South Valley Winery

Table of Contents

1.0 Introduction....................................................................................................................41.1 Industry Overview.................................................................................................41.2 Mission Statement.................................................................................................51.3 Goals and Objectives.............................................................................................51.4 Project Benefits......................................................................................................5

2.0 Policy.............................................................................................................................62.1 The Cottage Winery...............................................................................................62.2 Sales and Marketing..............................................................................................6

3.0 Operations Plan............................................................................................................73.1 Location.................................................................................................................73.2 Winemaking Process Plan.....................................................................................93.3 Floor Plan.............................................................................................................123.4 Average Business Cycles.....................................................................................14

3.4.1 Average Business Day..............................................................................143.4.2 Average Business Month..........................................................................153.4.3 Average Business Year.............................................................................15

3.5 Captial Budget.....................................................................................................163.6 Operating Expenses.............................................................................................17

4.0 Human Resources Plan..............................................................................................184.1 Human Resource Strategy...................................................................................184.2 Organizational Structure......................................................................................194.3 Job Descriptions...................................................................................................204.4 Training................................................................................................................224.5 Future Human Resources.....................................................................................23

5.0 Marketing Plan...........................................................................................................235.1 Current Market.....................................................................................................235.2 Competition.........................................................................................................26

5.2.1. Direct Wine Competition.........................................................................265.2.2 Indirect Wine Competition.......................................................................265.2.3 Indirect Tourist Competition....................................................................27

5.3 Product and Service Features...............................................................................275.3.1 Product......................................................................................................275.3.2 Service......................................................................................................28

5.4 Customers and Target Markets............................................................................285.5 Promotion............................................................................................................305.6 Pricing Policy.......................................................................................................325.7 Distribution Channels..........................................................................................335.8 Sales Objectives...................................................................................................335.9 SWOT Analysis...................................................................................................34

5.9.1 Strengths...................................................................................................345.9.2 Weaknesses...............................................................................................345.9.3 Opportunities............................................................................................355.9.4 Threats......................................................................................................35

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South Valley Winery

6.0 Financial Plan..............................................................................................................356.1 Loan Amortization...............................................................................................366.2 Dividend Policy...................................................................................................376.3 Economic Forecast...............................................................................................386.4 Unit Cost Analysis...............................................................................................386.6 Summary of Financial Results.............................................................................416.7 Sensitivity Analysis.............................................................................................426.8 Breakeven Analysis............................................................................................44

7.0 Conclusion...................................................................................................................468.0 References....................................................................................................................47Appendix A: Cottage Winery Policy.................................................................................49Appendix B: Financial Projections....................................................................................50Appendix C: Okanagan University College Wines Sales Course.....................................51

List of Figures

Figure 3.1.1. Proposed site plan for the South Valley Winery............................................8Figure 3.2.1. Process Plan Flow Chart................................................................................9Figure 3.2.2. Fruit Crusher and Primary Fermentation Tank............................................10Figure 3.2.3. Basket Press and Storage Tanks with Floating Lids....................................11Figure 3.2.4. Plate Filter....................................................................................................11Figure 3.2.5. Wine Bottler.................................................................................................12Figure 3.3.1. Floor Plan.....................................................................................................13Figure 3.4.1. Schedule of yearly business activities..........................................................15Figure 4.2.1. Organizational Structure..............................................................................19Figure 5.1.1. Wine sales in Canada over ten years...........................................................25Figure 6.4.1. Distribution of costs per unit in various production years...........................39Figure 6.7.1. Sensitivity analysis of the IRR ...................................................................44Figure 6.8.1. Breakeven Analysis of Average Selling Price.............................................45Figure 6.8.2. Breakeven Analysis of Quantity of Cases Sold...........................................46

List of Tables

Table 3.5.1. Capital Budget Summary..............................................................................16Table 3.6.1. Direct Material Purchases..............................................................................17Table 3.6.2. Direct Labour and Benefits............................................................................17Table 3.6.3. Manufacturing Overhead Costs.....................................................................18Table 3.6.4. Cost of Goods Manufactured.........................................................................18Table 4.3.1. Labour cost projected for ten years..............................................................22Table 5.1.1. Prices of fruit wines in B.C and Ontario.......................................................23Table 5.5.1. Marketing cost estimations for 10 years........................................................32Table 5.6.1. Prices per bottle of production showing increases with inflation..................33

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South Valley Winery

Table 5.8.1. Projected sales and revenues for South Valley Winery................................33Table 6.0.1. Financing.......................................................................................................36Table 6.1.1. Amortization Schedule..................................................................................37Table 6.2.1. Dividends Paid...............................................................................................38Table 6.4.1. Unit cost breakdown of producing and selling wine.....................................39Table 6.5.1. Summary of financial ratios..........................................................................41Table 6.6.1. Summary of Financial Results.......................................................................41Table 6.7.1. Scenario Analysis..........................................................................................42

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South Valley Winery

1.0 Introduction

1.1 Industry Overview

The Saskatchewan fruit wine industry is in the beginning stages of the product lifecycle

and is rather undeveloped. The Cottage Winery Policy formed in May 2002 has laid out

regulations and rules for the development and operation of small fruit wineries in

Saskatchewan. The policy outlines maximum and minimum production levels and

provides the winemakers with a discounted liquor tax rate on their production. Currently

there are two other fruit wineries in Saskatchewan that are not aggressively marketing

and producing products.

The fruit wine industry in Canada is becoming well developed in both British Columbia

and Ontario. Wineries have a broad product selection consisting of fruit wines, ice wines

and port wines. Besides selling wines, many wineries add tourist components to their

business such as tours, tasting, a restaurant, or a farmers’ market. The Fruit Wines of

Canada is a national producer’s association, which provides quality certification labeling

to its members modeled after the Vintner’s Quality Alliance. This organization promotes

Canadian fruit wine and creates markets both domestically and internationally for fruit

wine.

The grape wine industry is also a market in which fruit wine is competing. Currently it is

offering a diverse product line with a variety of high quality wines to choose from at

reasonable prices. The grape wine industry is well-developed with faithful customers

who preferentially purchase this type of wine.

Across Canada wine consumption has been increasing. Although wine consumption is

low in Saskatchewan, there is potential to initiate a trend in wine consumption and

increase the market share.

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South Valley Winery

1.2 Mission Statement

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.

1.3 Goals and Objectives

Create a significant value-added agricultural industry

Establish an image and name for the product

Create a tourist attraction along one of Saskatchewan’s busiest highways

Maximize production at 5000 cases

Provide a diverse product line expanded from Rhubarb, Saskatoon, Chokecherry, and

Raspberry wines to include sour cherry, black current, port and ice wines

Provide at least 20% return on equity

Become a member of The Fruit Wines of Canada, producing recognized quality fruit

wine products

1.4 Project Benefits

The development of the fruit wine industry in Saskatchewan will bring numerous benefits

to the province:

The high quality of dry fruit wine will be a reasonably priced substitute for many of

the imported table wines, keeping money in Saskatchewan.

The Cottage Winery policy ensures that the fruit ingredients are Saskatchewan grown,

helping to provide market and demand for Saskatchewan fruit production.

The value-added nature of the wine product will help to diversify the economy and

increase the industry within Saskatchewan.

South Valley Winery will provide jobs for some area residents and attract tourists

along with their spending money to the area.

2.0 Policy

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South Valley Winery

The South Valley Winery will be regulated under the Saskatchewan Liquor and Gaming

Authority (SLGA) Cottage Winery Policy. Introduced in May of 2002, the policy

(Appendix A) outlines the operations for the winery. In order to operate and sell wine

from a cottage winery, the owner and the SLGA must sign a contract made under the

policy. The discussion that follows outlines the main policy and how it will affect the

operations at the South Valley Winery.

2.1 The Cottage Winery

Under the SLGA’s policy, in order to have the designation of a “cottage winery” the

winery must:

Maintain a minimum annual production of 4,500 L (500 cases) and not

produce over a maximum of 45,000 L (5000 cases).

Be situated on principal farm property, and produce and sell $20,000 or more

in agricultural product annually, or derive 50% or more of its gross income

from its own agricultural production.

Obtain a Manufacturer’s Permit from the SLGA that is renewable on an

annual basis for $500.00. (A $200.00 one-time application fee at time of

initial application is also required).

Utilize no less than 65% of Saskatchewan grown fruit, and no less than 25%

of fruit grown by the winery on land owned or leased by the owner of the

winery. Outside sources can be blended to a maximum of 35%.

Providing the conditions are maintained, the winery will not be classified as commercial

and a reduced tax of $0.53 per litre will be paid.

