Sandlands Vineyards Case Analysis The case name is “Sandlands Vineyards”, more information about the case is in pdf attached.You will use a number of case

Sandlands Vineyards Case Analysis The case name is “Sandlands Vineyards”, more information about the case is in pdf attached.You will use a number of case analysis tools such as Five Forces, Strategic Fit analysis, Diamond, Value Chain Analysis, Balanced Scorecard, VRIO, etc. when appropriate. You may use outside resources, only to give an update on the company; please make sure you cite your references and clearly give credit to the author(s). Each written case analysis should be not more than 8 single spaced pages (font size 10 or 11). You may want to include graphs, tables and other figures (maximum 6 pages) to support your analyses.more information is in attached. For the exclusive use of z. li, 2020.
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REV: MARCH 8, 2019
BENJAMIN C. ESTY
GREGORY SALDUTTE
Sandlands Vineyards
“It’s the dream of many entrepreneurs: Get rich, buy a vineyard, kick back on the porch
and relax with a glass of wine. Keep dreaming. Wine is a tough, competitive, and
expensive business that’s likely harder than your current day job.” (Forbes Magazine) 1
As he wandered through the 100-year-old vines at the Kirschenmann Vineyard in Lodi, California,
Tegan Passalacqua reflected on the challenges of starting and running a small winery. “I am constantly
thinking about the business—what to produce, how much to produce, how to build the brand, and
most of all how to make really good wines.” Passalacqua and his wife Olivia owned both the
Kirschenmann Vineyard and a small winery called Sandlands Vineyards which produced “old-vine”
wines. Although he had a full-time job as the head winemaker at Turley Wine Cellars, he managed the
Kirschenmann Vineyard and made the Sandlands wines in his spare time using Turley’s facilities.
In early December 2017, however, the Passalacqua’s faced an important decision: should they buy
a building down the road from the Kirschenmann Vineyard and develop it into a winery and possibly
a tasting room for the Sandlands wines at a cost of up to $500,000? This building, known as Eastside
Meats, had been a meat processing facility with a history going back to the German and Russian
immigrants who settled in Lodi in the 19th century. Although it was not listed for sale, Passalacqua had
been in negotiations with the owner who seemed willing to sell. On the other hand, he and his wife
could save their limited resources with the goal of buying another vineyard. Unfortunately, old vine
vineyards did not come up for sale very often and when they did, they were generating more and more
interest from winemakers and selling at higher and higher prices. Knowing they could afford to make
only one major investment over the next five years, they had to decide whether to bid for the building
or save their resources for another vineyard.
The U.S. Wine Market
People have made wines for thousands of years by pressing grapes and fermenting the juice to
produce an alcoholic beverage. The resulting wines came in three primary colors (red, white, and rose)
and three main types: still (table wine), sparkling (with bubbles), and dessert (often sweeter and with
higher alcohol levels). Although there were thousands of kinds of grapes and more than 150 kinds that
were regularly used to make wine, 10 varieties accounted for 80% of the tons crushed in California. 2
Professor Benjamin C. Esty and Research Associate Gregory Saldutte prepared this case. It was reviewed and approved before publication by a
company designate. Some data in the case has been disguised to protect confidentiality. Funding for the development of this case was provided
by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to
serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2018, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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Sandlands Vineyards
The most common types of red wine grapes were Cabernet Sauvignon, Merlot, and Pinot Noir; the
most common types of white wine grapes were Chardonnay, Sauvignon Blanc, and Pinot Gris/Grigio.
