South Valley Winery
Executive Summary
Introduction
The Cottage Winery industry in Saskatchewan is relatively new and is in the introductory stage of development. A Saskatchewan Cottage Winery is defined as a winery situated in Saskatchewan, which makes wine from grapes and non-grape products grown in the Prairie Provinces. In May 2001, the Saskatchewan Liquor and Gaming Authority (SLGA) drafted a policy outlining regulations for the industry. The policy provides regulations for production levels and taxes that are paid by the winery. Overall, the policy was formed with the intent of providing a favourable economic and regulatory climate for fruit growers to form viable winery businesses.
The following is a proposed business plan including financial projections for the establishment and operation of a cottage winery in Saskatchewan. The proposed business, South Valley Winery, “will work as a family business to establish profitable value added fruit products while facilitating the development of the fruit wine market in Saskatchewan”
Operations
South Valley Winery will be located along Highway #1 near Balgonie, 25 km east of Regina. The winery site will be three acres in size, two of which will be used for fruit production in future years. The winemaking cycle occurs over a three-month period in which fresh or frozen fruit is processed into the finished good. The winemaking process involves 10 steps in converting fruit to wine.
pump
pump pump
pump
Corker
Delivery to Special Permits
Retail Sales
Storage
Figure 1: The wine making process.
1. Fruit Crushing
The process of winemaking begins by crushing the fruit with a manually operated roller fruit crusher into a primary fermentation tank.
2. Fermentation
Fermentation begins by adding water, sugar, acid, pectic enzymes and yeast to the refrigerated primary tank. The mixture remains in the primary tank for 15-20 days continually being stirred and monitored for sugar and alcohol content.
3. Basket Press
The pulp and wine mixture is pumped into a ratchet basket press, where the liquid is manually pressed off the pulp, and then transferred to an air-tight storage tank, where the wine will be stabilized and clarified over the next two to three months.
4. Stabilize and Clarify
In the storage tank the wine is stabilized with sulfur dioxide (SO2) to inhibit wild yeast growth and to protect from air oxidation and browning. Next, the wine is clarified with Sparkalloid® to drop out any remaining yeast cells, tannins and complex materials.
5. Filtration
Once the vintner is satisfied with the taste, colour and SO2 levels, the wine is filtered through a plate filter. This filtration will occur three times prior to bottling.
6. Bottling
The wine flow is regulated from the storage tank into the reservoir of the bottler where it streams down six spouts into the bottles, which are manually removed and replaced with new bottles.
7. Corking
The bottled wine is then corked by a manual corker.
8. Shrink-wrap
Plastic shrink-wrap is placed over the neck of the bottle and heated with a heat gun to seal the wrap tightly.
9. Labelling
Adhesive labels are applied to the bottles by hand.
10. Packaging
Bottles are packaged in cases of twelve and stored until the time of sale.
Capital Costs
To commence operations South Valley Winery will incur the following capital costs to operate the business.
Table 1. Capital Cost Summary
Land / 10,000Building and Site Set-up / 117,300
Production Equipment / 41,879
Office Equipment / 3,000
Working Capital / 41,986
Total Capital Costs / 214,165
The cost of goods manufactured in the first year of production can be seen in Table 2.
Table 2. Costs of Goods Manufactured
Direct Materials / 36,160Direct Labour Used / 16,800
Manufacturing Overhead / 13,204
Total Cost of Goods Manufactured / 68,079
Human Resource Management
South Valley Winery will be a corporation as a division of South Valley Farms owned by Rod and Jeanne Flaman. With restricted production levels, the winery will never reach a size where highly automated equipment is required. Although a very manual process it is likely that one person, with the exception of a few production steps requiring additional help, can feasibly complete the tasks to run the operations. A marketer will be hired to obtain adequate sales goals. Figure 2 gives an outline of the human resource organizational structure.
Figure 2. Human resource organizational structure
A brief outline of each employment position is included (see Table 3 for labour costs):
Manager: Nick Flaman must be able to perform a large variety of tasks. His time will need to be divided between wine production, overseeing retail staff, book-keeping, and marketing.
Marketer: The main goals of the marketer will be to create a product image to increase demand for authentic Saskatchewan fruit wine, and source out new markets. Looking into developing markets with restaurants, tour buses and other promotional activities will be imperative.
