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JUNE 2002 E. B. 2002-07

Writing a Business Plan:

An Example for a Small Premium Winery

An example of a business plan written for a small

premium winery in the Finger Lakes Region of New York by

Mark E. Pisoni

and Gerald B. WhiteDepartment of Applied Economics and Management

College of Agriculture and Life Sciences

Cornell University, Ithaca, New York 14853-7801

It is the policy of Cornell University actively to support equality of educational and employment opportunity. No person shall be denied admission to any educational program or activity or be denied employment on the basis of any legally prohibited discrimination involving, but not limited to, such factors as race, color, creed, religion, national or ethnic origin, sex, age or handicap. The University is committed to the maintenance of affirmative action programs which will assure the continuation of such equality of opportunity. i

Table of Contents

INTRODUCTION......................................................................................................................... 1

EXAMPLE BUSINESS PLAN..................................................................................................... 3

E

XECUTIVE SUMMARY................................................................................................................ 3

B

USINESS DESCRIPTION:............................................................................................................ 4

P

LAN OF OPERATIONS................................................................................................................ 5

M

ANAGEMENT TEAM.................................................................................................................. 7

I

NDUSTRY ANALYSIS:.................................................................................................................. 8

C

OMPETITOR ANALYSIS............................................................................................................ 10

M

ARKETING PLAN.................................................................................................................... 13

F

INANCIAL PLAN...................................................................................................................... 19

A

PPENDIX.................................................................................................................................. 26

REFERENCES............................................................................................................................ 44

Writing a Business Plan:

An Example for a Small Premium Winery

By Mark E. Pisoni and Gerald B. White*

INTRODUCTION

This is the second publication directed toward helping vintners and prospective investors to develop a business plan for a premium winery in New York State. (The first publication was Pisoni and White, Writing a Business Plan: A Guide for Small Premium Wineries, E. B. 2002-06). The first bulletin was a template for developing a business plan for a small premium winery in New York State. The main aim of this bulletin is to serve as an example of a business plan, developed using the format from EB 2002-06, that demonstrates the marketing potential and the financial feasibility for a winery producing premium wines that sell at price points above $20 per bottle. The plan has three major components. The first component emphasizes the plan of operations and the management team for the example winery. The second component is the development of a marketing strategy that will differentiate the premium product from other wines in the market. This differentiation is aimed at enabling the premium producer to market wines at prices not yet received by many New York wineries. Emphasis will be placed on various aspects of product offering, price, promotion, and distribution strategies. In particular, emphasis will be devoted to developing alternative distribution outlets. It is hypothesized that New York producers must emphasize different marketing channels, not relying only on sales at the tasting room, to be successful in the premium category. The third component of the example business plan estimates the investment and operating costs for a small winery producing the highest quality Pinot Noir. To ensure efficient use of the winery's facilities and to meet current market demands, the proposed winery will also produce small high quality lots of Chardonnay, Riesling, and Cabernet Franc. This production strategy will allow the winery to best use its equipment and distribute through ________ *The authors are former Graduate Assistant, Department of Applied Economics and Management, Cornell University, currently with the management team of Pisoni Vineyards and Winery, Gonzales, CA; and Professor, Department of Applied Economics and Management, Cornell University. This project was funded by a grant from the New York State Department of Agriculture and Markets "Grow NY" Program and a subcontract through the Research Committee of the Finger Lakes Pinot Noir Alliance. Appreciation is expressed to Bob Pool for his review and helpful suggestions on an earlier draft of this publication. 2 the optimal marketing channels. Winery equipment needs in the example plan were developed through consultations with premium California producers and representatives of equipment suppliers. The equipment component list was then refined to fit the New York situation by consultations with Thomas Henick-Kling, Thomas Cottrell and members of the Research Committee of the Finger Lakes Pinot Noir Alliance. The Research Committee also helped to specify the retail prices and the allocation percentages to the three distribution channels (winery tasting room, direct to retailers, and distributors). The overall goal of the project was to develop an optimal marketing strategy, enological and viticultural practices, and evaluate the economic feasibility for producing an ultra premium Pinot Noir varietal wine in New York State. Specific objectives were

1) To develop a strategy for successfully marketing ultra premium wines from New

York State priced at higher price points (i. e. $20 per bottle) than most wineries are now attaining,

2) To develop cash flow estimates for 10 years in the development of the prototype

winery to determine the economical potential.