People drank wine by itself or paired with food to enhance the taste. Red wines were traditionally
paired with high-fat foods such as beef and cheese while white wines were paired with leaner foods
such as chicken, seafood, and vegetables. Wine taste derived from a complex combination of the grape,
climate, weather, soil, and winemaking process. Winemakers described the taste using six
characteristics: acidity, tannin, alcohol, sweetness, fruit, and body (fullness). A balanced wine was one
in which all of these characteristics blended together harmoniously rather than having one of them
stand out above the others. Taste was a very subjective factor that could vary considerably from person
to person. As a result, it was an “experience good”, a product you had to try before you could decide
if you liked it or not. As one analyst quipped, finding a good wine was like finding a good barber. 3
To help consumers make an initial purchase decision, professional wine critics such as Robert
Parker, Jr., Jancis Robinson, and Antonio Galloni reviewed and rated wines particularly more
expensive ones. a While some people argued that critics provided objective assessments of wine quality,
an assertion the strong positive correlation between ratings and bottle prices seemed to corroborate,
others argued they had strong and almost predictable preferences that drove winemakers to produce
wines with specific taste characteristics. 4
The standard unit of measurement in the wine industry was a (9-liter) “case” which was comprised
of twelve 750 milliliter bottles (~ 2.4 U.S. gallons). Total sales in the U.S. wine industry in 2016 were
399 million cases with a retail value of $60 billion. 5 Approximately 70% of the wine consumed in the
U.S. was produced domestically and 90% of that was produced in California. The most famous wineproducing regions in California were Napa and Sonoma Valleys where millions of tourists flocked each
year to see the vineyards and taste the wines. Though not as well known, San Joaquin Valley also had
numerous vineyards and wineries. Lodi, in fact, had 85 of wineries. 6 The remaining 30% of
consumption was imported from Italy, France, Australia, and numerous other countries. Over time,
U.S. wine consumption per capita had grown from approximately one gallon per year in 1965, to two
gallons by 2000, and was up to almost three gallons by 2016. 7
Wine Customer Segments
The beverage market was divided into non-alcoholic (soft drinks, fruit juices, coffee, water, etc.) and
alcoholic beverages. The smaller market for alcoholic beverages included beer (50% of total dollar
sales); distilled spirits including rum, vodka, and gin (35%); and wine (15%). 8 Among adults of legal
drinking age (i.e., those over 21 in the United States), 36% abstained from drinking alcohol, 24% drank
alcohol but not wine, and 40% drank wine. 9 Approximately two thirds of the wine drinkers drank wine
occasionally (less than once per week) and one third drank wine more frequently. The high-frequency
drinkers accounted for over 80% of wine consumption and purchases. 10
According to one industry survey, there were six key customer types ranging from “overwhelmed”
customers who bought cheaper wines and felt bewildered by the range of choices to “enthusiastic”
customers who bought more expensive wines, and loved learning about and shopping for them (see
Exhibit 1). When surveyed, frequent wine drinkers listed price and brand as by far the most important
purchasing criteria (see Exhibit 2). Most consumers viewed price as a signal of quality, which was
particularly important given the enormous range of options available—a typical wine shop might carry
400 to 800 kinds of wine. Interestingly, however, there was no correlation between price and taste
a Robert Parker, Jr., created the 100-point rating scale in the 1970s. Wines rated above 85, 90, and 95 points were considered good,
outstanding, and extraordinary, respectively. Ratings were based on color, appearance, smell, and taste.
2
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Sandlands Vineyards
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preference for most drinkers in blind taste tests. There was, however, a positive relationship between
price and taste for “expert” or knowledgeable wine drinkers. 11
Wine Product Segments
Consistent with bottle price being a major purchasing criterion, most analysts segmented the wine
industry by price: the value segment for wine costing less than $10 per bottle and the premium segment
for wine costing more than $10. The value segment represented approximately 80% of the industry
volume and 60% of its revenues. 12 Marketing analysts further divided the premium segment into
“luxury” wines costing more than $50 per bottle. In fact, at the high end, wine could cost several
hundred if not several thousand dollars per bottle. Exhibit 3 shows sales by price point in the offpremise channel (i.e., grocery stores and wine shops), a segment where good data existed for low- to
mid-priced wines. More expensive wines were difficult to track because customers bought them
directly from wineries rather than through retail outlets, and that sales data was difficult to obtain.
