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”
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South Valley Winery
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.
Fruit
Crusher
Fruit Delivery
In Crates
Primary
Fermentation
pump
Filter
3X
pump
Storage
Tank
pump
Ratchet
Press
pump
Bottler
Corker
Packaging
Delivery to Special Permits
Retail Sales
Storage
Figure 1: The wine making process.
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South Valley Winery
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.
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South Valley Winery
Capital Costs
To commence operations South Valley Winery will incur the following capital costs to
operate the business.
Table 1. Capital Cost Summary
Land
10,000
Building 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
Direct Labour Used
Manufacturing Overhead
Total Cost of Goods Manufactured
36,160
16,800
13,204
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.
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South Valley Winery
Directors/Shareholders
Rod and Jeanne Flaman
Manager
Nick Flaman
Part-time
Tours/retail sales
(2)
Part-time
Bottling help
(5)
Full-time
Marketer
(1)
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.
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South Valley Winery
Table 3. Projected labour costs
2004
Marketing/Sales Labour
Manager
Marketer
Benefits
Total Salaries
Seasonal Retail Student Wage
Hours
Benefits
Total Season Wage
Total Marketing/Sales Labour +
Benefits
Production Labour
Permanent Labourer
Benefits for Salary Employees
Total Salaries
Part-Time Bottler Wage
Hours
Benefits for Wage-Earning
Employees
Total bottler wage
Total Direct Labour + Benefits
2006
2008
2010
2012
$20,000
$17,500
$3,293
$40,793
$9.00
700
$919
$7,219
$24,279
$40,039
$5,647
$69,965
$9.46
700
$965
$7,584
$27,480
$44,037
$6,279
$77,796
$9.93
700
$1,014
$7,968
$31,700
$49,096
$7,094
$87,890
$10.44
700
$1,065
$8,371
$36,219
$54,495
$7,965
$98,679
$10.97
700
$1,119
$8,795
$48,011
$77,549
$85,764
$96,262
$107,474
$15,000
$1,617
$16,617
$8.00
225
$15,759
$1,699
$17,458
$8.41
450
$16,557
$1,785
$18,342
$8.83
675
$17,395
$1,875
$19,271
$9.28
900
$18,276
$1,970
$20,246
$9.75
1125
$298
$2,098
$18,715
$627
$4,409
$21,868
$988
$6,949
$25,291
$1,384
$9,734
$29,005
$1,818
$12,784
$33,030
Marketing
Marketing is an essential for the success of South Valley Winery. Currently the fruit
wine market is relatively undeveloped within Saskatchewan, however it is becoming
established in British Columbia and Eastern Canada (Ontario and the Maritimes). Driving
the industry, The Fruit Wine Association, labels member wines with a Quality Assurance
label similar to the Vintner’s Quality Assurance (VQA) labels currently in the grape wine
market. Insuring quality and industry standards, these labels help sell the product. In
Saskatchewan the increase in sales of VQA wines and domestic ice wines suggests the
potential to create a similar market with fruit wines. Although current consumption of
wine in Saskatchewan is considerably lower than the national average, wine consumption
is increasing (Figure 3).
A potential market exists if the wine enters the market
aggressively and is vigorously promoted.
College of Agriculture and College of Commerce, University of Saskatchewan
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South Valley Winery
3300
Sales ($ millions)
3100
2900
2700
2500
2300
2100
1900
1700
1500
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
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.
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South Valley Winery
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
Sample Wine Costs
Mileage for deliveries
(cost)
Vehicle (Lease)
Telephone
Billboards
Radio Ads
Brochures
Newspaper ads
Bridal Shows
Trade Shows
Travelling backdrop
Webpage
Future Bus Tours
Posters
Total Marketing
Expense
2004
$960
2006
$1,220
2008
$1,551
2010
$1,972
2012
$2,507
$3,960
$8,321
$12,177
$250
$1,500
$4,000
$1,197
$5,443
$250
$500
$500
$325
$263
$1,576
$4,203
$1,455
$5,719
$263
$525
$103
$341
$368
$276
$1,656
$4,415
$1,769
$6,008
$276
$552
$108
$359
$5,673
$386
$14,000
$290
$1,740
$4,639
$2,150
$6,312
$290
$580
$113
$377
$6,262
$406
$16,000
$305
$1,828
$4,874
$2,613
$6,632
$305
$609
$119
$396
$6,912
$426
$350
$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
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South Valley Winery
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
$164,583
Owner'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
2013
6.988
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.
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South Valley Winery
Table 7. Summary of Financial Results
Year
2004
2008
2006
2010
Sales
52,935 241,015 351,749
COGS
29,156 105,709 136,390
Gross Margin
21,735 126,453 203,061
Expenses
80,395 113,109 131,050
72,011
Net Income Before Tax
-58,660
13,344
0
Income Tax
0
0
72,011
Net Income After Tax
-58,660
13,344
37,171
Net Cash Flow to Equity
64,221
3,809
Net Present Value (NPV)
Internal Rate of Return on Equity Investment
External Rate of Return on Equity Investment
2012
519,248 688,896
189,252 241,504
312,716 425,572
144,175 158,287
168,540 267,285
32,225
59,664
136,315 207,621
106,686 171,003
81,817
26.7%
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.
50.0%
40.0%
IRR
30.0%
20.0%
Worst Case
Base Case
Best Case
10.0%
0.0%
1
2
3
4
-10.0%
-20.0%
Quantity of
Sales
Ave. Selling
Price
Ave Fruit
Prices
Rate of
Growth
Figure 4. Sensitivity Analysis of the IRR for the Base, Best and Worst Case Scenario’s
Breakeven Analysis was performed for quantity of cases sold and average selling price.
Accounting breakeven was calculated for a net income of zero, with economic breakeven
being calculated for a desired IRR of 20%. Accounting breakeven price is very high in
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South Valley Winery
year one, which is needed to make up for the initial net loss in the first year. After the
business becomes profitable the breakeven price declines and is below the base case for
the remaining years. Since the IRR is calculated for the entire ten-year period the
economic breakeven price is lower than the base case in all years in order to obtain an
IRR of 20%. The economic breakeven price increases from year to year as a result of
inflation.
Quantity of cases sold was also found to have a significant impact on the feasibility of the
business due to its importance to gross revenue.
Both accounting and economic
breakeven quantities increase throughout the years as a result of the expanding business.
However, in the first year, the accounting breakeven quantity sold is higher than the base
case to cover the initial net loss in year one.
Conclusion
After 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.
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