2.2 Sales and Marketing

The policy outlines a strict guideline on how the product can be priced and marketed.

Any alcoholic products sold must be registered with the SLGA by completing a listing

application form. As part of the registration, a display price that includes the cost of the

wine, taxes and mark-up that the SLGA puts on the wine is established. This established

price cannot be changed unless an agreement is made between the SLGA and owner of

the winery. Any wine sold must also have a Shipping Container Code and a Universal

Product Code.

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South Valley Winery

Wine may be sold on premises from a retail store, through SLGA stores, and to special

occasion permit holders. The wine sold at the winery must be sold at a price equal to, or

exceeding the display price (as described above) and the winery pays only a $0.53 per

litre tax, retaining the difference between cost of manufacturing and selling price. If

selling wine through the SLGA, the SLGA will keep the difference between the cost of

the wine and display price. Sales to special occasion permit holders will be conducted

through the store and therefore be similar to the sales from the retail. Therefore, in order

to maximize profits, wine sales must be conducted through the retail store or to special

occasion permit holders.

To promote the product, the retail store will have a hospitality room for wine tasting and

will provide tours through the winery. Delivery of the wine may also be offered. Signs

may be displayed once approved by the SLGA and the Department of Highways if

located close to a highway. All external and media advertising must have prior approval

of the SLGA, which includes radio ads, brochures and web pages. The retail store may

be open in accordance with government and/or local municipal regulations (9.00am-

10:00pm Mon-Sat, 12:00am-6:00pm Sun).

3.0 Operations Plan

3.1 Location

The South Valley Winery will be located east of Regina on the No. 1 Trans-Canada

highway near Balgonie. The site was strategically placed in this location to attract

summer tourists that will be passing by during the busy months of June, July and August.

Off-ramps currently in place enable drivers to make an easy exit to the winery. The

winery site is three acres in size, two of which will be used for fruit production in future

years. Beautiful landscaping will envelop the main building, as well as the perimeter of

the yard, providing an aesthetically pleasing atmosphere enticing potential customers to

stop in. The site plan is functional, as all the materials that are required can be loaded and

unloaded by a half-ton truck at the loading dock.

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South Valley Winery

Loading Dock

Parki ng

Main Building

Entrance EntranceSas kato on B

err ies

Sas kato on Berr ies

Ras pbe rries

Rhu barbRas p -berr ies

Tree Row

Tree RowTree

Row

Highway #46

To Balgonie

N

S

E

W

To Regina

High way #1

To Pilot Butte

High

way

# 3

64To

Ede

nwol

d

Enter Exit

Loading Dock

Parki ng

Main Building

Entrance EntranceSas kato on B

err ies

Sas kato on Berr ies

Ras pbe rries

Rhu barbRas p -berr ies

Tree Row

Tree RowTree

Row

Highway #46

To Balgonie

N

S

E

W

N

S

E

W

To Regina

High way #1

To Pilot Butte

High

way

# 3

64To

Ede

nwol

d

Enter Exit

Figure 3.1.1. Proposed site plan for the South Valley Winery.

3.2 Winemaking Process Plan

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Fruit DeliveryIn Crates

Fruit Crushe

r

Primary Ferment

ation

South Valley Winery

pump

pump pump

pump

Corker

Distributed to Special Permits

Retail Sales Storage

Figure 3.2.1. Process Plan Flow Chart

1. The process of winemaking begins with the delivery of very ripe, or frozen fruit.

The berries are placed in a manually operated roller fruit crusher (Figure 3.2.2), and

crushed into a primary fermentation tank.

2. The fermentation process begins by adding water, sugar, acid, pectic enzymes and

yeast to the refrigerated primary tank. For a batch of wine to yield 1000L, 1000L of water

is added to 1000 lbs of crushed fruit in the primary tank.

The sugar is added to convert the yeast to alcohol. The amount of sugar added

will determine the final alcohol content of the wine. Acids are added to maintain the

desired pH of the wine. Wine low in acidity is often flat, while wine that is overly acidic

is usually tart. Wine acidity and pH have an inverse relationship, the lower the pH, the

higher the acidity. Pectic enzymes are added to consume pectin to clarify the wine and

help extract flavour and colour from the fruit.

College of Agriculture and College of Commerce, University of Saskatchewan 9

Ratchet Press

StorageTank

Filter3X

Bottler Packaging

South Valley Winery

The slurry remains in the primary tank for 15-20 days and is stirred twice a day,

meanwhile being monitored for sugar and alcohol content with a hydrometer. Once the

sugar has all been converted to alcohol, the wine is ready for the next step in the process.

Figure 3.2.2. Fruit Crusher and Primary Fermentation Tank

3. The pulp and wine mixture is pumped into a ratchet basket press (Figure 3.2.3),

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. 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. SO2 levels are monitored

daily; once the wine is stabilized, it is clarified with Sparkalloid® to drop out any

remaining yeast cells, tannins and complex materials.

College of Agriculture and College of Commerce, University of Saskatchewan 10

www.vintekaus.comwww.beer-wine.com

South Valley Winery

Figure 3.2.3. Basket Press and Storage Tanks with Floating Lids

5. Once the vintner is satisfied with the taste, colour and SO2 levels, the wine is

filtered through a plate filter (Figure 3.2.4). This filtration will occur three times prior to

bottling, each time with a filter of a smaller porosity.

Figure 3.2.4. Plate Filter

6. The finished wine is pumped back into a storage tank and is now ready to be

bottled. The wine flow is regulated into the reservoir of the bottler where it streams down

six spouts and into the bottles, which are manually removed and replaced with new

bottles (Figure 3.2.5).

College of Agriculture and College of Commerce, University of Saskatchewan 11

Office

Reta il C

o unte r

FinishedInventory

Cold Storage

Crusher

BottlingArea

Primary Fermentation

Tank

Secondary Fermentation

Tanks

Pump

Filter

Showroom

Loading Dock

Basket Press

Aspen Grove Winery

www.midwestsupplies.com http://crivellerbrew.com

South Valley Winery

Figure 3.2.5. Wine Bottler

7. The bottled wine is then passed to the corker, where it is manually corked. Plastic

shrink-wrap is placed over the neck of the bottle and heated with a heat gun to seal the

wrap tightly. The adhesive labels are then applied to the bottles, and the finished product

is packaged in cases of twelve bottles. Finally, the cases are then moved into storage as

finished inventory.

3.3 Floor Plan

The floor plan of the winery is designed to make the process of winemaking flow as

smoothly as possible, as well as to facilitate tasting and tours. The front of the building

consists of a comfortable showroom where tasting and retail sales will occur. The

commercial area of the winery is spacious, and makes transferring of wine as easy as

possible. There is ample room for tours consisting of large numbers. The finished

inventory storage and cold storage are both located at the rear of the building, near the

loading dock, to ensure efficient transfer of inventory. The manager’s office is centrally

located so that he can easily access both the processing and the retail areas.

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Aspen Grove Winery

South Valley Winery

Figure 3.3.1. Floor Plan

College of Agriculture and College of Commerce, University of Saskatchewan 13

60 feet

Office

Reta il C

o unte r

FinishedInventory

Cold Storage

Crusher

BottlingArea

Primary Fermentation

Tank

Secondary Fermentation

Tanks

Pump

Filter

Showroom

Loading Dock

Basket Press

42 feet

Office

South Valley Winery

3.4 Average Business Cycles

South Valley Winery’s average business day, month, and year will vary throughout the

year due to the seasonality of the business. The retail store will only be open for a few

months during the summer, typically from June until September. Peak wine production

will be tied in with the growing season and will start when the first fruit is picked at

approximately the end of July, and continue throughout the fall and winter. In the first

few years with low amounts of production the winemaking process will conclude in the

middle of April. Once production increases, winemaking will become a year round

procedure with the average batch taking approximately 12 weeks to complete. South

Valley Winery will consist of two full time workers including the manager and the

marketer, as well as part time seasonal staff helping in the busy times of the year. The

seasonal staff will include two part-time employees to operate the retail counter from

June until September as well as five part-time employees to help with bottling and

packaging of the wine at various times throughout the year.

3.4.1 Average Business Day

As mentioned earlier, the average business day will vary due to the seasonality of the

business. During the summer months the retail store will operate seven days a week,

with two part-time employees working shifts at the retail counter. The manager will be in

charge of human resources, winemaking operations, conducting wine tours, as well as

being in charge of all of the day to day decisions of the business. The manager will have

to budget his time between these tasks as he is also required to obtain market share, and

attract new customers to the business. The full time marketer will also be in charge of

obtaining new clients, and will spend a great portion of the day on the phone, and on the

road promoting South Valley’s product to the public. Marketing strategies will be

implemented in a team atmosphere by both the manager and the marketer in an attempt to

attract not only tourists and locals to the business, but to make South Valley Winery

accessible to the province through special event permits as well as promotional bus tours.

