Introduction

The American consumption per capita for wine has tripled since 1965, indicating a promise of industry growth and leading to intense competition within the market. A Napa Valley native, Tegan Passalacqua has years of expertise and has earned strong relationships with grape growers, eventually launching his own wine brand. Sandlands Vineyards produces distinctive, naturally flavorful grapes and maintains low prices that yield affordable wine of high quality. After establishing reputation and brand loyalty, Sandlands still faces some barriers that prevent it from reaching its full potential including high variable costs, lack of capacity, and reliance on distributors. Passalacqua now has to decide whether to buy a vineyard or a winery building. He should buy the warehouse for winery production, restructure distribution, and bolster brand equity to provide an unforgettable experience to his customers.

U.S. Wine Industry

The wine industry is broken down into two major segments of wine. The value segment is at a low price and the premium segment is at a high price and higher quality. Sandlands Vineyards operates in the premium wine segment with an average cost of $26 per bottle. Consumers are subject to price-quality inference, as proven by the significant upsurge in premium wine sales. Porter’s Five Forces (Exhibit 3) impact the profitability of the industry, which is currently over-saturated with wineries facing intense rivalry with the existing 9,000 winery competitors. Despite having less threats from potential substitutes and new entrants, wineries are under constant pressure from buyers who have low switching costs and suppliers who raise prices to offset supply chain disruptions.

Customer Segments

While beer contributes to 50% of the total alcoholic beverage market, wine sales only comprise 15%. Of these wine consumers, adults who drink once a week or more make up 80% of wine consumption and purchases. Addressing the preferences and purchasing habits of the right customer segment will better ensure sustained success in selling wine. The most frequent wine drinkers prefer price and brand as their most important criteria when purchasing wine. Price is therefore viewed as a signal of quality, and should be considered a priority when branding. This is an indication that affordability can affect brand perception and appeal to customers.Sandlands targets the segment of consumers who view wine as a unique experience and can differentiate from rivals in the premium market through unique production techniques and brand loyalty. The experience of drinking Sandlands wine underscores the years of experience and industry knowledge that Pasc brings. Sandlands ensures a special taste for customers and delivers high quality, which places the brand in a separate league from mainstream “value” wines. Occupying this gray area requires careful analysis and even some trial and error to have a properly optimized price. Charging too much or too little could drive away potential customers.

Distribution of Wine

Since wine bottles are heavy and need to be stored in temperature-controlled settings, it is often more expensive for wineries to ship the wine directly to the customers or retailers. The majority of the winemakers distribute 90% of the wine through distributors, which simplify the shipping process and lower the costs for wineries. However, selling to the distributors lowers the profit margin since winemakers have to sell the wine at a discount. While distributors can help market the wine to new customers, small wineries are not attracted to the big distributors that value volume over uniqueness. As a result, small wineries might lack marketing support from the top 100 distributors that own almost 95% of the market share.

Reasons to Buy

1. Full control

If Passalacqua decides to follow the strategic recommendation below, he will have full control from grapes to the consumer. With his relationship to the growers and his careful selection, a purchase of the building and the possibility to start his own winery will help Passalacqua achieve his dream. He will become independent as an owner and gain agency in decisions, including purchasing the best equipment for his wines and setting his own timelines. He can increase his productivity by creating procedures that push the brand further out on the productivity frontier. The independence and flexibility gained will increase his learning and experience curve as well. All of this will reflect a more joyful business for Passalacqua and ultimately, better customer satisfaction.

2. Positive investment
The investment has a positive net present value (Exhibit 4). With the investment comes the possibility of expanding production to exploit the economies of scale. The valuation is based on an assumption that Passalacqua is able to increase the number of cases produced by 200 each year until he reaches the maximum of 2.000 cases for a small premium winery. This will enable him to spread the fixed cost of $84,000 over a larger number of cases and get a lower average cost per case (Exhibit 1). With the lower costs comes a larger profit that could be used to reinvest into the company.  Depending on the vision of Sandlands, the strategic move can ensure better quality or larger quantity produced.

3. Tasting room

With the purchase of the building, it is an opportunity to create a tasting room that will increase direct sales to consumers. A tasting room is a defining factor for Passalacqua and his customers because it substitutes the distributor as a marketing tool. But perhaps more importantly, it represents an opportunity for people to experience the Sandlands wine, authentically appreciate the taste, and become a loyal customer. This would attract new customers, both private and others, such as restaurants, to his winery. The story is only strengthened by Passalacqua’s outstanding business savvy, which he demonstrates well with his relationships with other growers. 

Strategic Recommendations

1 – Private sales

With 25% of his wines sold through a distributor along with waiting lists and a large secondary market, Passalacqua has the possibility to increase his direct sales. He should reduce the reliance on distributors by selling directly to consumers and increase the price of his wine to more closely match the willingness-to-pay among consumers. The tasting room, previously mentioned, would also substitute the “marketing” he does by selling through distributors with a 50% discount. With a marriage between the Sandlands story and a unique customer experience, Passalacqua can raise prices and achieve a higher margin of production.

2 – Premium Sandlands wine

Passalacqua should brand his wines as a one-of-a-kind premium product for wine enthusiasts. Even though premium wines only account for 20% of the market, 40% of the profit goes to this segment. With the low level of substitutes, control over his own vineyard and relationship with other growers, Passalacqua would be able to take advantage of this. Furthermore, Passalacqua is known for being an excellent wine producer and experts in the industry praise his product. Our recommendation is to increase prices by approximately 50%. By doing so, Passalacqua will significantly increase profit that would strengthen his virtuous circle. However, he should take precautions to ensure that customers still choose the wine despite price-quality inference. This price increase should not be higher as Passalacqua himself has expressed that he would like to make good wine at an affordable price, and this seems to be a great vision for the company.

3 – Relationship with growers

To keep up with the increased production of wine after the purchase of the building, Passalacqua would need to maintain his long-term relationships with grape growers to stabilize supply without buying another vineyard. Thus, Passalacqua should continue his “handshake” strategy. However, if the winery grows to the extent that Passalacqua does not have time for all the “handshakes” in the future, Passalacqua might want to consider having long contracts with growers. This would further ensure that the power of suppliers are kept at a low level and Passalacqua’s profits are not exposed. 

Conclusion

A sustainable competitive advantage and the virtuous cycle of positively reinforcing activities has propelled Sandlands to become the fiercely competitive brand it is today. Within such a profitable market, Sandlands can acquire a new building and raise production, thereby expanding its business growth by reducing variable costs and introducing an in-housing marketing strategy. Existing competitors can imitate best practices, but Sandlands’ successful brand equity and product quality prevents rivals from coming close to matching the distinctive culture of “old-vine” wine that perfectly matches customer preferences. Passalacqua can finally live the dream of every winemaker – get rich, buy a vineyard, kick back and relax with a glass of your own wine.