Sainte Famille Wines Limited

Sainte Famille Wines Limited (SFW) was a new farm winery located in Falmouth, Nova Scotia. In the spring of 1990, Suzanne Corkum, president and co-owner of Sainte Famille Wines, looked over the racks of bottled wine from the first vintage. They were nearly ready for sale and the industry's peak season would soon begin. As she turned the bottles, she thought about how she would sell this wine. She had many final decisions to make over the next couple of months.

The Wine Industry in Canada

Wines fell into one of three categories: 1) commercial and table stock, 2) specialty, and 3) investment wines. Commercial and table stock wines were produced in high volume and were the lowest in quality and price of the three categories. Specialty wines were usually produced in small volumes by cottage or farm wineries. They were sold at a premium price and did not have wide distribution. Investment wines were purchased for the purpose of subsequent resale at a higher price.

This case was prepared by Shelley L MacDougall of Acadia University for the Atlantic-Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management. Some elements of this case have been disguised.

Copyright © 1992, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.

In Canada, a full range of commercial, table stock, and specialty wines were sold. These wines came from all over the world, imports representing fifty-two percent of wine sales in Canada and thirty-five percent in Nova Scotia. (See Exhibit 1)

The Canadian market was dominated by several large Ontariobased companies, which included Andres Wines Limited, founded in 1961, and TG Bright and Co Limited ("Brights," 1874). Both of these companies sold primarily commercial and table stock wines. They had manufacturing facilities across Canada and sold in every province. Inniskillin Wines, Chateau des Charmes, and Hillebrand Wines, also all of Ontario, were large farm wineries. They sold most of their wines in Ontario. Very few of the wines from these wineries were sold in Nova Scotia.

The wineries in Nova Scotia were Grande Pre Estate Wines in the Annapolis Valley, which sold approximately 25,000 cases per year, and Jost Vineyards Limited of Malagash, with sales of approximately 48,000 cases. Although these wineries sold some specialty wines, they sold mostly commercial and table stock wines.

There were forty-six vineyards in Nova Scotia, totalling 160 acres of certified production. These produced 130 tonnes of grapes each year.

The source of grapes used by a winery varied. Some wineries used only the grapes grown in their own vineyard. Alternative sources included grapes purchased from other local grape growers and bulk wine or concentrate purchased from other producers in Canada and abroad. The use of these sources allowed the winery to greatly expand output, as they did not have to invest the time and money in growing and processing grapes themselves. Quality was harder for the winery to control, however.

Forty percent of the typical year's wine sales were made in the period from May through August. Demand dropped off in September and October, picking up again in November and December for the Christmas season. Approximately thirty percent of annual sales came from the Christmas season. January to April was typically a very slow period for the wine industry. Exhibit I provides sales data for wine in Nova Scotia and Canada.

Free Trade

According to industry sources, the 1988 Canada-United States Free Trade Agreement (FTA) had a detrimental effect on Canadian grape growers and producers of commercial and table stock wine. After having been subsidised and protected by import duties for years, wine manufacturers found their preferential price markups phased out over a seven-year period. This had Canadian wineries competing directly with very large producers from the United States.

Wine manufacture, which was very capital intensive, was much less expensive on a per unit basis as large volumes were produced. A company such as Gallo Wines of California, with more favourable growing conditions and very large-scale production, could easily supply the Canadian market at a unit cost substantially lower than either Andres or Bright's - even after adding shipping costs.

Competition between American and Canadian producers seemed limited to commercial and table wines. Premium quality wines were not in competition with the products of the large US wine producers. Most American specialty wine manufacturers had much smaller operations, limited distribution, and charged a premium price for their product.

Grape growers also suffered from US competition. Prior to the FTA, Ontario and British Columbia wine manufacturers were required by law to use mostly Canadian-grown grapes. Once free trade was instituted, Canadian wine manufacturers were permitted to use unlimited quantities of cheaper wine concentrate and bulk wine from the United States. Grape growers in British Columbia and Ontario were pulling up entire vineyards as a result.

Andres and Brights, and the vineyards that supplied them, suffered most from the effects of free trade. Inniskillin, Hillebrand, Chateau des Charmes, and other cottage and boutique wineries welcomed the FTA. In fact, Inniskillin invested an additional $500,000 into barrel aging as a result of it.