College of Agriculture and College of Commerce, University of Saskatchewan 14

South Valley Winery

3.4.2 Average Business Month

The average business month will also vary throughout the year with the summer months

being the busiest for sales, and the fall and winter months being the busiest for

production. The manager will be in charge of ordering inventories, paying bills, as well

as continuing on with wine production. Winemaking supplies will be bought in bulk and

typically purchased once in the summer. Monthly financial statements will be produced

and analyzed by the manager to show where the business is strong and what areas need

improvement. These financial statements will be very critical in making all decisions in

this ever-changing business, as well as developing a targeted marketing strategy for the

upcoming months. The marketer will be responsible for implementing the marketing

strategy by attending trade shows, conducting wine tasting in restaurants, and by

promotion throughout the province. Depending on the individual situation, the manager

or the marketer will conduct wine deliveries to special event permit holders.

3.4.3 Average Business Year

The average business year will consist of retail sales occurring during the summer

months along with winemaking, special permit sales and marketing occurring throughout

the year. In South Valley Winery’s initial years the bulk of the focus will be on

marketing and developing the fruit wine market. The later years will focus on

maintaining and increasing this market, in order to reach maximum production.

Figure 3.4.1. Schedule of yearly business activities

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Jan Feb Mar April May June July Aug Sept Oct Nov Dec

Wine ProductionWine Production

Retail and tours on location

Promotion and Marketing

South Valley Winery

3.5 Captial Budget

Table 3.5.1 shows that the total capital expenses will be $214,268. This cost includes the

land, building, equipment, and working capital. The maximum capacity of wine

production for the beginning capital budget is 1000 cases of wine per year. If expansion

of production is 1000 cases every second year, additional capital expenses of

approximately $5,000 will be required for additional storage tanks. This is because the

tanks are the limiting factor in production. Expanding to 3000 cases will also require

another primary fermenter for the price of about $6,500. Costs were estimated from

reputable businesses and suppliers. All sources of equipment are in Table 3.5.1. A

detailed outline of capital expenses over a 10 year period is in Schedule 6 (Appendix B).

Table 3.5.1. Capital Budget Summary

Description Estimated SourceCost ($)

Land 10,000  Site Setup:     Building 63,000 Goodon Industries Sewage System 3,500 Wigs Pumps and Waterworks Natural Gas Installation 8,000 Sask Energy Electricity Installation 25,000 Sask Power Town Water Installation 14,300 Balgonie Landscaping 3,500 Lakeshore Garden Centre (Saskatoon) Total Cost 127,300  Production Equipment:   Capacity/Quantity/Source Primary Fermenter 6,500 800 gal. - 1 - Dairyland Agro Basket Press 1,000 110 Litre - 1 - The Compleat Winemaker Filter 5,600 20 plates - Criveller Co. (Ont.) Pump 1,000 20 gpm - 1 - The Compleat Winemaker Storage Tanks 4,800 1000 Litre - 4 - Criveller Co. (Ont.) Bottle Filler 800 4 nozzle - 1 - The Compleat Winemaker Bottle Corker 50 Single corker - 1 - Wine Kitz Hydrometer, Thermometer 500 1 – Fisher Scientific pH meter and probe 600 1 – Coal Parmer (Montreal) SO2 detector 500 1 - R & D Equipment (California) Fruit Crusher 400 33" x 22" x 14" - The Compleat Winemaker Walk in Freezer 14,000 1 - 9'x9' - D & C Refrigeration (Saskatoon) Used Garden Tractor 5,000 20 hp mower and rototiller - Private Deal Pallet Jack 429 2 ton capacity - 1 - Princess Auto Irrigation 700 Drip – Rainmaker Irrigation (Outlook)Office Equipment 3,000 Desk, Computer, Filing System Total Equipment Costs 44,879   Total Working Capital 41,986  Total Capital Costs 214,165  

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South Valley Winery

3.6 Operating Expenses

Operating expenses consist of direct materials, labour, and overhead manufacturing costs.

Direct material costs were obtained from unit costs.

Table 3.6.1. Direct Material Purchases for year 1

Fruit Purchased (lb)  Cost ($) Rhubarb 2,250 Raspberries 6,750 Saskatoon berries 6,750 Chokecherries 2,250Sugar (Kg) 1,152Yeast (Package) 288Acid Blend (g) 457Pectic Enzyme (g) 364Yeast Energizer (g) 281Campden (tablet) 110Clarifier (g) 257

Water 25

Labels 3,000

Corks 3,540

Bottles 7,080Shrink Wrap 1,200Filters 405 Total Direct Materials 36,160

Table 3.6.2. Direct Labour and Benefits for year 1

Permanent Labourer 15,000Benefits for Salary Employees 1,617Bottler wage 1,800Benefits for bottlers 298 Total Direct Labour + Benefits 18,715

College of Agriculture and College of Commerce, University of Saskatchewan 17

South Valley Winery

Table 3.6.3. Manufacturing Overhead Costs for year 1

Variable  Freight and Pallet Charges 360Maintenance 300 Total Variable Overhead 660Fixed  Natural Gas 1,250Insurance 750Property Taxes 1,000Capital Cost Allowance 8,104Electricity 1,440 Total Fixed Overhead 12,544 Total Manufacturing Overhead 13,204

The total cost of goods manufactured can be seen in Table 3.6.4. These values are also

available in schedule 3 of the financial model in Appendix B.

Table 3.6.4. Cost of Goods Manufactured

Direct Materials 36,160 Direct Labour Used 18,715 Manufacturing Overhead 13,204 Total Cost of Goods Manufactured 68,079

4.0 Human Resources Plan

4.1 Human Resource Strategy

South Valley Winery, as laid out in its mission statement, is a family oriented business.

This is reflected in the organization of the human resources and the employees. With

restricted production levels, a cottage winery will never reach a size where highly

automated equipment is required. Although a very manual process, one person, with the

exception of a few production steps requiring some extra help, can feasibly complete the

tasks to run the winery. Due to the nature and size of the business South Valley Winery’s

employee numbers are low, but skills high. Marketing plays a central role in the success

of the business, and due to the great importance of marketing, a separate position will be

in place to address this issue.

College of Agriculture and College of Commerce, University of Saskatchewan 18

South Valley Winery

In order to ensure that employees are working to their full potential to benefit the winery

and its sales, an incentive program for the manager and marketing position will be

implemented. Using gross margin as a performance measure, the marketer and manager

will receive a wage plus a bonus of 2.5% of gross margin. Gross margin being directly

tied to amount of product sold, revenues, and the cost of goods manufactured, the

marketer and manager will get higher wages providing they sell more product, and

produce it as efficiently as possible. The salaries for part-time workers are above

minimum wage and quite competitive for retail part-time work and therefore should

allow for selection of quality employees.

4.2 Organizational Structure

South Valley Winery will be a corporation owned by Rod and Jeanne Flaman. Their son

Nick Flaman will be responsible for the management, a marketer will be hired and a few

part-time positions will be available during peak sales and busy production times.

Figure 4.2.1. Organizational Structure

College of Agriculture and College of Commerce, University of Saskatchewan 19

Directors/ShareholdersRod and Jeanne Flaman

ManagerNick Flaman

Part-timeTours/retail sales

(2)

Part-timeBottling help

(5)

Full-timeMarketer

(1)

South Valley Winery

4.3 Job Descriptions

Shareholders/Directors: Rod and Jeanne Flaman will primarily be involved with

the winery by aiding the manager with decisions regarding winery objectives and

production levels.

Manager: The most intensive position, the manager, Nick Flaman must be able to

perform a large variety of tasks. Due to the small size of the business and the time each

task takes it is most realistic to have one person perform all of these tasks to save on

costs. Nick’s time will need to be divided between the following activities:

Wine Production: During wine production periods the wine needs to be monitored

daily, stirred and transfers completed as outlined in the production section. Nick will be

responsible for performing the daily checks and scheduling extra help when needed.

Securing outside berry supply and wine ingredients will also be the manager’s

responsibility.

Marketing: Marketing will prove to be one of the more challenging activities and

key to the success of the business. Although there is a full time marketing position, Nick

will need to allocate some of his time to marketing to ensure adequate sales.

Overseeing retail sale: During the summer months when the winery is open for

retail sales and tours, Nick will be responsible for hiring a part-time employee to conduct

tours, run tasting sessions, sell wine and accessories from the store, and look after site

maintenance.