Marketers classified premium wines as “non-essential luxury goods”, meaning that consumers
could defer purchases indefinitely (“non-essential”) and tended to buy proportionally more of them as
their income rose (“luxury good”). Exhibit 4 shows the fraction of adults who had purchased expensive
wines and the reasons why. Over 40% of adults had purchased a wine costing more than $50 per bottle,
and the most common reason was to celebrate a special occasion. The second and third most common
reasons were to drink or to give as a gift. When purchased to drink, premium wines competed against
other kinds of wine; when purchased for a special occasion or as a gift, they competed again other
kinds of wine such as champagne, food such as chocolates, and gifts such as flowers. One wine blogger
described the way he chose his wines this way:
There are what I call “Everyday Wines.” These are the kind of wines that we’ll pop open
with dinner on an average Tuesday night…The second category is what I call “Saturday
Night Wines”…for times when you want an outstanding wine—a wine that may be a focal
point…of the evening…And then there are “Special Occasion Wines.” These are wines that
really are special—that when you open, you’re excited…
And I broadly break them into three categories. The first are what we might call the RollsRoyce wines…These babies are expensive!…[T]he next category might be the Porsches (or
the wines of the experts). They’re often expensive…[and] hard to find…The third category
is unique…We might call it “What the Cool Kids are Drinking.” For example, one night a
month in New York, a group of 15 or so of the top somms [sommeliers] in the city meet after
work and bring exciting new finds to share. Perhaps a Chenin Blanc from Sandlands…If you
open a bottle of one of these for your friends, even the wine lovers may say “What the hell
is this?” After they taste it, the novices may still be unconvinced—these are not mainstream
wines—but the serious wine lovers will likely say “Ummm… this is really interesting!” 13
The Structure of the U.S. Wine Industry
Producing wine consisted of three main activities: growing grapes (sourcing), making wine
(production), and distributing wine (distribution). Exhibit 5 provides a schematic overview of these
three activities. The two key wine segments—the value or commodity segment at the low end and the
premium segment at the high end—differed in how they conducted each of the activities. The former
relied more on “science” and automation to mass produce consistent and affordable (low-cost) wines;
the latter relied on a complex combination of art, science, and nature to produce more unique, higherquality wines. In both segments, however, the production, distribution, and sale of wine was regulated
extensively and taxed heavily at both the federal and state levels.
3
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Sandlands Vineyards
Growing Grapes
Winemakers often said that “wine was made in the vineyard.” When growing grapes, farmers made
a series of critical decisions such as what to grow (which type of grape); how to farm (plant, prune, and
harvest the grapes); whether to irrigate or “dry farm”; and whether to use pesticides or grow
organically. In the value segment, the objective was maximum yield with decent quality and low cost.
In the premium segment, by contrast, there was considerably more variation in farming techniques
and a desire to grow high-quality grapes. Premium winemakers sought a match between the type of
grape, the climate, and the “terroir” (the French word for soil or earth)—all three of which affected the
ultimate wine’s taste. From year-to-year, weather—temperature and rainfall—also affected the taste.
The most critical decision in any given year was when to pick the grapes, a decision that was based
in part on science (acid and sugar levels) and in part on the winemaker’s judgment regarding the
desired wine. Control of the harvest also mattered—did you pick all of the grapes or just the best
clusters; did you pick in the early morning or later in the day; did you pick certain elevations, etc.—
which is why winemakers liked to be involved with the harvesting process to the extent possible. There
was no substitute for experience in making good picking decisions, which is why aspiring winemakers
sought to work as many harvests as possible.
Wineries sourced grapes in three ways (see Exhibit 5). One option was to own or lease the vineyards
(an “estate” or integrated winery) which gave winemakers full control over growing practices and
harvesting decisions. A second option was to buy grapes on the spot market or with longer-term
contracts. The final option, used by négociants (French for merchant) or “virtual’ winemakers, was to
buy wine made by others and resell it under a proprietary brand name. The largest wine makers used
a combination of all three structures; the smaller, premium winemakers tended to buy grapes.