3) To assess the risk of investment in the model winery to economic parameters such as

wine prices, interest rates, grape prices, and equipment costs. For vineyard practices and costs for these premium vinifera varietals, see White and Pisoni, Cost of Establishment and Production of Vinifera Grapes in the Finger Lakes

Region of New York, 2001 (E.B. 2002-01).

Potential Use

This example business plan can be used by individual firms to develop estimates for their own operations. The close working relationship with the Finger Lakes Pinot Noir Alliance's Research Committee helps to ensure that the final prototype plan is adaptable to the New York situation. The results can be of immediate use to the members of this group who either already have, or will soon, develop their individual plans for attaining premium Pinot Noir production. It should be emphasized that the financial feasibility analysis shown in this publication is not meant to represent the financial performance of an average small farm winery in New York. The situation in the example plan is different in several respects from the average New York winery. First, production is limited to about 9,000 cases using high quality vinification methods and top of the line equipment; secondly, production is totally from vinifera varieties; and thirdly, price points are higher than those being attained by most New York wineries. The ultimate aim is to develop a strategy for eventually breaking out of heavy reliance on tasting room sales direct to consumers. (The concept of this business plan is not to represent what the New York wine industry is now, but what it could be in the future for some wineries who are paying the utmost attention to quality and marketing strategy.) 3

EXAMPLE BUSINESS PLAN

Executive Summary

The proposed small premium winery will be located in the Finger Lakes region of New York. Annual production will begin at 1,850 cases in year one and increase to 9,250 cases in year five. The winery will produce the following four vinifera varietals: Pinot Noir, Cabernet Franc, Chardonnay, and Riesling. The majority of the wine will be sold out of the tasting room, but as production increases we will utilize other distribution channels (high-end restaurants and wine shops) to reach customers. The key to the winery's success will be its high quality vinifera wine. Research shows that consumers are drinking more expensive and higher quality wines, and the proposed winery will capitalize on these consumption trends. Few wineries in the Finger Lakes focus exclusively on vinifera varietals, and doing so will differentiate us from local competitors. The following table summarizes the amount of money needed each year to establish the proposed small, premium winery. The money will be used to construct the winery and tasting room, purchase the necessary winemaking equipment, and cover the annual operating expenses.

Year Amount of money needed

Year 0 $ 690,042

Year 1 $ 630,150

Year 2 $ 267,818

Year 3 $ 154,257

Year 4 $ 1,545

Total over four years $ 1,734,812

4

Business Description:

Mission Statement:

Our mission is to produce the highest quality vinifera wines from the Finger Lakes region of New York. The winery will provide an enjoyable lifestyle and adequate standard of living for both the owner and employees.

Business Description:

I am entering the wine business because of my love of wine, winemaking, and the winemaker lifestyle. I have worked as a cellar rat and winemaker for a number of years for other wineries gaining the experience I need to carry out my dream of owning and operating my own small premium winery. The proposed winery will be located in the Finger Lakes region of New York. There are a number of successful wineries in the Finger Lakes, but, the majority of these wineries focus on making wines from native varieties and French-American hybrids. These wines are very popular among local consumers; however, I feel there will be a growing demand for high quality vinifera wines from the Finger Lakes region in the near future. Research shows that as consumers become more sophisticated about wine, they gravitate towards higher quality vinifera wines. The winery is currently in the developmental stages, but the initial production plans and growth strategies have been established. The winery will produce Pinot Noir, Cabernet Franc, Riesling, and Chardonnay from vineyards throughout the Finger Lakes. Production will begin at about 2,000 cases (about 500 of each varietal) and increase to

10,000 cases in year five.