Company Background

As described by the company's new brochure, "Sainte Famine Wines Limited [was] a small, family owned vineyard and winery located on an original Acadian Village site known as La Paroisse Sainte Famine De Pisiquit, settled in about 1685. The region [later came to be] known as Falmouth, Nova Scotia, the gateway to the beautiful Annapolis Valley. Sainte Famine Wines [was] dedicated to the art of growing quality grapes and vinting them into elegant premium wines."1

1 Sainte Famille Wines Limited brochure.

The Corkums purchased their farm in 1980 to grow strawberries. While plans to prepare the land were being made, the Nova Scotia strawberry U-pick industry went into decline. As a result, Suzanne and her husband, Doug, began to evaluate other commercial crops.

Around this time, Suzanne saw Roger Dial, president of Grande Pre Estate Wines, on television discussing the merits of grape growing in Nova Scotia. Suzanne had made wine in her home and enjoyed quality wine. As grapes might be a good alternative crop, Suzanne and Doug began researching the wine industry. They decided to experiment by planting one acre of grapevines. The vines did well in the warm summer climate of interior Nova Scotia. The following year, they planted a second acre. They worked these two acres for several years while learning the art of growing grapes and managing vines. "It was a trial-and-error process," explained Suzanne. Both research and crop results showed the land and climate were suitable for growing quality grapes.

In 1985, Suzanne became involved in the Grape Growers Association of Nova Scotia. Together with Roger Dial of Grand Pre Wines and Hans Jost of Jost Wines, she developed Nova Scotia's farm winery policy, approved by the Nova Scotia government in 1986. This legislation allowed wineries to sell 350 cases of wine directly to the consumer at retail prices for every certified acre in production.2 Prior to this development, all wines had to be sold through the government-operated Nova Scotia Liquor Commission (NSLC).

2 If a farm winery sold over the 350 case per acre quota, the NSLC collected the profit on the excess sales.

Before a winery could sell its product through the ninety-seven NSLC outlets, it had to guarantee enough supply to meet the demand. The NSLC did not want stock-outs of general listed wines, a requirement that was onerous for a small winery with limited production. If stock-outs occurred regularly, the NSLC would delist the offending product. Enactment of the farm winery policy enabled a small winery to enter the market independent of the exclusive NSLC distribution network. It was then possible for Suzanne and Doug to start a farm winery. They did so in 1986.

At this time, the Corkums travelled throughout Oregon, New York, Pennsylvania, British Columbia, and Ontario looking at the types of wine various cottage wineries sold, how the wineries were built, what volumes they sold, and what equipment they used. The following year, they went to Europe to look at estate wineries.

Suzanne and Doug planted additional grapevines, and Suzanne prepared the business plan. In February 1989, the plan was completed. Production goals and sales projections were for 2,500 cases in the first year (1989 vintage), 3,500 cases in the second year, 4,800 and 6,000 cases in the third and fourth years respectively. There were twelve 750mL bottles to a case.

Applications were submitted to banks and the Atlantic Canada Opportunities Agency (ACOA) for funding, the Nova Scotia Liquor Commission for a farm winery permit, and the provincial government for a vendor's licence. An ACOA grant was approved in August 1989. All other applications, being contingent upon the grant, were subsequently approved.

Construction of the building that would house the winery began soon after. SFW built facilities for a production volume of 6,000 cases. If demand exceeded this amount, Suzanne envisioned increasing production to 7,500 cases with existing facilities, but was reluctant to expand beyond this level.

Included in the plans was a wine and gift shop where SFW would sell wine, gift baskets and local crafts. The gift shop would overlook the vineyard.

The winery was not ready in time to process and store the first harvest. In the fall of 1989, a make-shift winery was set up in a vacant warehouse on the property until construction of the permanent winery was complete. The 5,000 gallons of aging wine were transported to the new winery in the spring of 1990.

Suzanne expected the winery to be open to the public in June 1990. At that time, there would only be white wines ready for sale. The red wines would not be released until November, although they would be still fairly "young", having had only a little over one year to ferment. They would be pleasant to drink, although not yet at their best. The Owners and Staff

Sainte Famille was owned jointly by Suzanne and Doug. Suzanne had a degree in business administration and spent two years in an agricultural science programme. After staying at home to raise children, Suzanne worked for Canada Mortgage and Housing and the Nova Scotia Housing and Mortgage Commission from 1969 to 1979. For the next five years, she was a self-employed broker of confectionary goods. From 1985 to 1990, Suzanne was manager of the Nova Scotia Fruit Growers Association, before devoting her energies full-time to her wine business in March of 1990.

At age forty-seven, Suzanne was energetic and optimistic by nature. Having grown up on a farm, she enjoyed farming and was familiar with the business. This is the primary reason she and Doug purchased the farm.