One of the greatest challenges for growers was dealing with diseases and pests. Although farmers
could control these problems with fungicides and pesticides, others preferred to farm organically. One
of the most destructive pests was known as phylloxera, an insect that attacked the roots of grape vines
and eventually killed them. An outbreak in the mid-1800s destroyed a majority of the vineyards in
California and Europe. More recently, a second outbreak during the 1980s forced Californian growers
to replant their vineyards. By grafting different kinds of grape vines onto naturally immune rootstocks,
growers could avoid phylloxera damage even though the process came with unavoidable cost: it
changed the taste of the resulting wine according to some people. Others argued the change was so
minor compared to the winemaking process that it was undetectable. Interestingly, phylloxera had less
impact on vines grown in sandy soils because they were inhospitable to the insect. As a result,
vineyards with sandy soils tended to have a higher fraction of “own-rooted” rather than grafted vines.
As of 2016, there were 5,900 wine grape growers in California who farmed just over 600,000 acres. 14
The largest grower, Bronco Wine Company, had 40,000 acres and revenues of $182 million. 15 In
contrast, 90% of the growers had fewer than 100 acres and 50% had fewer than 5 acres. 16 These smaller
vineyards provided grapes used to make premium wines. Vines became productive three years after
planting, remained productive for 20 to 40 years, and then were replaced as output fell. An acre of land
produced from 2 to 10 tons of grapes, with high-quality wines at the lower end and low-quality wines
at the upper end. Each ton of grapes produced roughly 65 cases of wine. The challenge for all growers
was the high and rising cost of land: vineyards ranged from $20,000 to $40,000 per acre in San Joaquin
Valley and from $50,000 to $370,000 per acre in Napa Valley. 17 Restrictive zoning and strict
environmental regulations meant new land was difficult and costly to acquire. Rising land prices,
however, helped offset the low operating margins most growers earned on their grapes—averaging
9% despite considerable variation over time and across growers. Growers with the most prized
4
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Sandlands Vineyards
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vineyards, which produced the most expensive wines, could earn higher operating margins, perhaps
20 to 40% or more, but they were relatively rare and few growers disclosed their profitability. 18
In addition to grapes, the other major inputs needed to make wine were equipment (processing,
pressing, and bottling machines); labor particularly the services of a skilled winemaker b; barrels to
store and age the wine; packaging which consisted of bottles, labels, closures (corks or screw caps),
boxes for shipping; and buildings to house the equipment and store the wine. With the exception of
skilled winemakers, all of these inputs were readily available from multiple suppliers at competitive
prices.
Making Wine
Most wineries had a head winemaker who ran the process of transforming grapes into wine, a
process that involved four key steps: 1) pressing the grapes, 2) fermenting the juice, 3) aging the wine,
and 4) bottling the wine for distribution. Each step in the process could be done in multiple ways and
required the winemaker’s judgement to achieve a desired taste. For example, in the pressing stage, you
could destem the grapes or press full clusters; in the fermenting stage, you could do one or two
fermentations; and in the aging stage, you could store the wine in oak barrels which affected the taste
or stainless steel containers which did not. For wines in the value segment, the challenge was to blend
grapes from multiple vineyards to produce a consistent taste year after year. One of the most important
decisions was how much to intervene in the process. The choice was between letting the wine become
what it was destined to become—fermentation was after all a natural process that would occur on its
own—or manipulating the wine by adding sugar, acid, enzymes, or water. While making wine
depended in part on the science of chemistry and growing depended in part on the luck of nature,
winemaking ultimately depended on the winemaker’s skill, knowledge, and accumulated experience.
As of 2017, there were more than 9,000 wineries in the U.S., and more than 4,000 in California alone.
Exhibit 6a shows the distribution of wineries based on size. Most wineries were very small: 80% of the
wineries produced fewer than 5,000 cases per year. At the top end, the three largest firms (E&J Gallo,
The Wine Group, and Constellation Brands) controlled 60% of total wine production. 19 Gallo, in
particular, produced 75 million cases across 90 brands and generated sales of $4.7 billion. 20
Consolidation at the top end had occurred steadily over the past 20 years and was likely to continue in
the coming years. The largest firms produced wine in the value segment, yet some of them also
produced a few premium wines. For example, Constellation Brands produced Opus One, a “Bordeaux
style” cabernet sauvignon that sold for up to $…
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