MICHAEL SHAPS WINERY:

EVALUATING THE “CUSTOM CRUSH” OPPORTUNITY

Written and Communication Analysis-1 (2018-2020)

Submitted to

Prof. Asha Kaul

By,

Aditya Shankar

Section B

On

July 8th, 2018

Indian Institute of Management

Ahmedabad

PGP 2018-2020
 Letter of Transmittal

To,

Michael Shaps,

Michael Shaps Winesworks.

Date: July 6th, 201X

Subject: Recommended course of action with regard to additional production capacity.

Dear Michael Shaps,

Here is a report analysing the various options available with regard to additional production

capacity which has been recently acquired by your firm. I have evaluated all feasible options

keeping in line with the firm’s objective of achieving best returns while improving the Michael

Shaps brand value and it is recommended that you should go ahead with the Custom Crush

idea using alternate boxing while utilizing remaining capacity for further expansion of Michael

Shap’s line.

Regards,

Aditya Shankar,

Consultant, WIMWI.

July 8th, 201X.

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Executive Summary

With the growing difficulty in selling Michael Shap brand wines to the distributers and a large

unutilized production capacity, diversifying business through custom crush approach is the

most viable option to counter the problems at hand. After evaluating the options against the

criteria of achieving best returns while maintaining the brand value, it is thereby recommended

that the firm should go ahead with the expansion of both Custom Crush with alternative boxing

and Michael Shaps line. Current market situation also demands keeping sales representatives

for both Custom Crush and Michael Shaps line expansion.

[93 words]

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Table of Contents

Situation Analysis ................................................................................................................................ 4

The Problem ............................................................................................................................................ 6
The Options............................................................................................................................................. 6

The Criteria ............................................................................................................................................. 6

Evaluation Of options ...............................................................................................................................

Option 1 ............................................................................................................................................... 6

Option 2 ............................................................................................................................................... 7

The Recommendation ............................................................................................................................. 8

Action Plan.............................................................................................................................................. 8

Exhibits ................................................................................................................................................... 9

Exhibit A .............................................................................................................................................. 9

Exhibit B ............................................................................................................................................. 10

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Situation Analysis

Virginia wine industry flourished manifold in the past 3 decades owing to the technological

advancements and an increased demand for niche varietals which offered a broad range of fruit

flavour profiles. However, the industry’s growth retarded in the past few years and the wine

industry got hit by a depression. A big industry player and multiple wine award winner Michael

Chaps Wineries sustained the depression owing to its good reputation as a premium

winemaker. Their differentiated high-quality products along with a loyal customer base helped

them reach their maximum production capacity of 14,250 cases/year. Less market uncertainty

marked by expected stable growth rate and increasing demand for private premium labels made

the firm acquire a winery outside Charlottesville. Production capacity is expected to double up

through this acquisition however, the firm is unsure about the best course of action to

undertake.

Michael Shaps sold his products through three channels- Winery’s Tasting Room (8.4% of

total sales), online (26.6%) and wholesalers (65%) while ensuring profit margin of 195% in the

case of direct to customer sales and 30% in case of three-tier-sale. Since his newly acquired

winery had limited customer parking space, Shaps was unsure of much growth in DtC through

winery’s tasting rooms and thereby conservatively predicted ~5000 sales through DtC channel.

In the recent years, sales distribution has also become a challenge due to an active cut-down of

vendors by the retailers and due to entry of multiple competitors. Therefore, MS has to take a

quick decision as to how to expand his business to utilize his additional production capacity

while reaping maximum returns.

There has been an increase in the demand of niche varietals along with customised private

labelled wines which MS named the “Custom Crush”. Custom Crush offers guaranteed returns

due to fixed contracts, higher profit margins due to reduced labor costs and higher retail price
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compared to MS brand wines. Also, there is a scope of introducing an alternative eco-friendly

and sustainable packaging which might further reduce overall production costs.

So, MS can either go for expansion of his own MS brand or he can go ahead with both Custom

Crush and MS production. MS is confident of further expanding his own MS brand, but he will

require a sales representative to foster strong relationships with major distributors and retailers

to sell more of his own labels.

Expanding his additional capacity through both Custom-Crush and Michael Shaps will require

giving discounts to commercial clients in case of CC and will also require hiring sales

representative for both which will reduce the net profit margin however reduced production

costs in CC will negate this impact. It is expected that CC will grow by 2000 each year after

its initial 8000 sales in 2011. Increased contribution of CC in production will reduce MS

production to a level after which profit does not get realised from MS. In the alternate boxing

approach, it gives MS an opportunity to increase profit margins further, by selling the boxed

wines at bottled wine rates by providing a user selling point of increased durability and

portability, however it will involve a one-time setup cost for packaging.

Shaps objective of achieving best returns while retaining brand image can be fulfilled by

projecting and evaluating the Net Present Value of both the options for the next 5 years. It is

also required to check the viability of using alternate boxing in the custom crush approach in

the second case.

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The Problem

Identifying the best course of action for utilizing additional production capacity.

The Options

1. Expand Michael Shap’s line

2. Expand Custom Crush and Michael Shaps line without using alternative boxing for CC

3. Expand Custom Crush and Michael Shaps line while using alternative boxing for CC

Criteria for Evaluation

Criteria for the evaluation of the options in the decreasing order of preference are as follows:

a. Best Returns from available options

b. Retaining Michael Shaps brand value

Evaluation of Options

1. Expand Michael Shap’s Line

a. Returns –

b. Michael Shaps brand value –

2. Expand Custom Crush and Michael Shaps line without using alternative boxing for
CC
a. Returns –

b. Michael Shaps brand value –

3. Expand Custom Crush and Michael Shaps line while using alternative boxing for CC
a. Returns-
b. Michael Shaps brand value-

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The Recommendation

Michael Shap Wineworks should utilize the additional production capacity through expansion

of Custom Crush with Alternative boxing and rest through its own MS production.

Action Plan

1. The

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EXHIBITS
EXHIBIT A

Retail prices and Contribution for the OrganicKidz bottles:

Specialty Stores: Stocks narrow-necked bottles

Retail price = $19.99 to $24.99

Average Retail Price = $22.49

Contribution = $11.25

Mass Merchandiser: Stocks wide-mouthed bottles

Retail price = $15.00 to $18.00

Average Retail Price = $16.50

Contribution = $ 9.45

Costco (Warehouse club): Stocks wide-mouthed bottles

Retail price = $10.00

Profit Margin = 10%

Contribution = (10 – 0.1*10)

= $ 9.00

All prices are per bottle.

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EXHIBIT B

Analysis of Costco Offer:

Initial offer = $20000.00 to $40000.00

Average = $30000.00

Current sales (as of September, 2009) = $65000.00

Current no. of bottles (as of September, 2009) = 6000

Increase in sales = (30000.00/65000.00)*100

= 46.15%

Price of each bottle = (65000.00/6000)

= $10.83

No. of bottles to be produced = (30000.00/10.83)

= 2769 (rounded up)

Expected subsequent offer:

No. of bottles = 45000

Sales volume = $400000.00

Increase in sales volume = (45000/6000)*100

= 750 %

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