Doug Corkum worked full-time as executive director of the Halifax Industrial Commission and planned to continue there until retirement, which was several years away. "I do the 'grunt' work on the farm," said Doug, smiling. "Suzanne tells me what needs to be done in the vineyard and I do it."

Suzanne was the nerve centre of SFW. While she and Doug made major decisions together, Suzanne made the operating decisions. She was responsible for overseeing the development and maintenance of the vineyard, personnel, ordering of supplies, financial management and promotion.

SFW employed a professional winemaker on a consulting basis. This arrangement was to continue for the first two years of production (1989 and 1990 vintages). It was his job to develop the wines and train Suzanne in wine production. After that time, he would be paid a retainer to monitor quality.

SFW estimated that staffing needs would be two to six employees, depending on the time of year. A store manager would be employed full-time during the summer and Christmas season, part-time for the rest of the year. Others were hired for pruning vines and picking grapes, and to work on the bottling line as needed.

The Product

Sainte Famille produced specialty wines from grapes grown in the company's own vineyard. The 1989 vintage consisted of eight white wines and two red wines, mainly varietals.3 (See Exhibit 2) Suzanne and the winemaker were developing blends to appeal to those customers who preferred them. SFW also planned a limited quantity (sixty cases or 2.4 percent of the first year's total production) of a wine called Apple Blossom Special for the region's summer festival.

3 Varietals are wines made from at least eighty percent of one type of grape, in contrast to a blend of two or more types. Many of the wines on the market were blended wines.

Suzanne felt strongly about using only her own grapes. Partly for this reason, SFW's volume was small by industry standards. This, Suzanne reasoned, allowed her to maintain Sainte FamiIle's unique taste and ensure quality.

Attention to quality was considerable, and premium wines were the result. John Schreiner of the Financial Post would later give accolades to SFW after comparing its wines with other Nova Scotian wines. He described the Sainte Famille Chardonnay as "a clean, vivacious wine, with an elegant balance of light fruit and understated oak."4

Sainte Famille also considered selling some wine under specialized labels, for example, displaying a corporate logo. This was intended for supplying conventions, company dinners, Christmas parties, weddings, etc. A direct sales effort would be needed for this purpose, and Suzanne believed a part-time sales person would meet her needs should she decide to sell to corporate clients.

Production

Sainte Famille had twelve acres of grapevines. All of these acres were certified5 under the farm winery policy, although only ten had vines mature enough for wine making. The vines on the remaining two acres would not be sufficiently mature until 1992. There were twenty-three acres on which to plant additional vines in the future.

A new grapevine usually could not be fruited (grapes picked and used for wine) until its third year. Some varieties required an additional year before fruiting could begin. A vine was not in full production until its fifth or sixth year. It takes ten years for a vine to "settle down" and produce consistent yield, sugar, acid, etc.

Grapes were picked in autumn, and processed and fermented over the winter. White wines required ten months to ferment, whereas red wines required twelve to twenty-four months.

4 Financial Post, Volume 84 (46) November 3,1990, p.11. 5 An acre of vines was certified by the Nova Scotia Department of Agriculture if it was maintained (sprayed, weeded, cultivated, etc.) according to guidelines set out by the farm winery policy.

Sainte Famille aged the red wines in oak casks. This required additional fermentation time, but resulted in better quality wines with a distinctive flavour. The first harvest, the 1989 vintage, would be available for sale early in the summer of 1990. Suzanne expected there would be enough wine from this crop to meet demand until the summer of 1991. Sainte Famille's production in the first year (1989 vintage) was 2,500 cases of wine, approximately 22,500 litres.

Distribution

SFW had several choices for distribution of its wines: sales through Nova Scotia Liquor Commission specialty stores, through all the NSLC stores, or direct sales from the winery to final consumers and restaurants.

To sell wine through the Nova Scotia Liquor Commission, a winery had to apply for a "listing." Wines had to meet a minimum quality standard, as judged by a NSLC panel of wine tasters, to obtain a listing. There were two types of listings under which the wine could be distributed: special and general.

Wines that were sold under a special listing were available only through the two "Port of Wine" stores in Halifax and the specialty sections of eight regular NSLC stores. A special listing was primarily for high-quality varietals; and specialty wines. Being high-quality varietals, most of the Sainte Famille wines would likely qualify for a special listing.

Wines with a general listing were sold in the ninety-seven regular NSLC stores throughout the province. Quality standards were lower for general listings than for special listings, and retail prices were usually lower. Table stock wines usually sold under a general listing.

