Sula Vineyards (B) - Sustainable Growth?

Dr. Raymond Lopez

April 14, 2016

 
 

Keywords: ● Strategy Implementation ● Family Business ● Small Business ● Succession ● Diversification ● Colli Bolognesi, Northern Italy

Case Overview

This case provides students with an opportunity to learn about the growth of the Indian wine industry over the last two decades. After rapid growth in the late 1990’s and early 2000’s the “Great Recession” affected most of the world. After years of “trading up” the price and quantity ladder for most products, including wine, a “trading down” phenomenon affected consumers in 2008 and 2009. Even though internationalization of the Indian economy resulted in changing tastes and preferences of its consumers, especially with respect to the wine segment of the beverage marketplace, demand for wine declined significantly.

Prior to the “Great Recession” Indian wine production was growing rapidly, due to the entrepreneurial efforts of individuals like Rajeev Samant. He was a native of India who came to the U.S to study at Stanford University and worked for Oracle for only 2 years. He decided to return to his homeland to create a firm that would spearhead wine consumption and production in India.

With the professional assistance of Kerry Damskey, a wine consultant from California, he started Sula wines using 30 acres of family land in Nashik. Together they designed both red and white wine brands that been accepted enthusiastically by consumers in India as well as in Western Europe and North America.

After successfully guiding Sula Vineyards through the “Great Recession” the firm has emerged as the number one producer of premium wines in India. It has also developed a growing “hospitality” operation that complements and enhances its wine business. Currently in early 2013, management is considering how fast to grow over the next 5 years, and how funds should be obtained to support these strategic initiatives. Rajeev has utilized two private equity deals to supplement both short and long-term borrowings. With negative free cash flow, due to rapid expansion of assets, a major challenge is to finance growth while maintaining operating control of the company.

Still basking in the afterglow of the successful 6th annual SulaFest in early February 2013, Sula Vineyards’ management met in April 2013 to discuss how to remain the leading premium-wine producer in India. Held at the winery in early February, SulaFest was an annual two-day event pairing Sula wine and Indian food with a marathon series of rock concerts under the stars. Rajeev Samant (“Rajeev”) and Kerry Damskey (“Kerry”), Sula’s co-founders, held high expectations for Sula’s expanded portfolio of single-varietal brands as they continued to achieve above market-growth rates, all of which would require more consistent quantity and quality of grapes from both owned and contract vineyards. To cope with anticipated future growth, the co-founders knew that further investment in facilities for winemaking and wine tourism would be necessary, but the magnitude and priorities for such investments needed to be worked out.

Since its first plantings of grapes in 1996, Sula’s strategic focus had always been to target India’s emerging quality-wine consumer for its premium wine. As word spread of the quality of Sula’s first vintage, sales picked up, and the company was on its way. Sula had grown with the Indian market and had also been responsible for a good part of that growth. Rajeev utilized his marketing skills to spread the word and stimulate demand for Indian wines, both domestically and internationally.1Yet domestic wine was the segment hit hardest by customers’ tendencies towards “trading down” in prices paid for wines from 2008 to 2010. Product backed up in the supply chain, all the way to the winery, and Sula had trouble servicing its debt. Still, Sula moved decisively into sustainable wine operations with a number of costly, but important, investments in organic agriculture, energy reduction and water conservation, all considered necessary to sustain its sole base of grape-growing and winemaking operations in Nashik, India. According to the Indian Government Tourist Office, Nashik is located in the northern part of the state of Maharashtra, situated 2,300 feet above sea level, and at a distance of about 171 kilometers (km) from Mumbai and 210 km from Pune.2Nashik, considered India’s primary wine-growing region, boasted 22 out of India’s 46 wineries. The region was characterized by a tropical climate.

Monsoons were typical from July through September, and the region experienced hot summers and dry, cooler winters. Once the global recession began to abate in 2012, Sula’s diversification strategies included activities in beverage distribution as well as hospitality. Sula leveraged its extensive distribution network to wine imports as well as beer and other beverages. And, in 2012, Sula opened a 32- room Beyond Vineyard facility, supporting extended visitor stays. Located a short 3 km from the winery, it provided a broad variety of facilities for visitors. Each guestroom had a private balcony, with lake and hill view. Other facilities included all day dining available at Café Rose, a conference hall, gymnasium, infinity pool, vino spa and the Red Room for games and just “chilling out.” Sula also opened wine and tapas bars, located in some of India’s largest population centers, such as Mumbai and Goa, with plans to increase their presence in tier II (Chhattisgarh, Orissa, Jammu, Kashmir) and tier III cities (Nasik, Baroda, Trichy, Madurai, each with populations less than one million people) across the Indian subcontinent. Over time, these hospitality activities were expected to contribute to revenues as well as to the incremental growth of the core wine business.3

“Five years ago we had a very extensive strategic planning session, Rajeev.” Kerry said.