Book-keeping: The manager will keep track of the finances and complete monthly

and yearly assessments of financial goals.

Starting salary for the manager will be $35,000, with a bonus of 2.5% of gross

margin. His salary will be allocated as $15,000 for production work and $20,000 for

work with management and marketing.

Marketer: Without product sales the winery will not succeed. In order to ensure

that there is a market for wine production a marketer will be hired. 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. The

marketer will be responsible for attending various trade-shows, bridal shows, and

College of Agriculture and College of Commerce, University of Saskatchewan 20

South Valley Winery

promoting the fruit wine industry development in Saskatchewan. The marketer will be

hired for only half of the first year as the business begins production. Afterwards it will

be a full time position. Salary for the first year will be $17,500 and there after be

$35,000 plus a bonus of 2.5% of gross margin.

Part-time Retail staff: Two part-time positions will be filled to run the winery

retail store for the months of June, July and August. Besides selling wine their duties will

include conducting tours and tasting, maintaining store cleanliness, and site maintenance.

An hourly wage of $9.00 will be paid. Open for three months, the part-time retail sales

will have approximately 700 hours divided between the two positions to allow for time

off. The winery should not have a problem filling this position as it is located close to

Regina and it pays a sufficient wage.

Part-time bottling staff: As bottling is a very labour intensive step in winemaking,

additional help will need to be hired. Jobs will include bottle preparation, labeling,

corking, and shrink-wrapping bottles for distribution. A wage of $8.00 an hour will be

paid to each of the five employees. In the first year ten batches will require 80 hours of

labour per person.

College of Agriculture and College of Commerce, University of Saskatchewan 21

South Valley Winery

Table 4.3.1. Labour cost projected for ten years.2004 2006 2008 2010 2012

Marketing/Sales LabourManager $20,000 $24,279 $27,480 $31,700 $36,219Marketer $17,500 $40,039 $44,037 $49,096 $54,495Benefits $3,293 $5,647 $6,279 $7,094 $7,965 Total Salaries $40,793 $69,965 $77,796 $87,890 $98,679Seasonal Retail Student Wage $9.00 $9.46 $9.93 $10.44 $10.97Hours 700 700 700 700 700Benefits $919 $965 $1,014 $1,065 $1,119 Total Season Wage $7,219 $7,584 $7,968 $8,371 $8,795Total Marketing/Sales Labour + Benefits $48,011 $77,549 $85,764 $96,262 $107,474

Production LabourPermanent Labourer $15,000 $15,759 $16,557 $17,395 $18,276Benefits for Salary Employees $1,617 $1,699 $1,785 $1,875 $1,970 Total Salaries $16,617 $17,458 $18,342 $19,271 $20,246Part-Time Bottler Wage $8.00 $8.41 $8.83 $9.28 $9.75Hours 225 450 675 900 1125Benefits for Wage-Earning Employees $298 $627 $988 $1,384 $1,818 Total bottler wage $2,098 $4,409 $6,949 $9,734 $12,784Total Direct Labour + Benefits $18,715 $21,868 $25,291 $29,005 $33,030

4.4 Training

In order for a business to succeed, it must have the right people to carry out the daily

activities and promote the business. The manager will be the key person in ensuring the

success of the business. Nick Flaman is a recent graduate from the University of

Saskatchewan with an Agriculture Degree. In order to market the product and produce

consistent high quality wine he will need to be trained. A professional vintner, Dominic

Rivard, routinely helps people develop recipes and learn to make fruit wines. Dominic

will be hired to assist Nick with the technical aspects of wine production. A course in

wine sales is also available at the Okanagan University College (OUC) in Penticton

(Appendix C). The 117 hour course covers winemaking, wine store promotions, wine

marketing and wine sales at a tuition cost of $970 (OUC Course Calendar). The other

positions will be trained effectively on the job.

College of Agriculture and College of Commerce, University of Saskatchewan 22

South Valley Winery

4.5 Future Human Resources

As long as the winery remains a cottage winery, no additional positions are planned. If

the winery expands to maximum production and finds that current human resources are

insufficient, the situation will be re-evaluated and perhaps extra positions will be added.

5.0 Marketing Plan

5.1 Current Market

Fruit wines are commercially produced by more than 53 licensed wineries in nine

provinces (including Saskatchewan), making the fruit wine industry truly national in

scope. Canada is commonly regarded as one of the world’s leading fruit wine producing

countries. However, the development of this industry has not been without setbacks. In

the past, fruit wines made from loganberries, blackberries and apples dominated British

Columbia’s wine market. Initially these fruit wines were regarded as undesirable and

much too sweet. This reputation tarnished the industry for a considerable period of time

and is still a common perception among consumers in the western regions of Canada.

The fruit wine industry in the eastern regions of Canada tends to be stronger with a well-

developed industry in Ontario. Wineries in this region market high quality dry fruit

wines, dessert wines, ice wines and ports at highly competitive prices comparable to

grape wines (Table 5.1.1.).

Table 5.1.1. Prices of fruit wines in B.C and Ontario

Type of Wine B.C Prices* Eastern Prices*

Apple $10.09 $ 9.95Raspberry $11.95 $ 11.95Strawberry $13.95 $ 11.95Pear $13.95 $ 12.95*Prices averaged from Bellamere Country Wines, Archibald Orchards Estate and Cox Creek Winery for Eastern prices, Columbia Valley Classics Winery, Elephant Island Orchard Wines and Fort Wines wineries for B.C prices.

The strength of the fruit wine market is growing throughout Canada, in both eastern and

western areas thanks to the establishment of the Fruit Wines of Canada in March 2000.

The Fruit Wines of Canada, a national producers' association, was formed from the

College of Agriculture and College of Commerce, University of Saskatchewan 23

South Valley Winery

existing Fruit Wines of Ontario association. The Federal department of Agriculture and

Agri-Food provided $84,000 through the Agri-Food Trade 2000 program to help with

strategic planning, benchmarking of the current industry, and identifying domestic and

international market opportunities. The goal of the Fruit Wines of Canada is to establish

standards for the production of quality 100% Canadian fruit wines. The organization

developed national fruit wine standards, a certification process, an audit process, a quality

certification logo and a generic marketing strategy to address domestic and international

needs. The Quality Certified (QC) standards, modeled on the highly successful Vintners

Quality Alliance (VQA) quality standards system of the Canadian grape wine industry

ensures that certified wines meet and exceed the strict standards set by the QC. Some of

the standards included:

Wine must be made from an authorized fruit species. Grapes are not authorized.

Wine must be made from 100% fruit or juice from the region specified

Wine must pass a stringent lab test.

A qualified tasting panel must evaluate wine and deem the wine to be free of

faults including ensuring the fruit species character is expressed in the aroma and

flavour of the wine.

Acting as a guarantee of quality for consumers, the establishment and recognition of the

QC quality standards is essential for increased sales in Canada and internationally. The

association has 16 representatives from all of Canada's fruit wine producing regions.

Two representatives from Western Canada, seven from Ontario, three from Quebec and

four from the Atlantic Provinces; representatives per region are based on the current

number of licensed fruit wineries in each region. The association also has annual awards

to showcase premium wines from the member wineries. Further information on

standards and how to become a member can be obtained by calling (877) 839-6447 or

visiting http://www.fruitwinesofontario.com/standards.htm.

Current fruit wineries in both eastern and western regions of the country boast much

more than simply wine sales. Almost all wineries include tours, tasting and special

events on location. Often wineries are combined with retail stores, country markets or

restaurants to create a tourist attraction as well as a wine store. When implementing tours

College of Agriculture and College of Commerce, University of Saskatchewan 24

South Valley Winery

and tasting, wineries take different approaches. For example, some provide the services

for free, while established wineries on well-traveled routes charge tour fees.

The wine market as a whole, consisting of grape and fruit wines, is small in

Saskatchewan. Annual consumption of all types of wine is well below the national

average. Canadians consume 12.2 L per capita annually, compared to Saskatchewan

where 4.9 L is consumed. According the SLGA’s year end review of sales, total wine

sales slipped 0.44% during 2001 in Saskatchewan, while they increased 4.88% nationally

(Figure 5.1.1.). When buying grape wines, the trend is to purchase imported wines. The

red table wines of Australia have seen significant growth in past years. However, the

increase in sales of domestic ice wines and the Canadian Vintners Quality Alliance wines

provides hope to expanding the market in Saskatchewan. It is possible that when

marketed correctly, fruit wine grown locally could enter this niche. One thing remains

clear from analyzing the market, it will be essential to provide a strong product image and

provide exceptional services to ensure sales.