A NSLC listing brought both problems and benefits. There was a one hundred dollar fee for a general listing (no charge for a special listing) and a high markup. Furthermore, the NSLC's requirement of guaranteed supply was a risk for a winery the size and age of SFW. Suzanne told the story of a local competitor, which, as a result of the large volume required by the NSLC, depleted the original supply of its listed wine. To accommodate the NSLC, the winery substituted with bulk wine purchased from other producers and sold it under the same label. The product was inconsistent - each time a customer bought the wine, it had a different flavour. Suzanne felt this resulted in a loss of integrity; the general listing did more harm than good in that case. The NSLC was more tolerant of stockouts for special listed wines, as these were frequently produced by small farm wineries.

Under the farm winery policy, SFW was permitted to sell a maximum of 350 cases of wine per certified acre direct to restaurants and consumers. Doing so would involve making sales calls to restaurants, delivery, and follow-up by SFW staff.

Selling wine direct from the winery and through Nova Scotian restaurants would allow SFW to retain more of the markup by avoiding the NSLC. However, the winery would have to incur more selling expenses. Direct sales would not provide the market penetration and product turnover achievable with a NSLC listing.

Pricing

While many consumers of table stock wine were quite price sensitive, those consumers who preferred a good quality wine were willing to pay a reasonable premium. Many consumers perceived a positive price-quality relationship for wines.

Suzanne had to finally decide on prices for her wines. The prices would be functions of the costs of production, overhead, taxes, consumer demand, the prices of competing products, positioning, and, of course, desired profit.

Prices for the various SFW wines would differ. The Chardonnay, for example, was more expensive to produce than other types. Much of the pricing decision, however, depended upon which method of distribution Suzanne chose.

The NSLC reserved the right to determine the retail price for a general-listed wine. They categorized wines; each category had a set minimum and suggested range of retail prices. For instance, the retail price for a Canadian white blend would fall between approximately $6.25 and $7.60 per 750mL bottle.6 As a result of this structure, prices of all the wines in the category were quite similar. Examples of Canadian wines and prices at the specialty stores and the regular NSLC stores are in Exhibit 3. There were no set price ranges for special-listed wines, although the NSLC did require prices be reasonable vis-a-vis similar wines.

The NSLC markup was approximately sixty-nine percent. For instance, the NSLC would pay Sainte Famille $2.70 for a bottle of wine, which it would then sell to the consumer for $6.90. (This differential includes sales and excise taxes - see Exhibit 4 for the breakdown of prices.)

If SFW's wines were not listed with the NSLC, the winery could charge prices that were competitive and retain the NSLC markup. If Suzanne sold the same bottle of wine direct to the consumer, she could likewise charge customers $6.90 per bottle and earn an additional contribution of $2.43 per bottle. The average variable cost for a bottle of SFW wine was approximately $2.21.

6 This price range is for a general listing.

Suzanne anticipated that she would have enough 1989 Chardonnay, SFW's premium white wine, to support a listing with the NSLC for a restricted number of stores. She inquired about a special listing. The NSLC set a retail price of $13.20 per 750mL bottle of SFW Chardonnay. This was based on the prices of other Canadian Chardonnay wines. If SFW obtained this listing, all its Chardonnay would have to be sold at this price, even those bottles sold direct to the restaurants and from the wine shop. Suzanne wondered whether $13.20 was too high a price for her Chardonnay. Not only would it have her competing directly with larger wineries, but it might be too high to encourage consumers to give a new wine a try. The only way she could have her wine listed at a lower price was to lower her wholesale price.

Suzanne estimated that by late 1991, she would also have enough Gold Bell and Johannisberg Riesling to support a NSLC special listing if she so chose.

Investment

It cost approximately $10,000 to $11,000 to bring one acre into production with hired labour. This investment was made over the five years that new vines were non-producing or in low production.

SFW's initial investment in the building, equipment, and vineyard was approximately $500,000. This was financed by equity, a mortgage, and a $50,000 ACOA grant. (See Exhibit 5 for financial data.7)

7 All financial data for the company is disguised.

Decisions, Decisions

Projected output and sales of the 1989 vintage were 2,500 cases, under "normal" economic conditions. A recession was looming, and a new federal goods and services tax (GST) was proposed for January 1991. How these factors would affect SFW's sales was uncertain.

Suzanne considered producing wine for the "screw-cap" market and selling bag-in-a-box wine (table stock and commercial wine sold in twenty-litre bags). A twenty-litre bag of wine sold for $95 at the NSLC and provided higher margins due to savings in packaging. Average variable costs would approximate $28. Yet, the fixed costs and necessary volumes would be very high. Facilities would have to be expanded to accommodate these volumes. Although quality might be compromised, SFW could be more price competitive on all its wines with the larger facilities.

