Exceptional Wines business case study for WINE 7002 Final Assessment

Trimester 2 2024

Exceptional wines was established in 1982 and has successfully established its brand reputation through success in Australian wine show competitions and James Halliday endorsements featuring consistently high scores for several wines in the Exceptional Wines range.

Exceptional Wines has focussed on the Australian domestic market, selling 8,500 of its 10,500 case sales through the on-premise, specialty retail, winery cellar door and winery onsite restaurant sales channels.

The remaining 2,000 cases were exported to China until 2020 when the imposition of high tariffs rendered the China market unviable. Since 2020 the 2,000 cases of this wine has been sold off to a bulk wine trading business.

Exceptional Wines as well as expecting growth in its domestic market sales, is now seeking to identify alternative export markets for the 2,000 cases displaced from the China market. The 2,000 cases from the China market were priced at $220 FOB, so the alternate export market/s will need to show strong demand for high priced wines.

In addition Exceptional Wines is planning further sales growth of 5,000 cases by entering new export markets.

Consequently new markets are required to provide export sales of 7,000 cases, of which 2,000 cases are higher in price than the 5,000 case planned sales growth.

In order to enable this sales increase in both the domestic and export markets, Exceptional Wines plans to increase production each year, to produce an additional 6,000 cases by 2029, when total production will reach 16,500 cases.

The original family owners of Exceptional Wines have decided to retire and have handed over management of the business to their son Peter who is the winemaker for Exceptional.

Peter is a qualified winemaker who has travelled extensively to European wine regions where he has acquired a lot of knowledge and experience in European winemaking practices and wine styles.

Peter is very optimistic about future sales growth for Exceptional Wines in both the domestic and in export markets. He is aware that recent Free Trade Agreements have improved the competitiveness of Australian wine in the Japan and South Korea markets and, to a more limited extent, the India market. A recent South Australian Government report from a trade mission visit to India has persuaded Peter that India is a market with great future potential for wine exports.

Recognising that COVID 19 restrictions have ended and international borders have opened, Peter is assuming that wine export markets will revert to their previous sales performance and trends.

Peter’s challenge is to establish the justification for Exceptional’s production expansion by

expanding sales in the domestic market to take full advantage of the WET rebate

identifying export markets with suitable pricing to replace the lost China market of 2,000 cases

identifying export market sales volume and margin opportunities to achieve additional annual export sales of 5,000 cases in 2029,

demonstrating that an increase to 16,500 cases in Exceptional Wines annual production is justified by the market opportunities,

identifying a market for Exceptional Wines surplus inventory comprising a total of 2,000 cases of $150 FOB Cabernet blend unsold from the 2018 and 2019 vintages.

defining what capabilities and resources will be required for Exceptional Wines to be successful in entering the selected new markets.

More specific information about Exceptional Wines is provided in the following profile.

Exceptional Wines Profile

Size 10,500 cases annual sales in 2024

Business objectives Grow the business by expanding in the domestic market to take full advantage of the WET rebate and by diversifying into new export markets to replace the China market sales of 2,000 cases and in addition to achieve an increase in annual export sales volume of 5,000 cases.

Maintain strong margins (profitability).

Brand Established 1982, Halliday 5 red star winery

Region Coonawarra, South Australia

Wine range Cabernet Sauvignon, Cabernet blend, Chardonnay, Shiraz.

All wines are packaged in screwcap closures.

ExistingMarkets

(annual sales, cases) Australia 8,500, China mainland 2,000 (until 2020, now sold as bulk)

Route to market Exceptional Wines has relied on its distribution agent in the domestic market, together with limited cellar door sales (150 cases in 2024) from the winery site and no sales have yet been made from the newly launched Exceptional Wines wineclub or the recently opened winery restaurant.

Wine availability (cases) 2025 11,500; 2026 12,500; 2027 14,000; 2028 15,500; 2029 16,500

The additional 6,000 cases consist of:

Chardonnay 1000 cases @ $85 FOB

Shiraz 2000 cases @ $120 FOB

Cabernet blend 2000 cases @ $150 FOB

Cabernet Sauvignon 1000 cases @ $200 FOB

In addition to the extra production above, the 2,000 cases displaced from the China market comprised Cabernet Sauvignon priced at $220 FOB.

Also there is surplus inventory of 2,000 cases of Cabernet blend @$150 FOB left over from the 2018 and 2019 vintages.

Price points (FOB) for

6,000 case extra volume $85 25%;

$120 25%;

$150 25%;

$200 25%

of the additional 6,000 cases of wine availability. Note that up to 1000 cases of this extra wine availability could be allocated to the domestic market, with the quantity determined by the quantity eligible for the WET rebate.

Domestic price

(average wholesale/case) $135

Business capabilities Since Exceptional Wines is such a small wine business it only has 4 full time and 1 part time employees.

These include

John who is CEO and winemaker;

a vineyard manager

a cellar hand who assists with production and vineyard operations;

a Cellar Door person who is responsible for all domestic and export sales;

and an office manager who is responsible for finance and administration roles.

Restaurant staffing is provided by an independent operator

All of these staff are very busy with their existing roles and do not have any spare time to allocate to investigating export markets.

None of the staff have marketing skills or export experience.

Peter the new CEO is committed to expanding into export markets and he intends to seek distribution in new markets through an internet search for agents to represent Exceptional Wines. His previous experience with the China market was that many people approached Exceptional Wines who had the contacts in China to achieve distribution and sales without requiring any effort or expense by Exceptional Wines. Consequently he is confident that he will be able to achieve similar outcomes in other export markets.

Peter considers that because the wines from Exceptional Wines are of high quality, then it will not be necessary to provide promotion funding to support the distribution candidates who he expects to identify for the selected markets.

Also he believes that market visits will not be necessary because Exceptional has an English language website with all its wines and their endorsements fully detailed.

Peter cannot commit time for overseas travel due to his winemaking and business management responsibilities for Exceptional Wines.

Exceptional Wines is quite profitable but pays out most of the profits as dividends to JPeter’s parents, so there is a shortage of funds to invest in growing the production side of the business and in developing new markets.

The Exceptional Wines budget has allocated $10,000 per year for export expenses including any marketing for the new export markets.

Risk Exceptional Wines has previously avoided the risks associated with export but new CEO Peter understands that the normal commercial risks of export such as exchange rate fluctuations, poor sales performance and payment delays are acceptable in order to expand the business.

Exceptional Wines has been quoted $15,000 by an expert lawyer to register its brand trademarks in new export markets. However Peter has decided that this is an unnecessary expense and therefore has not taken any action on this issue.

Margins (profitability) Exceptional Wines has a target Gross Margin of 35% for each new market. This margin will be achieved if the additional wine exports are sold at FOB prices in the same ratio as the extra wine availability, namely:

25% @ $85 FOB; 25% @ $120 FOB; 25% @ $150 FOB; 25% @$200 FOB

In addition the 2,000 cases of Cabernet Sauvignon previously sold in the China market @ $220 FOB need to be sold in new export markets at $220 FOB.

Paul van der Lee 12.7.24