Figure 5.1.1. Wine sales in Canada over ten years.

College of Agriculture and College of Commerce, University of Saskatchewan 25

South Valley Winery

5.2 Competition

The competition for South Valley Winery can be broken into two categories, including

the competition from other wineries and substitute wine products, as well as the indirect

competition from other tourist industries in the province.

5.2.1. Direct Wine Competition

Direct competition for South Valley will come from the Aspen Grove Winery located

south of White City, 10 km from the South Valley location. Comparable to South Valley,

Aspen Grove is a family operated fruit winery, and has similar product and service goals.

Both wineries will be selling their product to tourists on site, but South Valley feels they

can capture a larger share of this market being located on a major highway with heavier

traffic. Aspen Grove is taking a different approach to marketing by selling their product

to liquor board stores, as opposed to the special permits market that South Valley is

pursuing. With the full time marketer aggressively promoting South Valley’s product to

the public, there is currently no strong direct competition.

5.2.2 Indirect Wine Competition

Indirect competition poses more of a threat and will include products other than fruit

wines that are substitutes. These products include grape wines and wine coolers sold at

liquor board stores and off-sale locations, in addition to winemaking ingredients and wine

kits sold to consumers who produce their own wine. Bottled wines in which South

Valley will be competing with in liquor stores are priced from $6.00 to $20.00. South

Valley’s average selling price is $10.30 per bottle. The marketer will try to attract

potential consumers to pay this price by promoting a differentiated product and by

making the product available by free delivery to special permit customers.

College of Agriculture and College of Commerce, University of Saskatchewan 26

South Valley Winery

5.2.3 Indirect Tourist Competition

Indirect tourist competitors include other businesses and facilities along highways and in

cities that may indirectly attract potential customers away from the winery. If a family is

travelling past the winery and has recently made a stop from their travels to visit another

tourist establishment, they are less likely to come and see the winery. These types of

attractions include the Craft-Tea Elevator Restaurant in Indian Head, the Regina Science

Centre and Parliament buildings, the Moose Jaw Tunnels and Western Development

Museum, and the Chaplain Lake Shorebird Preserve in Chaplain. Similar to South

Valley Winery, the Chaplain Lake Shorebird Preserve and the Craft-Tea Elevator are

located on the No. 1 highway and are designed to appeal to drivers passing by. It is the

winery’s aim to have the majority of traveler’s stop in to tour its venue as opposed to the

others. This goal will be attained by large, attractive signage, in addition to the novelty

of having a winery, with free tasting and tours, on a Saskatchewan highway. If a

vacationer recently visited a tourist attraction in one of the neighboring cities it is

probable that they were charged an admission of some sort. South Valley’s hope is that

by offering a novel and free experience the appeal will be large enough for the customer

to visit before continuing on with their voyage.

5.3 Product and Service Features

5.3.1 Product

South Valley Winery will sell a physical product of Rhubarb, Saskatoon, Chokecherry,

and Raspberry fruit wines with a two-year shelf life, but it will also sell much more than

the physical product. South Valley Wine is unique because it is made in Saskatchewan

with native and locally grown fruits. Customers can experience a taste that is

authentically Saskatchewan. Not only is it made from fruit grown in Saskatchewan, but

also 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.

College of Agriculture and College of Commerce, University of Saskatchewan 27

South Valley Winery

5.3.2 Service

People who buy the wine directly from the winery can come away with a memorable

experience. There will be taste sessions available, along with tours of the winery so each

customer can understand how their wine was produced. The winery will also be a

pleasant area to visit. Boasting beautifully landscaped grounds and picnic areas, it makes

the winery an interesting and pleasant roadside stop for tourists on their way by.

Residents of Regina and surrounding area can enjoy stopping by the winery to see what is

new and visit with the vintner--an escape from regular routines. One might come to buy

wine, but will leave with fond memories in addition to the wine.

Customers with large orders and special occasion permit holders can enjoy free delivery

of the wine to their event. South Valley’s wine will be sure to satisfy the guests’ tastes

while being an attraction for out of province guests.

In the future, an expansion of the product line will hopefully provide greater selection

and the potential to secure more sales. Hopeful expansions include the addition of sour

cherry, black current, Port, and ice wines.

5.4 Customers and Target Markets

Wine is a luxury good that people do not need. Therefore it is South Valley’s job to

make them want to buy wine. With this in mind it is important to carefully define the

target customer profile.

People who purchase wines are typically both males and females aged 35-64, with an

income of $35,000+ to allow for disposable income (Al Barber, SLGA Retail Services

Branch). Other wine purchases are made by individuals and groups for special functions

like dances, socials, weddings, anniversaries and other special events.

South Valley Winery will specifically be targeting two customer groups in specific

markets; sightseers and special event permit holders. Sightseers include tourist traffic

along the highway and area residents. The target market population in a 25-mile radius

College of Agriculture and College of Commerce, University of Saskatchewan 28

South Valley Winery

around the winery including the cities of Regina and Moose Jaw is approximately 80,000

representing a large potential base of customers. Last year 1,407,000 people visited

Regina and generated $194.9 million in consumer spending. The reasons that people

traveled to Regina varied from: visiting friends and relatives (38%), pleasure trips (28%)

and business trips (21%). The majority of these tourists travel between the months of

May to August. Being open from June to August aims to attract a number of these

visitors on their travel down one of the busiest tourist highways in Saskatchewan, the

Trans Canada Highway. Based on the traffic that other tourist attractions in the area

receive, including the Craft-Tea Elevator at Indian Head, and the Western Development

Museum in Moose Jaw, an average of 50 visitors is expected per day. Providing that

sixty percent of the people that visit the winery will purchase one bottle of wine, in the

summer approximately 225 cases of wine could be sold directly to tourists, not including

the local market. With the local market running year round, wine sales directly from the

winery could approach 300 cases, with expansion as the market is developed.

In the province of Saskatchewan the liquor board grants roughly 20,000 permits annually

for liquor at private functions. Typically these functions average wine consumption of 6-

8 cases. By capturing only one percent of the permits granted, the winery could sell

approximately 1400 cases of wine. The potential for growth into this market is great and

the winery could access a greater number of permits as production increases. South

Valley Winery wants to service these customers by offering free delivery of a premium

fruit wine product with a unique Saskatchewan touch.

There are other potential markets that the wine could be sold into in order to increase

demand as production increases. The winery would look very closely at supplying

locally owned licensed restaurants, such as Harwood’s located in the Mineral Spa in

Moose Jaw. The limitation on this would be to insure that demand would not grow

greater than the supply that is capped by the Cottage Winery Policy. Other markets

include exporting the wine out of province and selling through the SLGA stores. Sales

through the SLGA stores are avoided due to the difficulty of making a profit.

College of Agriculture and College of Commerce, University of Saskatchewan 29

South Valley Winery

5.5 Promotion

As the success of the winery lies primarily on how well the wine is marketed to create

sales; it is crucial to have strong advertising activities to raise awareness. The two target

markets require different tactics in order to reach customers.

The sightseer consumer group requires traditional advertising avenues to raise awareness:

Billboards located on the highway to attract the attention of passing motorists.

Radio ads will be run on local radio stations targeting listeners aged 35-64, such as

Country 600 am. The cost of a weekend package is $350, which includes 21

advertisements from Friday to Sunday evening.

Newspaper ads will be run in the Regina Leader Post and Western Producer for the

summer months.

As with any small business, word of mouth will play a very important role to generate

consumer awareness. The service at the winery must be friendly, the atmosphere

aesthetically pleasing, and the wine of consistently high quality to ensure that the

word of mouth advertising is beneficial.

Posters and brochures will supplement this advertising as well.

To access the special occasion permit holders it will be very important to attend events

where people are planning for their occasion:

To secure wedding permits a booth will be set up at Bridal Shows.

Other local fall fairs and trade shows such as the Farm Progress Show in Regina will

be attended to raise awareness of the product and services available.

Advertising at the farmer’s market where fruit production from South Valley Farms is

sold would also be an excellent way to create an image for the product.

A web page will also be set up on the Internet to provide one more way of increasing

awareness.