When asked about SFW's limited capacity, Suzanne responded, I don't think it is a problem to 'short' the market if demand exceeds supply People will know to buy early in the year. I do not want to grow too large. For one thing, I would lose control."

Suzanne turned the facts over in her mind again and again. What prices should she set for the wines? Should she go with NSLC listings? Bypassing the NSLC would require a greater selling effort on her part and a much slower penetration of the market. Yet, she would have more control over prices, which she felt might be important for positioning and acquiring market share.

Meanwhile, start-up costs were large. "Quality is very important to us, but without volume sales, it will be hard to pay the bills." Exhibit 1 Sales of Wine In Nova Scotia and Canada 750 mL Cases

Source: 1990 Annual Report , Nova Scotia Liquor Commission Sale of Red and White Table Wines in Canada Market Share by Country of Origin 1986 vs. 1990 (years ending March 31)

Source: Canadian Wine Institute 1990 Annual Report

Five Year Sales by Category % of Total Hectolitres Year Ending March 31

Source: 1990 Annual Report, Nova Scotia Liquor Commision Exhibit 2 Sainte Famille Grapes and Wines

Grape Varieties Grown by Sainte Famille Vineyards:

Marechal Foch Michurinetz Seyval Blanc Chardonnay Two Riesling crosses Ortega Bacchas Siegfried Orion

Wines Produced by Sainte Famille Wines Ltd:

(Red) Marechal Foch, Michurinetz (not available in 1990 vintage) Red blend (new 1990 vintage)

(White) Gold bell Chardonnay Seyval Blanc Siegfried 1989 Riesling Johannisberg Riesling Apple Blossom Special (60 cases only) Chablis (planned for 1990 vintage)

Source: Suzanne Corkurn Exhibit 3

Special Listing Wines

Canadian White Wines(750 mL bottle) Chardonnay: Chateau des Charmes $13.95 Inniskillin 13.20

Johannisberg Riesling: Brights $9.80 Inniskillin 13.20

Canadian Red Wines Jost Grand Cru Rouge $12.95 Gamay Beaujolais 8.05

General Listing Wines

Canadian White Wines Andres Domaine D'Or Chardonnay* $8.70 Andres Hochtaler 7.25 Andres Schloss Hochtaler Gold Rielsing 6.45 Andres Similkameen Chablis 6.00 Jost Chardonnay* 8.37 Jost Riesling Gold Label 7.90 Jost Riesling Vidal 6.95

Canadian Red Wines Jost Marechal Foch $6.65 Andres Domaine D'Or 7.15 Grande Pre Cuvee Evangeline 6.30

* Chardonnay was a varietal, relatively expensive to produce and very popular. Accordingly, the price was not in the range of other Canadian white wines.

Source: NSLC Port of Wines Price List and General Price List Exhibit 4

Retail and Wholesale Prices for a 750 mL bottle of Wine NSLC Listing vs. Selling Direct Retail price - $6.90

Selling Wholesale to the NSLC

Wholesale price $2.70 add: excise tax .34 federal sales tax .55 subtotal 3.59 add: NSLC markup 2.48 NSLC handling charge .20 subtotal 6.27 add: provincial sales tax .63 Retail price $6.90

Selling Direct to Customers

Wholesale price $5.12 add: NSLC Administration fee .13 excise tax .34 subtotal 5.59 add: federal sales tax .68 6.27 add: provincial sales tax .63 Retail Price $6.90

Note: Selling price is disguised.

Source: Sainte Famille Wines Limited business plan. Exhibit 5 Projected Costs for 2500 Cases Year ending August 31, 1991

Cost of goods sold (note 1) $66,305 Winery and Selling Expenses 128,877 General Administration 30,778

Total Expenses $225,960

Note 1 - includes depreciation charge of $18,894 on cellar and packaging equipment

Sainte Famille Wines Projected Balance Sheet* As of August 1991

Bank ($89,135) Accounts Receivable 856 Inventories 60,366

Building 296,800 Equipment 206,223 Accumulated Depreciation (37,202)

Total Assets $437,908

Accounts Payable 10,148 Mortgage 234,744 ACOA grant holdback 10% 50,302

Total Liabilities 295,195 Owners Equity 142,713

Total Liabilities and Equity $437,908

* Numbers are disguised. Source: Sainte Famille Wines Limited business plan.