The winery has been set up as a Limited Liability Company (LLC). An LLC was selected because of its liability protection, flexibility, and favored tax treatment. An LLC protects its owners from being held personally responsible for the business's liabilities. The most money an investor can lose is his or her investment in the company. Goal # 1: Obtain the permits necessary for commercial wine production

Objectives: When? Who?

(1) Contact Uncork NY & extension offices for informationJanuary Me (2) Contact local wineries to learn of their experiences and recommendations for a lawyerJanuary Me (3) Send to BATF and SLA for application packets January Me (4) Hire a lawyer to help with the application process February Me (5) Have all forms and paperwork submitted April Me 5

Plan of Operations

The proposed winery will purchase grapes from top vineyards around the Finger Lakes regions. Grapes will be transported to the winery via flatbed trailers and, as is customary in the wine industry, grape growers pay for harvesting and transportation charges. (For vineyard operations and costs, see White and Pisoni, 2002.)

Red wine making process

Hand harvested grapes (Pinot Noir and Cabernet Franc) will be removed from the flatbed trailer with a forklift and the grape bins will be dumped onto the sort table with a conveyor. The grapes will then move along the conveyor and workers will remove any rotten or unripe grapes. The grapes will then go into the crusher/destemmer that rests on top of the stainless steel fermentation vat. The red grapes will ferment for about 14 days in the open top stainless steel fermentation vats. Once fermentation is complete, the free run wine will be pumped out of the stainless steel tanks and placed into oak barrels for aging. The must will be pumped into the press, and the pressed wine will then be pumped into French oak barrels for aging. The wines will age in barrel for about 12 months and will most likely be racked twice. Wines will then be pumped out of barrel, filtered, and run through the bottling line. There the wine will be bottled, corked, labeled, and capsuled. Workers will take the finished wine off at the end of the bottling line and place the wine in cases where it will age another six months prior to release. Thus, the wine is sold 18 months after harvest.

White wine making process

Chardonnay is made in a similar fashion except that after pressing the juice falls into a settling tank where it settles overnight. The free run juice is then pumped off into barrels where it ferments. The must is then pumped out of the tank and pressed, and the pressed wine is pumped into barrels to ferment. The wine ages for 12 months and then is bottled in similar fashion to the red varietals. Thus, Chardonnay wine is sold 18 months after harvest. Riesling is made in a similar fashion except that after pressing, the wine is fermented and aged in stainless steel tanks instead of oak barrels. Riesling is only aged six months in the tanks and then it is bottled. The wine ages another six months in bottle and is then sold. Thus, the Riesling is sold 12 months after harvest. Sales The majority of sales take place in the tasting room and thus distribution is not a serious issue. The wine is aged in the winery and when it is ready to be sold it is brought into the tasting room as needed. Wines are then sold from a cash register in the tasting room. In year five a small percent of wine, 10%, is being sold to local restaurants and in year six another 10% of wine is sold through distributors. A full time marketing/sales person is hired in year five to take care of these sales to restaurants. 6

Projected Personnel Requirements

Employee job descriptions

Position Job Description

Winemaker/ General

ManagerWine production, quality control, coordinating winery operation and maintenance, sales, marketing, financial record keeping, and staffing General Manager Coordinate winery operation and maintenance, sales, marketing financial record keeping, and staffing (Starting in year 5) Winemaker Wine production, lab management, and quality control (Starting in year 5) Assistant Winemaker Assist winemaker in lab duties, quality control, wine production, and inventory management (Years 3 and 4) Sales Person Promote and market wine, organize product shipping functions, and maintain relationship with distributors (Starting in year 5) Cellar Rat Assist winemaker with wine production, quality control, winery operation and maintenance, and warehousing Tasting room manager Operate tasting room, monitor tasting room inventory, give winery tours, and control tasting room sales (Starting in year 4)

Temporary harvest

workerAssist winemaker with wine production during harvest, (Starting in year 2)

Temporary bottling

workerAssist winemaker with wine bottlings (Starting in year 2) Clerical/ secretarial Answer phone calls, file papers, assist with accounting

Tasting room/

Customer ServicePour wines in tasting room, give winery tours (Starting in year 2)

Source: Folwell, Bales, and Edwards, 2000.