College of Agriculture and College of Commerce, University of Saskatchewan 30

South Valley Winery

Wine tasting and tours of the winery will be the largest promotional activities at the

winery. Tours will be run during the summer months by the retail staff along with tasting

sessions as requested by customers. The retail store will also contain wine accessories

such as bottle openers and other Saskatchewan made products. In order to increase sales,

the winery must create an image for its product, as there are many substitute and

alternative products. Wine from South Valley Winery will carry the logo “From the

Vintner’s Home to Yours”. A Saskatchewan made product from unique fruit ingredients,

with a direct link from consumer to producer. When a customer purchases a bottle of

South Valley’s wine, they will be able to talk directly to the vintner, see exactly how their

wine was produced and even taste it before purchase. Once at home, opening his or her

bottle of wine, the consumer can remember the pleasant experience and savor the unique

homegrown taste of a quality dry fruit wine. The shop and the area surrounding the

winery will be aesthetically pleasing and provide a picnic area to make it an ideal place

for a roadside stop in the country before reaching the noise of the city. Once people stop,

they are much more likely to wander into the shop and make a purchase.

In the future, promotional activities will grow to include tour buses. Casino bus tours in

the area heading for Moose Jaw and Regina provide an opportunity to obtain customers

as they pass by. South Valley could coordinate tours with these buses. Independent

winery tours could also be run on a schedule out of Regina, offering a free activity for the

afternoon.

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South Valley Winery

Table 5.5.1. Marketing cost estimations for 10 years.  2004 2006 2008 2010 2012Sample Wine Costs $960 $1,220 $1,551 $1,972 $2,507Mileage for deliveries (cost) $3,960 $8,321 $12,177    Vehicle (Lease)       $14,000 $16,000Telephone $250 $263 $276 $290 $305Billboards $1,500 $1,576 $1,656 $1,740 $1,828Radio Ads $4,000 $4,203 $4,415 $4,639 $4,874Brochures $1,197 $1,455 $1,769 $2,150 $2,613Newspaper ads $5,443 $5,719 $6,008 $6,312 $6,632Bridal Shows $250 $263 $276 $290 $305Trade Shows $500 $525 $552 $580 $609Travelling backdrop $500 $103 $108 $113 $119Webpage $325 $341 $359 $377 $396Future Bus Tours     $5,673 $6,262 $6,912Posters $350 $368 $386 $406 $426Total Marketing Expense $19,235 $24,356 $35,206 $39,130 $43,525

5.6 Pricing Policy

The wine will be priced at par to the fruit wine markets in eastern Canada and B.C. A

unique product and Saskatchewan made, people purchasing South Valley wine can see

the profits supporting a local business, value added processing within the province and

creating jobs for people in the area. The unique appeal should support pricing in

Saskatchewan, an area where the fruit wine market is being established. The Saskatoon

and Raspberry wines are priced higher than the Rhubarb and Chokecherry wines for a

number of reasons. Primarily the cost of Saskatoon berries and raspberries are higher

than that of rhubarb and chokecherry. Also, Saskatoon berries have been marketed in

other industries as a unique Saskatchewan fruit and people have been willing to pay

elevated prices for Saskatoon jams, pies and other confectionaries that include Saskatoon

berries.

Table 5.6.1 shows changes in wine prices over nine years. The pricing of wine will

remain constant, increasing only with inflation. The market will support these changes,

but an increasing sales price cannot be justified in a developing market.

College of Agriculture and College of Commerce, University of Saskatchewan 32

South Valley Winery

Table 5.6.1. Prices per bottle over 9 years of production showing increases with inflation.

Year 2004 2006 2008 2010 2012Saskatoon Berry Wine $11.35 $11.92 $12.53 $13.16 $13.83Raspberry Wine $10.45 $10.98 $11.53 $12.12 $12.73Chokecherry Wine $9.45 $9.93 $10.43 $10.96 $11.51Rhubarb Wine $9.95 $10.45 $10.98 $11.54 $12.12

5.7 Distribution Channels

In order to maximize profits, wine will primarily be sold from the winery directly to

visiting customers and will not be marketed through the SLGA. A portion of sales will

be delivered directly to special permit customers purchasing large volumes of wine.

Future distribution channels may include restaurants and out of province markets.

5.8 Sales Objectives

Build a market that will demand a production level that maximizes the Cottage

Winery Policy production of 5000 cases.

Obtain 2-3% of the special occasion permits in ten years representing total case sales

of approximately 4300 cases.

Sell 700 cases directly from the winery to tourist traffic, build a local reputation, and

supply one or two locally owned restaurants with wine.

Obtain a return on equity of 20%.

Table 5.8.1. Projected sales and revenues for South Valley Winery  Year  2004 2006 2008 2010 2012Quantity of Sales (cases) 428 1856 2578 3623 4575Sales Revenue          Saskatoon Berry Wine $14,583 $66,396 $96,902 $143,045 $189,781Raspberry Wine $13,426 $61,131 $89,218 $131,702 $174,732Chokecherry Wine $12,142 $55,281 $80,680 $119,099 $158,011Rhubarb Wine $12,784 $58,206 $84,949 $125,401 $166,372Total $52,935 $241,015 $351,749 $519,248 $688,896

College of Agriculture and College of Commerce, University of Saskatchewan 33

South Valley Winery

5.9 SWOT Analysis

The SWOT analysis (strengths, weaknesses, opportunities and threats) of South Valley

Winery will examine the strong qualities and challenges of the business by considering

both internal and external aspects of the winery. Strengths and weaknesses study the

internal facets, whereas opportunities and threats investigate the effect of external forces

on the business.

5.9.1 Strengths

1. There is little direct competition for fruit wines in Saskatchewan.

2. South Valley has a production equipment cost advantage over other wineries by using

manual equipment.

3. Low staff requirements.

4. Small family oriented business HRM structure with a single view.

5. Direct distribution channel to customers – “from the vintner’s home to yours”.

6. Wine is available at the winery on the No. 1 highway, which is unique to

Saskatchewan.

5.9.2 Weaknesses

1. The manager is not trained in marketing, which is the most important obstacle of this

business.

This will be overcome by sending the manager to Okanagan University College to

receive a wine sales certificate (Appendix C).

A full time marketer will be hired to increase the marketing focus.

2. Narrow product line.

As the business expands, more fruit wines will be added to the product line as

well as port wines and ice wines.

3. No experience in commercial wine production.

A vintner will be hired to spend a week with the manager to give him a hands-on

understanding of fruit wine production and the vintner will be available for

consulting throughout the wine making process.

4. South Valley needs a strong product image to sell its product.

College of Agriculture and College of Commerce, University of Saskatchewan 34

South Valley Winery

The marketer’s goal is to develop the product image. An incentive to do this well

will be based on a bonus program derived from gross margin.

5. There is limited distribution of the product within the province.

As the market expands, the product will be available at more venues throughout

the province.

5.9.3 Opportunities

1. Sell the product to tourists and to the special permits market.

2. Expand the product line to include black current and sour cherry wine.

3. Offer more Saskatchewan items in the gift shop such as wine bottle openers, jams,

and other specialty items.

4. Add a restaurant to the business to expand products, services and appeal.

5. The winery is located on the No. 1 highway close to a major center increasing

potential sales.

5.9.4 Threats

1. Government policy restricting the potential market to liquor board stores due to the

large mark up.

Create another marketing position to develop alternative markets.

2. Competition from other fruit wineries such as Aspen Grove.

South Valley will have a strong marketing approach to their business, as well as

the competitive advantage of a superior location.

3. Competition from liquor board stores.

The product must be differentiated to attract customers.

6.0 Financial Plan

In order for South Valley winery to meet initial capital expenditures, and maintain a

positive cash flow, a total of $329,165 of long-term debt and owner’s equity will be

required. The long-term debt will be financed with a loan from the Farm Credit

Corporation (FCC) and Rod Flaman will supply the owner’s equity (Table 6.0.1). South

College of Agriculture and College of Commerce, University of Saskatchewan 35

South Valley Winery

Valley does not have enough assets to obtain more than $75,000 of financing. Therefore,

in order to secure the loan from FCC, Rod Flaman will have to utilize some of his

farmland as additional collateral to obtain the total debt financing required.

Table 6.0.1. FinancingLong Term Debt $164,583Owner's Equity $164,583Total Financing $329,165

6.1 Loan Amortization

The loan will be secured with FCC. The total of $164,583 will be amortized over 15

years with an average interest rate of 7.4%. The loan is set up as a constant period

payment at $18,529 over the 15 years.