Part-time staff: Two positions for retail and five for bottling will be filled. Retail positions will include selling wine, conducting tours and tasting, maintaining store cleanliness, and site maintenance. Bottler’s jobs will include bottle preparation, labelling, corking, and shrink-wrapping bottles for distribution.
Table 3. Projected labour costs
2004 / 2006 / 2008 / 2010 / 2012Marketing/Sales Labour
Manager / $20,000 / $24,279 / $27,480 / $31,700 / $36,219
Marketer / $17,500 / $40,039 / $44,037 / $49,096 / $54,495
Benefits / $3,293 / $5,647 / $6,279 / $7,094 / $7,965
Total Salaries / $40,793 / $69,965 / $77,796 / $87,890 / $98,679
Seasonal Retail Student Wage / $9.00 / $9.46 / $9.93 / $10.44 / $10.97
Hours / 700 / 700 / 700 / 700 / 700
Benefits / $919 / $965 / $1,014 / $1,065 / $1,119
Total Season Wage / $7,219 / $7,584 / $7,968 / $8,371 / $8,795
Total Marketing/Sales Labour + Benefits / $48,011 / $77,549 / $85,764 / $96,262 / $107,474
Production Labour
Permanent Labourer / $15,000 / $15,759 / $16,557 / $17,395 / $18,276
Benefits for Salary Employees / $1,617 / $1,699 / $1,785 / $1,875 / $1,970
Total Salaries / $16,617 / $17,458 / $18,342 / $19,271 / $20,246
Part-Time Bottler Wage / $8.00 / $8.41 / $8.83 / $9.28 / $9.75
Hours / 225 / 450 / 675 / 900 / 1125
Benefits for Wage-Earning Employees / $298 / $627 / $988 / $1,384 / $1,818
Total bottler wage / $2,098 / $4,409 / $6,949 / $9,734 / $12,784
Total Direct Labour + Benefits / $18,715 / $21,868 / $25,291 / $29,005 / $33,030
Marketing
Marketing is an essential for the success of South Valley Winery. Currently the fruit wine market is relatively undeveloped within Saskatchewan, however it is becoming established in British Columbia and Eastern Canada (Ontario and the Maritimes). Driving the industry, The Fruit Wine Association, labels member wines with a Quality Assurance label similar to the Vintner’s Quality Assurance (VQA) labels currently in the grape wine market. Insuring quality and industry standards, these labels help sell the product. In Saskatchewan the increase in sales of VQA wines and domestic ice wines suggests the potential to create a similar market with fruit wines. Although current consumption of wine in Saskatchewan is considerably lower than the national average, wine consumption is increasing (Figure 3). A potential market exists if the wine enters the market aggressively and is vigorously promoted.
Figure 3. Wine sales in Canada over ten years.
In order to enter and improve the market, South Valley Winery will sell much more than a physical product. Saskatoon, raspberry, rhubarb, and chokecherry wines with a 2-year shelf life will be initially available. The goal is to increase this product line to include sour cherry, black current, ice wine and port wines. Each bottle is carefully made directly by the vintner, a local Saskatchewan resident. The wine at South Valley Winery comes directly “From the Vintner’s Home to Yours”. People who buy the wine directly from the winery can come away with a memorable experience. Tasting sessions and tours will allow each customer to taste the wine and understand how it was produced. The winery will also be a pleasant area to visit. Boasting beautifully landscaped grounds and picnic areas, the winery is an interesting stop. One might come to buy wine, but will leave with fond memories in addition to the wine.
Marketing will be directed to appeal to both males and females aged 35-64, with an income of $35,000+, as they typically purchase the most wine. Individuals and groups make other wine purchases for special functions such as dances, socials, weddings, anniversaries and other special events. South Valley Winery will specifically be targeting these two customer groups in defined markets; sightseers and special event permit holders. Other potential markets include restaurants and SLGA stores, although loss of markup when sold through SLGA stores makes this an undesirable option. The wine will be priced at par with the fruit wine industry (average price $10.30 per bottle) increasing yearly with inflation.