Full time Personnel Requirements & Expenses

Job Title Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7+ Winemaker/ General Manager $ 42,500 $ 43,775 $ 45,088 $ 46,509

General Manager $ 50,000 $ 51,525 $ 53,097

Winemaker $ 47,927 $ 49,389 $ 50,895

Assistant Winemaker $ 30,000 $ 30,915

Marketing/ Sales $ 40,000 $ 41,220 $ 42,477

Tasting Room Manager $ 30,000 $ 30,915 $ 31,858 $ 32,830 Cellar Rat $ 26,000 $ 26,793 $ 27,610 $ 28,452 $ 29,320 $ 30,214 $ 31,136

Total Full time annual labor

expense$ 68,500 $ 70,589 $ 102,742 $135,876 $198,162 $204,206 $ 210,434

Part time Personnel Requirements & Expenses

Job Title Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7+ Temporary harvest worker at winery $ 2,473 $ 2,549 $ 2,626 $2,706 $ 2,789 $ 2,874 Temporary harvest worker at winery $2,706 $ 2,789 $ 2,874 Temporary bottling worker $ 1,855 $ 1,911 $ 1,970 $2,030 $ 2,092 $ 2,156

Temporary bottling worker $ 2,092 $ 2,092

Clerical/ Secretarial $ 5,200 $ 5,359 $ 5,522 $ 5,690 $5,864 $ 6,043 $ 6,227 Tasting room/ customer service $ 5,359 $11,044 $11,381 $11,728 $12,086 $ 12,454

Tasting room/ customer service $ 12,454

Total Part time annual labor

Expense$ 5,200 $15,045 $21,026 $24,294 $25,035 $27,890 $ 41,195 7

Management Team

Bob Smith, General Manager

Bob Smith's duties as general manager include coordinating grape purchasing, winery operation and maintenance, sales, marketing, financial record keeping, and staffing. Smith worked as general winemaker for White's Finger Lakes winery for 10 years and worked as a winemaker prior to that experience. He attended Cornell and graduated with a degree in Agricultural Economics.

Name in Bold, Winemaker

Name in Bold, Sales/Tasting room manager

8

Industry Analysis:

Wine consumption trends

The industry analysis shows that current consumption trends are favorable for the domestic wine market, especially for producers of ultra premium wines. Total domestic and per capita wine consumption have increased each year since 1993. Retail wine sales have increased 8.2 percent per year over the past five years. The dramatic growth in retail wine sales can be attributed to the increasing popularity of premium wines. The following table illustrates the rapid growth of the premium wine market. Even though the table reports only California table wine shipments, it serves as a good example for the US wine market because California represents over 90 percent of all US production. The high premium segment ($7 per bottle and above) of the table wine market is growing the fastest in terms of volume. This segment increased 14 percent by volume while the entire table wine market increased only three percent. Even more striking is the amount of revenue the high premium segment generates. In 1999, the high premium segment commanded 52 percent of the total wine revenue while only representing 23 percent of the volume. Furthermore, the ultra-premium segment (over $14 per bottle) represents 25 percent of the total revenues and only seven percent of the volume. Estimated 1999 California Table Wine Shipments by Price Segment

Retail Price

per BottlePrice

SegmentEstimated

nine liter cases sold (millions)Percent

Change

from 1998 to 1999Percent of Total

VolumeEstimated

Winery Sales

Revenues

(millions)Percent of Total

Revenue

Over $14 Ultra-

Premium10.1 11% 7% $ 1,330 25%

$7-$14 Super-

Premium24.5 15% 16% $ 1,420 27%

High

Premium

and Above34.6 14% 23% $ 2,750 52% $3-$7 Popular

Premium49.5 4% 33% $ 1,650 31%

Subtotal of

all Premium84.0 8% 56% $ 4,400 83%

Below $3 Jug Wine 65.7 -3% 44% $ 920 17%

Total Table

Wine149.7 3% 100% $ 5,320 100%

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