College of Agriculture and College of Commerce, University of Saskatchewan 36

South Valley Winery

Table 6.1.1. Amortization ScheduleYear 2004 2005 2006 2007 2008   Debt Rate 7.4% 7.4% 7.4% 7.4% 7.4%   Beginning Balance 0 158,232 151,412 144,087 136,220Addition 164,583 0 0 0 0Interest 12,179 11,709 11,204 10,662 10,080Debt Payment 18,529 18,529 18,529 18,529 18,529   Ending Balance 158,232 151,412 144,087 136,220 127,771

Year 2009 2010 2011 2012 2013   Debt Rate 7.4% 7.4% 7.4% 7.4% 7.4%   Beginning Balance 127,771 118,696 108,950 98,483 87,241Addition 0 0 0 0 0Interest 9,455 8,784 8,062 7,288 6,456Debt Payment 18,529 18,529 18,529 18,529 18,529   Ending Balance 118,696 108,950 98,483 87,241 75,168

Year 2014 2015 2016 2017 2018   Debt Rate 7.4% 7.4% 7.4% 7.4% 7.4%   Beginning Balance 75,168 62,201 48,274 33,317 17,253Addition 0 0 0 0 0Interest 5,562 4,603 3,572 2,465 1,277Debt Payment 18,529 18,529 18,529 18,529 18,529   Ending Balance 62,201 48,274 33,317 17,253 0

6.2 Dividend Policy

Dividends will be paid to the equity investors when profits and cash flow increase

sufficiently. Before paying dividends South Valley needs to ensure that there will be

sufficient cash for operating the following year. Therefore, a calculation of cash, minus

working capital increased by a factor of 1.15 to allow for unexpected expenses will be

used to calculate dividends paid. Any positive value from this calculation will be paid

out to equity investors (Table 6.2.1).

Dividend Paid: If Cash - (Working Captial x 1.15) >0

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South Valley Winery

Table 6.2.1. Dividends Paid2010 2011 2012 20136.988 103,642 122,164 166,885

6.3 Economic Forecast

A 10-year projection has been made using an inflation rate of 2.5%. This rate has been

used to derive all wages, supplies, and expenses.

6.4 Unit Cost Analysis

In order to make accurate decisions regarding management of a business it is important to

evaluate the distribution of the costs associated with the production, marketing and

selling of the product. Understanding what represents the majority of the costs per unit

allows a manager to evaluate where costs could be reduced and monitor if costs are

increasing to the point where there is a need to change production methods or selling

tactics. In winemaking significant unit costs are represented by key direct materials. The

direct material costs can be allocated as approximately half of the cost for fruit and the

other half packaging. The other ingredients including yeast, sugars and additives do not

represent significant costs. The overhead costs are also relatively low, but the selling and

administration costs, which include the marketing costs, represent the largest cost

associated with the production and selling of wine. These costs decrease with increasing

production because they are fixed costs, whereas the direct material costs, which are

variable costs, remain relatively constant per unit (Table 6.4.1 and Figure 6.4.1.).

College of Agriculture and College of Commerce, University of Saskatchewan 38

South Valley Winery

Table 6.4.1. Unit cost breakdown of producing and selling wine.

Unit Cost per Case 2004 2006 2008 2010 2012Fruit $18.00 $18.91 $19.87 $20.87 $21.93Ingredients $2.93 $3.08 $3.24 $3.40 $3.58Packaging Materials $15.23 $16.00 $16.81 $17.66 $18.55Total Unit Cost of Direct Materials $36.16 $37.99 $39.91 $41.93 $44.06Direct Labour $18.72 $10.93 $8.43 $7.25 $6.61Overhead $13.20 $8.44 $5.51 $4.13 $3.27Total Unit Cost of Labour and Overhead

$31.92 $19.37 $13.94 $11.38 $9.88

Total Unit Cost of Production $68.08 $57.37 $53.85 $53.31 $53.93Selling and Administration $80.40 $56.55 $43.68 $36.04 $31.66Total Unit Cost of Selling $148.47 $113.92 $97.54 $89.36 $85.59Expected Average Selling Price $123.60 $129.86 $136.43 $143.34 $150.59

Figure 6.4.1. Distribution of costs per unit in various production years.

College of Agriculture and College of Commerce, University of Saskatchewan 39

Fruit12%

Ingredients 2%

Packaging Materials

10%

Direct Labour13%

Overhead9%

Selling and Administration

54%

Year 2004

Fruit19%

Ingredients 3%

Packaging Materials

16%

Direct Labour9%

Overhead6%

Selling and Administration

47%

Year: 2008

Fruit22%

Ingredients 4%

Packaging Materials

19%Direct Labour

9%Overhead

5%

Selling and Administration

41%

Year: 2010

Fruit16% Ingredients

3%

Packaging Materials

14%

Direct Labour9%

Overhead7%

Selling and Administration

51%

Year: 2006

South Valley Winery

6.5 Ratio Analysis

The projected performance ratios for South Valley Winery show a successful business

over time and are summarized in Table 6.5.1. Detailed analysis can be found in Schedule

11 of Appendix B. When interpreting the ratios it is important to remember the nature of

the business and the values on which they are based.

Measuring liquidity by the current ratio, the current assets over the current liabilities are

used. The high value indicates that the winery has a very strong ability to meet short-term

obligations. Although this should be looked at critically, the values taken from the

balance sheet represent a point in time when direct materials have already been purchased

and paid for. The remaining short-term obligations consist only of labour and overhead

monthly payments. Therefore, at different times of the year this ratio will vary.

Half of the initial financing for the winery is debt financing; the solvency of the winery

reflects this. Initially, the debt ratio and the debt to equity ratio are both quite high

indicating a significant financial risk, however, based on projections the ratios decrease to

acceptable levels. The business should be able to make debt payments and internal

financing can be used for future expansions.

The investment utilization ratios are high largely due to the nature of the business. The

period from raw fruit to finished product is lengthy due to the time wine is in production.

Inventory turnover ratios and average day’s inventory reflect this.

In the first year of production output is low resulting in high costs per unit. The first year

the winery is in business will have lower profitability because of the low sales and high

start up costs. After the initial sales are underway and production increases, the winery

recognizes good profitability ratios. Profitability is expected to improve as the winery

expands because of increased sales and lower unit costs.

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South Valley Winery

Table 6.5.1. Summary of financial ratios2004 2006 2008 2010 2012

Liquidity RatiosCurrent Ratio 33.67 13.27 26.52 70.23 86.47Activity and Operating RatiosTotal Asset Turnover 0.20 1.16 1.25 1.10 1.16Inventory Turnover 0.67 1.85 1.61 1.69 1.69Average Days Inventory 543 198 227 216 217Leverage RatiosDebt Ratio 0.61 0.72 0.47 0.24 0.16Debt to Equity 1.52 2.56 0.90 0.32 0.19Profitability RatiosGross Profit Margin 0.41 0.53 0.58 0.60 0.62Net Profit Margin -1.11 0.06 0.21 0.26 0.30Return on Total Assets -0.22 0.06 0.26 0.29 0.35Return on Equity -0.55 0.23 0.49 0.38 0.42

6.6 Summary of Financial Results

Table 6.6.1 provides an overview of several key values in the financial plan over the 10-

year period.

Table 6.6.1. Summary of Financial ResultsYear 2004 2005 2006 2007 2008

 Sales 52,935 111,746 241,015 264,457 351,749COGS 29,156 66,411 105,709 115,609 136,390Gross Margin 21,735 41,128 126,453 139,371 203,061Expenses 80,395 102,220 113,109 121,473 131,050Net Income Before Tax -58,660 -61,093 13,344 17,898 72,011Income Tax 0 0 0 0 0Net Income After Tax -58,660 -61,093 13,344 17,898 72,011Net Cash Flow to Equity 64,221 -62,037 3,809 19,459 37,171

Year 2009 2010 2011 2012 2013 

Sales 408,820 519,248 581,253 688,896 762,621COGS 161,085 189,252 215,420 241,504 272,635Gross Margin 233,790 312,716 346,962 425,572 466,420Expenses 136,122 144,175 149,927 158,287 164,744Net Income Before Tax 97,668 168,540 197,034 267,285 301,676Income Tax 15,520 32,225 37,673 59,664 70,614Net Income After Tax 82,149 136,315 159,361 207,621 231,062Net Cash Flow to Equity 77,764 106,686 154,956 171,003 522,828   

Net Present Value (NPV) 81,817Internal Rate of Return on Equity Investment 26.7%External Rate of Return on Equity Investment 21.8%

College of Agriculture and College of Commerce, University of Saskatchewan 41

South Valley Winery

6.7 Sensitivity Analysis

The sensitivity analysis shows how sensitive the IRR is to changes in various critical

variables. Table 6.7.1 shows the percent changes in the four important critical variables

for South Valley Winery creating the best and worst case scenarios. The base case

represents the best estimate of the expected results.