In order to increase awareness of the product the following tools will be used:
· Billboards
· Radio ads
· Newspaper ads
· Posters and brochures
· Word of mouth to generate consumer awareness
· Bridal Shows, local fall fairs and trade shows
· Advertising at the farmer’s market where fruit production from South Valley Farms is sold
· Web page
Table 4. Marketing Expenses
2004 / 2006 / 2008 / 2010 / 2012Sample Wine Costs / $960 / $1,220 / $1,551 / $1,972 / $2,507
Mileage for deliveries (cost) / $3,960 / $8,321 / $12,177
Vehicle (Lease) / $14,000 / $16,000
Telephone / $250 / $263 / $276 / $290 / $305
Billboards / $1,500 / $1,576 / $1,656 / $1,740 / $1,828
Radio Ads / $4,000 / $4,203 / $4,415 / $4,639 / $4,874
Brochures / $1,197 / $1,455 / $1,769 / $2,150 / $2,613
Newspaper ads / $5,443 / $5,719 / $6,008 / $6,312 / $6,632
Bridal Shows / $250 / $263 / $276 / $290 / $305
Trade Shows / $500 / $525 / $552 / $580 / $609
Travelling backdrop / $500 / $103 / $108 / $113 / $119
Webpage / $325 / $341 / $359 / $377 / $396
Future Bus Tours / $5,673 / $6,262 / $6,912
Posters / $350 / $368 / $386 / $406 / $426
Total Marketing Expense / $19,235 / $24,356 / $35,206 / $39,130 / $43,525
The competition for South Valley Winery includes the competition from other wineries, retail liquor stores, substitute wine products, as well as the indirect competition from other tourist industries in the province. Aspen Grove Winery is the most direct competition due to its comparable product and service. South Valley feels a larger share of this market can be captured due to the location on a major highway and its special occasion permit target market. Other products including grape wines, wine coolers and winemaking ingredients are significant competition. South Valley Winery will compete with a differentiated product and by offering free delivery to customers. South Valley will also compete by large, attractive signage and promoting the novelty of free wine tasting and tours on a Saskatchewan highway.
Financial Plan
South Valley Winery’s financial plan is projected over a 10-year period. All prices, expenses and wages are increased at a rate of inflation of 2.5%. Financing will be obtained equally from long-term debt and owners equity. Long-term debt will be obtained from the Farm Credit Corporation (FCC) at an interest rate of 7.4%, and will be paid back over a 15-year period. The owner Rod Flaman will contribute the owner’s equity. Table 5 shows that the total external financing of this company.
Table 5. Financing budget
Long Term Debt / $164,583Owner's Equity / $164,583
Total Financing / $329,165
Dividends are paid out to the equity investor once profits increase sufficiently. Dividends paid uses a formula of cash on hand minus working capital multiplied by a safety factor of 1.15 to allow for unexpected expenses. It is estimated that dividend payments will begin after 6 years of operations (Table 6).
Table 6. Dividends Paid
2010 / 2011 / 2012 / 20136.988 / 103,642 / 122,164 / 166,885
The Summary of Financial Results is listed in Table 7. There is a net loss initially in year one, with profits realized in years three through year 10. The cash flow remains positive for all years, allowing the winery to operate. The IRR is calculated to be 26.7% over the 10-year period, which makes this business both cash flow and economically feasible.
Table 7. Summary of Financial Results
Year / 2004 / 2006 / 2008 / 2010 / 2012Sales / 52,935 / 241,015 / 351,749 / 519,248 / 688,896
COGS / 29,156 / 105,709 / 136,390 / 189,252 / 241,504
Gross Margin / 21,735 / 126,453 / 203,061 / 312,716 / 425,572
Expenses / 80,395 / 113,109 / 131,050 / 144,175 / 158,287
Net Income Before Tax / -58,660 / 13,344 / 72,011 / 168,540 / 267,285
Income Tax / 0 / 0 / 0 / 32,225 / 59,664
Net Income After Tax / -58,660 / 13,344 / 72,011 / 136,315 / 207,621
Net Cash Flow to Equity / 64,221 / 3,809 / 37,171 / 106,686 / 171,003
Net Present Value (NPV) / 81,817
Internal Rate of Return on Equity Investment / 26.7%
External Rate of Return on Equity Investment / 21.8%
Figure 3 shows the changes in IRR as a result of fluctuations to South Valley Winery’s four critical variables in the best and worst case scenarios. The critical variables that greatly affect this business’s profitability are the quantity of sales, the average selling price, the average fruit price and the business expansion rate.