Business final?

INTRODUCTION

Tegan Passalacqua is head winemaker at Turley Wine Cellars, owner of Kirschenmann Vineyard and Sandlands Vineyards out of Lodi, California. In a market that is continually evolving, Passalacqua is looking to turn to the past for a more sumptuous future. In the good graces of founder Larry Turley, Passalacqua currently maintains a sweetheart deal in which he may utilize Turley facilities to work his own wines. This coupled with relationships with growers built out of Turley facilities, Passalacqua has hard choices in front of him on how best to proceed. Passalacqua is considering either purchasing a costly old vine vineyard to secure heritage vines, or a historic meat processing building that could be home to his new winery and tasting room for his Sandlands wines.

EXTERNAL ANALYSIS

The US wine market is an attractive industry only if positioned well. As a whole, the market is very competitive due to low returns, easy access for new entrants, and both powerful suppliers and buyers. Stateside wine consumption continues to grow and saw tripled consumption rates in the past approximate 50 years. Near 70% of the wine consumed was produced in California and amassed an astonishing approximate $42 billion in sales. About 40% of adults of drinking age reported themselves as wine drinkers, and 90% of these sales were attributed to frequent and knowledgeable wine enthusiasts. Wine enthusiasts’ tendencies trend towards higher priced premium wines with the belief that with high cost comes higher quality, though the relation is purely anecdotal. Old-vine wines such as that of Passalacqua’s vineyard have seen a resurgence in popularity amongst winemakers. Older vines are believed to provide a more balanced and nuanced product. This refinement often fetches growers higher prices on their grapes. Older vines produce considerably less workable fruit than newer vines, and as such are rarely utilized by large operations. Suppliers of old-vine grapes have power due to the scarcity of old-vines and rarity of their particular type. As the number of old-vine vineyards continue to decline, the inherent value of those remaining will skyrocket. Regrettably, most smaller wineries are found to have lost money on average. Larger, mass-producing operations pumping out affordable wines are seen to have generally more profitable long-term gains.

Wine is often considered in terms of a premium segment and a value segment. Premium wines can be found at prices above $10, while value wines have a purchase price of lower than $10. Sandlands aimed to maintain a retail price point between $24-$28. While technically within the premium segment, it is seen as an affordable option within the segment itself. Premium wines can demand hundreds, even thousands of dollars. In this regard, Sandlands is positioned well to meet the everyday enthusiast of which cost is still a concern. An offering in this range appeals to a wider array of people than just the elite enthusiasts and provides an attractive entry level cost to the product. To provide an artful offering at this price point is incredibly competitive. Data would be helpful to weigh whether the revenues realized at the competitive price point is worth the risk that is gained when now competing with such a low price group. To mitigate the risk of outright substitution Sandlands would need to focus on differentiating based on wine type, flavors, and packaging.

Producers of wines fall into two primary categories of either mass producers or commodity driven suppliers. The mass producers of the wine scene are driven to compel their market segment with affordable, drinkable everyday wines that can be produced in large scale with certain outcomes. For these titans’ efficiency and repeatability is the name of the game. Small scale operations are often a passion project that chase the art of encapsulating the terroir. High quality, artful renderings are also more expensive to come by as it requires a slower, more thoughtful approach to growing and sourcing grapes. If production is to remain small, profits are almost certain to remain in step. A niche market with a cult following may however allow a winemaker to expand production thoughtfully to increase revenues. Outright expansion and explosive growth are not feasible, though horizontal growth can be considered. Small growers that have access to old-vine grapes can consider it a hedge against imitation. The backward vertical integration of Sandlands with an old-vines vineyard purchase would further stabilize the outfit with a steady supply of old-vine grapes. This move could be considered in order to reduce external supplier power and other old-vine vineyards continue to bought at ever-increasing prices. The only way to ensure growers don’t price gouge you is to grow your own grapes.

The wine industry has expansive options at all price points and very particular distribution channels which is why buyers hold tremendous power. The average consumer may find that their tastes change or even dwindle as time goes on. Disposable income, unemployment, inflation, and other economic factors can swing the adoption rates in the market drastically on a whim. Switching costs are near null for this type of product as there are endless offerings on the market within a chosen price range. There may be slight mental or emotional discomfort for the buyer to have to try new products, but there is no shortage of wines in a preferred type (Chardonnay, Sauvignon Blanc, etc.). The ability for consumers to switch for a comparable product based on price is effortless given the options readily available. The seemingly limitless choices and lack of barriers to entry ensure a competitive market.

Distribution channels for wine are a difficult barrier for a smaller entrant, as established producers have a grip on distribution channels particularly due to the volume they can produce. Those producing in high quantity have the luxury of partnering with established distributors with far reaches. These main capillaries of distribution are becoming more concentrated as time goes on, making it more difficult for smaller operations to make headway. Smaller producers are often relegated to small distributors that focus on limited run products. These distributors are unable to recover the same revenues as the large distributors due to the lack of volume. This cost is often eaten by the winemaker in order to get their product into the hands of a distributor to widen their consumer base.

