s function. Sells to Retailers and Discounters buy from Wineries normally at a higher cost position than Salut, since they sell the winery branded product.

Retailers – Sell to end use consumers. Two types: Discounters, who sell at a 35% mark up and Retailers, who sell at a 50% mark up.

Salute will lease both warehouse and office space from Stone Management, Watervliet, NY. Again, to avoid the high capital cost of warehouse construction, fleet purchase and maintenance, and labor. Stone management charges bases upon pallet handling and storage at a rate of $4.25 in per pallet, $4.25 out per pallet, and $4.50 per month storage per pallet (a pallet consists of approximately 50 cases). Given a three-week lead-time and a safety stock of 1 week, Salut’s distribution and handling costs per year are indicated in Appendix 2.

5.6 Advertising and Promotion

Salut’s sales force will initially act as the promotional force behind Salut. Through sampling and featuring Salut wine at targeted restaurants, Salut will create brand awareness through human intervention and point of purchase advertising.

6-1 Competition

There are approximately 1250 wineries in the United States concentrated mainly in California. California accounts for 90% of US production followed by New York (4%) and Northwest states (3%) (www.fas.usda.gov/htp/horticulture/wine ). The five major players: E&J Gallo Winery, Constellation Brands, The Wine Group Inc, Robert Mondavi Corp, and Beringer Blass Wine Estates, who combined hold 60% share, compete on a national level. Other wineries compete on local, state, and regional levels. Additionally, wine imports have been on the rise since 1994 growing nearly 100% since that time.

Our products are unique because we specifically target a younger demographic, which also tend to have a lower frequency purchase behavior. Additionally, to my knowledge, Salut will be the only wine company that samples their wine to consumers in restaurants, which is a legal practice in New York.

10 Our low cost position and lean supply chain gives us quite a bit of margin to play with in our pricing strategy. With no capital tied into plant, equipment, or manufacturing, Salut doesn’t require high margins to return a profit.

7.1 Risk/Opportunity

The greatest risks we have in our business today are not selling the predicted quantities. Even in the worst-case scenario, we feel that we could sell off all of our product at cost therefore recovering are COGS expenses. We feel we can overcome these risks because of openness to the end user and focusing first and foremost on the consumer’s needs as opposed to the supplier’s product, which is the downfall of too many wineries - too much focus on product without truly understanding the customer.

The opportunities before us are significant; we have the opportunity to penetrate and dominate a segment of the population, which is not currently targeted if we can expand strategically and retain focus on the specific segment we have targeted. Identifying and rectifying our target’s low purchase behavior will be a key to our positioning strategy.

8-1 Management Team

Salute’ is set up as an LLC, with Joseph Kita as the general partner, CEO, CMO, and director of sales. Additional partners are needed to fulfill the goals and objective of Salute’ they include:  CFO – to initially analyze feasibility of various capital expenditure options as the business expands, project revenues, costs, net income, and budgeting.  Legal Counsel – to advise on legal issues and provisions related to the business, which tends to be saturated with various legalities.  Wine Counselor – advise on selecting, pricing, tasting, and other various aspects of the product itself. A marketing and sales background is a plus.

As Salute grows other positions that will need to be filled are sales, administration, product delivery, and accounting. A COO may be needed as Salut expands, however at this point our logistics are being outsourced and managed by a third party. Salut’ will also set up stipulations and contracts in the event that a partner or team member leaves the company. Whether through buyouts, death, etc, they bylaws and voting rights will be written to ensure the perseverance of the company. Salut will purchase Directors and Officer’s insurance.

Employee salaries are embedded in SG&A expenses. Additionally, all employees will have an equity stake in the company as an incentive to produce bottom line results.

11 9-1 Capital Requirements

Salut seeks $200, 000 of Angel funding in order to grow at a self- sustaining rate of 60% volume growth per year, 20% IRR, positive cash flow in year two, 46% five year ROI, payback between year 4 and 5. After year five, Salut sales will take off exponentially. Additionally by setting up accounts receivables at 30 days and Account Payable at 60 days, Salut will be able to take advantage of supplier financing. The investors will take an equity stake in the company of 70%. Salut reserves a 30% stake to be distributed as a payment incentive to all employees both current and future.

9.2 Sales Summary

Salut’s sales will grow at a CAGR of 60% per year for the first five years. This number is conservative as it only takes into consideration a per capita consumption CAGR of 4.9%. Price has not been adjusted for inflation or in regard to grape crop supply and demand.

2003 2004 2005 2006 2007 Revenue $222,609 $463,917 $966,803 $1,762,965 $2,361,869 Gross Profit $117,599 $238,511 $482,964 $854,217 $1,107,883 Operating Profit -$26,487 $28,643 $140,312 $352,766 $568,707

Additional financial considerations can be found in Appendix 3.

9.3 Exit Strategy

Several options are viable as exit strategies for Salute. The first option is to sell Salut outright either as an entire entity or sell each branded product to a larger various wine conglomerates. Secondly, Salut can function as a capital cow and continue to expand operations on a regional, statewide, and ultimately countrywide basis. At various points, capital expenditures will be necessary to construct independent bottling facilities and perhaps wine making facilities to take advantage of economies of scales thereby minimizing variable costs. This strategy would ultimately entail an IPO. Finally, it would be written in the LLC bylaws that if after a specific period of time, a certain partner wants to leave the partnership, his/her position may be purchased by another partner based upon certain valuation criteria set up by our CFO.

12 10.1 Conclusions

Recognizing that a market segment exists, whose needs are not met and by focusing on these consumers needs as opposed to the products, Salut strongly believes that a profitable and sustainable company can be created. Current wine companies tend to invest a lot in product development without ever listening to the consumer. These firms compete in a competitive market because majority of the companies tend to focus on core wine consumers as opposed to marginal consumers and non-adopters. Information has shown that the marginal and non- adopters make up a large percentage of the population but have some hesitations, concerns, and images around the consumption of wine. By focusing on these concerns and marketing to a younger, often overlooked demographics, Salut intends to gain share and create brand awareness in the market, through the implementation of an innovative marketing strategy. Packaging and promotion are the key to this strategy as well as having a minimally capital intensive business model.