Which Way to the Future?

A Case on Strategy & the Impact of Stakeholders

NorthValley Winery 2007

Little did Maria and Steven Powers realize in 1985 that the small family winery they started as a hobby would grow to be a multistate limited partnership with annual revenues of nearly $24 million (FY 2004). Steve's ability to create innovative blends of Northwest grapes coupled with exacting recipes for Pinot Noir, Zinfandel, and Chardonnay had won regional, and recently national, attention. Maria's people and marketing skills had created a loyal set of distributors, small wine shop retailers, and individual collectors.

In fact, many of the winery's limited partners were grape growers and distributors who felt so strongly about the quality of the product and the founders that they were willing to help finance thegrowth of the business by direct investment. The Powers managed the business on a dayto-day basis. The partners met annually to set strategy for the next 1 to 2 years. The upcoming partners meeting was going to be the most difficult since the Power's had offered equity positions to nonfamily members (the Power'sfamily held 40% of the total shares with 12 limited partners holding the remaining 60%). The limited partnership equity and strong cash flow allowed the winery to grow without the crushing long term debt many local wineries faced. Another major difference was that NorthValley raised no grapes of its own; it purchased grapes from select regional growers. Thus there were no land purchase or agricultural costs normally associated with a small scale winery.

Growth was at the heart of the matter. In the past 4 years, NorthValley's unit sales had

grown at 20% per year. This near doubling of business over four years was creating tremendous

pressure on the Powers to keep up with daytoday operations. Little details were being forgotten

and operational problems were increasing in frequency as the Powers' 60 hour work weeks began

to take their toll. The winery was currently at full capacity. Most of the 2005 production was

presold 8 months before it would be ready to distribute. In fact, even as wine prices had

been virtually flat over the previous four years, North Valley Winery had increased prices

about 7% per year with no decrease in unit demand. Customers wanted more NorthValley

product. As the winery's products were becoming known nationally, East Coast stores were

losing interest in stocking their wines due to a lack of available inventory.

The growers and distributors who were limited partners wanted to undertake a major expansion. This had been the longterm strategy agreed upon by the partners. This subset of owners wanted to double the production and warehousing capacity of NorthValley's facilities. While this was clearly in their individual business interests, most partners firmly believed that this was what NorthValley had to do to be competitive. The price tag for the expansion was $20 million over 3 years. Several regional lenders had already expressed interest in all or part of a 15 year loan at favorable rates to fund the expansion. One San Francisco investment banker wanted to float an IPO to raise the required funds rather than have the winery use a debt strategy.

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The Powers were in a quandary. Family members saw the price this growth was taking on Maria and Steve individually and as a couple. Their work had become their lives and work didn't seem much like fun to either one of them. Steve worried that the expansion would make their product a commodity, so common that it would soon lose its specialty appeal. Maria realized that expansion meant bringing in outside managers for marketing, warehousing, finance, and quality assurance. The small scale operations they had enjoyed originally were a distant memory. The winery's 140 employees also were concerned about the prospect of expansion, `outside' managers, and losing the closeknit culture that had developed over the years. Most employees viewed themselves as extended family members of Steve and Maria.

The Power's faced two immediate questions:

1.) How to handle the upcoming partners meeting?

2.) What strategy to deal with growth?

There were multiple views and perspectives. All of the partners would need to have an opportunity to express their views. Agreement had to be reached in a consensus fashion. This would be the toughest challenge the business and the Powers had faced in 20 years.

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