Politically, winemakers have had the benefit of changes in law to allow producers to sell direct to consumers as well as distributors. While a win for winemakers, it is important to note that this face to face transaction requires a physical location to interface with customers. The overhead for a tasting room and front-facing operation is a considerable cost. Some wineries may find that they are able to mark up their prices for these direct-to-consumer sales if they are able to pair it with an experiential tasting. Depending on the savvy of the winemaker and the marketing this endeavor can work to the advantage of the small winery. Smaller wineries may find that backwards integration (by way of vineyards) staves off profit loss by ensuring not only supply but also they are able to provide the necessary experience to demand higher price points for their product. This strategy circumnavigates the need to attempt to compete with larger producers for distribution access. If independent marketing efforts are successfully targeted it is possible to maintain sales at the estate/integrated winery, while only utilizing small distribution channels.

INTERNAL ANALYSIS

Passalacqua is uniquely positioned after having built years of relationships with growers via his work at Turley Wine Cellars. Passalacqua has endeared himself to local growers who favor less formality and rigidity in agreements. Instead of traditional long-term contracts that lock a grower into supplying for a particular buyer over time, Passalacqua has forged unique deals with growers via handshake agreements. The growers have shown to respect this type of everyday agreement and are loyal to Passalacqua and his operation. This is a unique strength that competitors may not possess as at the outset it is risky. If Passalacqua were a new winemaker being unable to secure a solid contract would leave him with unknown product procurement. Instead, Passalacqua has forged relationships over years that he can rely on. Additionally, the lack of contract allows Passalacqua the ability to pivot from one grape to another if the market requires. This flexibility may prove beneficial as popular tastes change from year to year.

Tegan’s ownership of his own old-vine vineyard has secured access to an ever-dwindling supply of heritage vines. While not enough to fuel all of Pasalacqua’s production, he maintains a source of sought-after old-vine grapes. Old vine vineyards are thought to provide more complex and balanced notes, relaying taste from the terroir. Competitors are not simply able to go purchase old vine vineyards as it is obviously something that must be grown over time. There is a finite number of vineyards considered to be old vines (50+ years), until newer vineyards age into the distinction. In this sense, the vineyard Tegan procured is a limited resource that not all competitors have access to. As climate and pest disturbances continue to threaten the health of older less vigorous vines, it is highly unlikely that there is potential for imitation.

With the use of Turley Wine Cellars facilities, Pasalacqua has had access to state-of-the-art facilities. A tremendous cost savings is found in utilizing the equipment while Tegan is able to fund the purchase of more expensive equipment on his own. This unique asset allows Sandlands to recover the capital to safely finance larger purchases in a measured and planned manner. Financially sound decisions ensure that the operation is not struggling from the production line forward, and can offer some measure of cost savings to its customer. Offering affordability in a premium, small batch wine is not commonplace and differentiates Sandlands offerings from others on the market without cutting into profits.

Winemaking in and of itself is a craft that took years for Passalacqua to home. Tegan’s work in Turley Wine Cellars cultivated the unique vision that he brings to his winemaking process. Winemaking experience is imitable in that there are over 4,000 wineries in California alone raising winemakers of distinction. While this is not a completely unique resource to Sandlands, Pasalacqua can expect a nice cost savings over an approximate $50,000 per year currently. This can be framed as an everyday cost savings that does not inherently position Sandlands above other wineries. Competitively, it is wise for such a small winemaker to market their unique expression via their wines and in this sense Pasalacqua cannot be replicated. Terroir and vision in winemaking can be tasted (sight unseen) to identify a winemaker. If Pasalacqua is able to develop a flavor profile that is identifiable by consumers he can realize profits that are unique to his product only. The success of Sandlands wine in the secondary market speaks to the chase consumers are willing to take for a satisfying product. Additionally, consumers were willing to pay double his retail price for his products on the secondary market, alluding to the ability to increase prices without backlash.

Sandlands has maintained relationships with small distribution channels that allows the movement of product beyond the scope of what Pasalacqua can manage independently. Profit is drastically reduced when moving product through these channels as small distributors require a hefty discount to make the contract worth their effort. Pasalacqua has devoted only 25% of product to these distribution channels and maintains them as means of marketing only. This strategy understands that the relevant income from consumers across the nation tasting Sandlands wines is worth the upfront loss in revenues. As access to large distribution channels are out of reach for a small-scale winery, Pasalacqua has cultivated a loyal local following and a large buyer list independently. Via the use of his own social media and website following he has amassed a list that ensures no product sits unwanted. While it is great to have all product moving, it also speaks to the ability to increase production as the market will allow for it.

Recommendations:

The acquisition of the historical building is strategically advantageous in two regards

-Horizontal growth allows Pasalacqua to increase production, which does not outgrow current distribution channels or labor resources (he is the only winemaker).

-Purchase of the building allows for an environmental upgrade for consumers, which is currently his primary distribution method (straight to consumer)

-Enhancing the direct to consumer experience allows Sandlands to recover higher revenues per bottle, as they are willing to spend up to meet the maker, tour the production facilities, etc.

-Playing up the artisanal component of Sandlands small scale, heritage old vine winemaking informed by the land distills the brand and enhances on-site marketing.