Table 6.7.1. Scenario Analysis

The first significant variable to South Valley Winery is the amount of product that will be

successfully marketed. This is very important for this business because the fruit wine

market is undeveloped and is the reason that the worst case scenario looks at 50% of the

estimated base case sales. The best case scenario is only raised slightly due to a limited

amount of product available for sale, and is 105% of the base case. Figure 6.7.1 shows

that the quantity of sales is an important variable to this business as the worst case

scenario results in an IRR of –13.7%. The best case scenario results in a slightly higher

IRR but it is not substantial due to the small increase in the amount of sales looked at for

the best case.

The next critical variable looked at is the change in the average selling price of the wine.

This is also a very important variable as selling price is essential in developing market

share and directly results in the gross revenue for this business. The worst case scenario

College of Agriculture and College of Commerce, University of Saskatchewan 42

South Valley Winery

looks at 75% of the base case selling price, whereas the best case looks at a 25% increase

in the base case selling price. The change in IRR for the best and worst case scenarios is

shown in Figure 6.7.1. The IRR shows great sensitivity to changing selling price as it

ranges from 44.9% in the best case to 12.7% in the worst case.

The change in the purchase price of fruit was also examined as a critical variable as it is

the main direct material cost when producing wine. The worst case scenario showed fruit

prices increasing to 150% of the base case purchase price, and the best case scenario

showed fruit prices decreasing to 75% of the base case purchase price. The changes were

made with the rationale that fruit prices are more likely to increase substantially, rather

than decrease, in the future. As Figure 6.7.1 shows, the changes in IRR were not

significant between the best and the worst case scenarios. This shows that although fruit

is a major input, fluctuation in fruit prices do not drastically change South Valley

Winery’s economic feasibility.

The last critical variable studied was the differences in the rate of growth this company

could possibly experience. The base case begins at 1000 cases in year one and increases

every second year by 1000 cases reaching a maximum of 5000 cases. The reason for

following this expansion plan rather than having a constant growth rate is to give a longer

period of time to develop the market before expanding the business. The worst case

scenario looks at a slower rate of growth where the business starts at 1000 cases in year

one and increases constantly by 250 cases a year. The best case scenario looks at a faster

rate of growth where the business starts at 1000 cases and increases constantly by 500

cases a year. As shown in Figure 6.7.1 the change in growth rate moderately affects the

IRR ranging from 34.8% for the best case to 18.7% for the worst case.

College of Agriculture and College of Commerce, University of Saskatchewan 43

South Valley Winery

Figure 6.7.1. Sensitivity analysis of the IRR for the worst, base and best case scenarios

6.8 Breakeven Analysis

The breakeven analysis was calculated for five different years accounting for the changes

in the growth of South Valley Winery. Both accounting and economic breakeven analysis

was performed on the two most critical variables for this business. Economic breakeven

was based on a desired IRR of 20%, with accounting breakeven based on net income

being equal to zero. The two most critical variables for South Valley Winery determined

from the sensitivity analysis are average selling price and the quantity of cases sold.

College of Agriculture and College of Commerce, University of Saskatchewan 44

South Valley Winery

Figure 6.8.1. Breakeven Analysis of Average Selling Price

As shown in figure 6.8.1, accounting breakeven for average selling price is very high in

year 1 and is above the base case selling price. It then decreases in the following years to

remain below the base case selling price. This is due to the fact that in year one South

Valley Winery has a negative net income, therefore the price must be raised above the

base case selling price to result in a net income of zero. In subsequent years the average

selling price continues to decrease as a result of economies of scale and increased

production.

The base case average selling price increases throughout the years solely on the basis of

inflation. Economic breakeven was calculated on a desired IRR of 20 % over a 10-year

period. To achieve economic breakeven, 85% of the base case selling price is required,

on average. Since the base case IRR is calculated at 26.7%, with an average selling price

of 123.60, the economic breakeven price at an IRR of 20% is lower at $105.06 per case

in year one. IRR is calculated for a 10 year period and the increase in economic

breakeven price throughout the years is due to inflation.

College of Agriculture and College of Commerce, University of Saskatchewan 45

South Valley Winery

Figure 6.8.2. Breakeven Analysis of Quantity of Cases Sold

The accounting and economic breakeven was also calculated for the quantity of cases

sold. For accounting breakeven in year one, the number of cases sold is above the base

case quantity sold, due to negative net income. For the 10 year period, the accounting

break even is, on average, 24% below the base case expected sales level. In following

years the number of cases sold to break even increases as a result of expanding

production, and is lower than the base case sales resulting in profits for those years. The

economic breakeven for quantity of product sold is lower than the base case, and

increases with production throughout the years.

7.0 ConclusionAfter completing the business plan for South Valley Winery it has been concluded that it

is a feasible enterprise. The financial model has demonstrated that South Valley Winery

will be receiving an IRR of 26.7%, at the given projected sales and prices. The

business’s main obstacle in achieving economic success will be reaching the desired level

of sales in an undeveloped fruit wine market. Failure to meet projected sales may result

in an unattractive IRR jeopardizing the feasibility of the business. South Valley Winery

will ensure that sales are met by extensive marketing to tourists and to the special permits

market resulting in a profitable Saskatchewan business.

College of Agriculture and College of Commerce, University of Saskatchewan 46

South Valley Winery

8.0 ReferencesArchibald Orchards EstateBomanville Ontariohttp://www.archibalds-estatewinery.on.ca

Basic Winemaking Procedureshttp://www.wyeastlab.com/education/edwiprod.htm

Bellamere WinesLondon Ontariohttp://www.bellamere.com

British Columbia Wineshttp://www.bcwine.com

Columbia Valley Classics WineryChilliwack British Columbiahttp:// www.cvcwines.com

Cox Creek CellarsGuelph Ontariohttp://www.coxcreekcellars.on.ca

Criveller Company Canada6935 Oakwood Drive, Niagra Falls, ON L2E 6S5Ph (905) 357-2930

D & C Refrigeration Sales and Service122 Stone Terrace Saskatoon, SK S7M 4J5(306) 384-9133

Dairyland Agro Supply Ltd.Saskatoon SK242-5850

Elephant Island Orchard WinesNaramata British Columbia.http:// www.elephantislandwine.com

Farm Credit CorporationSaskatoon SK306-975-4248Fischer Scientific – Lab Equipment80 Iroquois Drive Brightwaters, N.Y. 11718-1602 Fax: 631.666.3873http://www.fischersci.com

Fort WinesFort Langley British Columbiahttp://www.thefortwineco.com

Goodon IndustriesBox 777, Boissevain, MB. Canada, R0K 0E0Toll Free 1-800-665-0470

Lakeshore Garden CentreHwy 16 & Boychuck Dr. Saskatoon(306) 477-0713

Massaccesi, Raymond. 1976. Winemaker’s Recipe Handbook.

Okanagan University College Homepage – Wine Sales Certificatehttp://www.ouc.bc.ca/ce/winestudies/sales.htm

Regina Saskatchewan Homepage – Transportation Linkhttp://regina.foundlocally.com/Trans/Trans-BusesListing.htm

Dominic RivardFort Langley B.C.

Roger’s SugarTaber AB

College of Agriculture and College of Commerce, University of Saskatchewan 47

South Valley Winery

403-223-3535

R.M of EdenwoldBalgonie SK771-2522

SaskenergyRegina SK1-800-567-8899

SaskpowerRegina SK1-800-757-6937

SaskwaterWatrous SK946-3200

Saskatchewan Liquor and Gaming AuthorityMr. Al Barber, Retail Services Branch (306)-787-4236

Statistics Canada - Control and sale of alcoholic beverageshttp://www.statcan.ca/Daily/English/020712/d020712b.htm

Town of BalgonieBalgonie SK771-2284

Brian and Cherry ToppAspen Grove Cottage WineryWhite City, Saskatchewan306-771-2921

Vinquiry - Analytical Services, Consulting & Supplies for the Wine Industryhttp://www.vinquiry.com/products.htm

Winemakers Emporium - Advanced Winemaking Procedures

http://www.winemakersemporium.com/Advanced%20Winemaking.htm

Wigs Pumps and WaterworksSaskatoon SK652-4276

World of WaterSaskatoon, SK306-653-0099

WYEAST USA http://www.wyeastlab.com

College of Agriculture and College of Commerce, University of Saskatchewan 48

South Valley Winery

Appendix A:

Cottage Winery Policy

College of Agriculture and College of Commerce, University of Saskatchewan 49

South Valley Winery

Appendix B:

Financial Projections

College of Agriculture and College of Commerce, University of Saskatchewan 50

South Valley Winery

Appendix C:

Okanagan University College Wines Sales Course

College of Agriculture and College of Commerce, University of Saskatchewan 51