I remember traveling from my home in Sonoma County, California just before the Great Recession. At that time, our expectations for company growth, expansion plans and strategic initiatives had to be revised extensively. Here in 2013, however, I am more confident about our plans.4

 

Rajeev replied:

Kerry, our future rate of growth and expansion of operations now appear to lie within a smaller range of possibilities. We are anticipating growth rates of 12 percent to 26 percent per year, compared with 2 percent to 28 percent per year that we experienced prior to 2008. We have diversified significantly, leading to greater stability of revenues and greater confidence of our corporate forecasts. However, while most of our wine industry rivals in developed countries managed to recover from the Great Recession, the Indian wine industry’s subsequent growth has been relatively tepid. The premium wine-drinking segment of the developed world appears to have ‘bounced-back’ more rapidly based on worldwide growth in sales depletions of premium wines.

The only questions to be answered at this meeting are settling on the preferred growth rate and the financing alternatives to achieve that rate of growth. If we position our brands and our diversification into wine tourism correctly, do you believe that the globalization of the wine industry could present us with an opportunity to market our brand and achieve growth at rates surpassing growth of the Indian wine market?

 

THE INDIAN WINE INDUSTRY IN 2013

Consumption of wine was almost entirely an urban phenomenon in India. Over 90 percent of table wine consumption occurred in the cities of Delhi, Mumbai, Kolkata, Chennai and Bangalore, where each luxury international hotel was located. These “islands of affluence” constituted what was called India’s “wine archipelago.” See Exhibit 1 for a map of India. See Exhibit 2 for a map of the Maharashtra state, showing the Nashik wine-growing region where Sula was located.

According to Alok Chandra, an Indian wine expert, the industry weathered and slowly began to recover from a “triple whammy” of adverse events that occurred in or around 2008. 5These events included:

  1. a slowdown in consumer spending due to the worldwide economic recession,
  2. a lingering impact on travel and tourism of the November 2008 Mumbai terrorist attacks as well as subsequent attacks on female tourists, and
  3. a weakening Indian rupee (which had depreciated from Rs 40 to Rs 50 per United States dollar in 2012).

Exhibit 1. Map of India

Source: MapsofIndia.com

Exhibit 2. Map of Maharashtra

Source: MapsofIndia.com

Availability of all wines to the Indian market over the 2008–2012 period is shown in Exhibit 3.

Exhibit 3. Indian Wine Market — Domestic Availability, 2008–2012 (Thousands of 12 x 750 ml cases)

 
2012
2011
2010
2009
2008
Production
1,277
1,222
1,444
1,400
1,300
Imports
488
493
283
199
367
Annual supply
1,765
1,715
1,727
1,599
1,667
Exports
122
123
77
232
192
Domestic availability
1,643
1,592
1,650
1,367
1,475

 

Source: USDA Foreign Agricultural Service (2012), Wine Market Update 2012, Global Agricultural Information Network, December 14.

All alcoholic beverages were subject to the same central and state level regulations in India, at least with respect to controls, taxes and miscellaneous constraints. Some state governments selectively increased excise duties on wine products imported into their states (Maharashtra, Karnataka, Goa, and Delhi). These rising product prices contributed to reduced wine consumption. Domestic consumption of Indian wines peaked in 2008, and in the subsequent years leading up to 2012, consumption had not yet returned to those record levels, as shown in Exhibit 4.

Exhibit 4. Indian Wine Market — Consumption, 2008–2012 (Thousands of 12 x 750 ml cases)

 
2012
2011
2010
2009
2008
Still Wines
 
 
 
 
 
 
Red
 
575.00
 
515.00
 
440.00
 
495.00
 
645.00
White
320.00
285.00
235.50
324.50
440.00
Rosé
55.00
50.00
44.50
45.50
45.00
Total, still wines
950.00
850.00
720.00
865.00
1,130.00
 
 
 
 
 
 
Sparkling
93.50
75.50
61.50
76.00
122.50
Fortified
24.75
22.00
19.50
20.50
27.50
Light Aperitifs
17.50
14.00
11.00
12.50
14.00
Other
365.00
350.00
335.00
300.00
300.00
Total wines
1,450.75
1,311.50
1,147.00
1,274.00
1,594.00

 

Source: Smith, A. (2013), International Wine & Spirits Annual Report, 2013: Indian Country Report.

On the production side, as shown in Exhibit 5, expansion had been erratic and slower growing during the five-year period after 2008, only rebounding in 2012.

Exhibit 5. Indian Wine Market — Locally Produced Wines, 2008–12 (Thousands of 12 x 750 ml cases)

 
2012
2011
2010
2009
2008
Still Wine
730.00
655.00
580.00
740.00
175.00
Sparkling
52.50
42.00
35.00
58.00
22.50
Fortified
22.00
20.00
17.50
19.00
1.50
Light Aperitifs
5.00
5.00
5.00
6.00
5.50
Other
365.00
350.00
335.00
300.00
0.00
Total wines
1,174.50
1,072.00
972.50
1,123.00
204.50

 

Source: Smith, A. (2013), International Wine & Spirits Annual Report, 2013: Indian Country Report.

While the longer-term outlook for the Indian wine industry was favorable, growing from 1.2 million cases in 2008 to an estimated 5 million cases in 2013 and 50 million cases by 2028, near- term challenges were said to be significant. Overhead per bottle of wine sold in India was much higher than for spirits or beer. However, unlike the 20 percent plus growth rates of the early 2000s, industry observers estimated that production and consumption growth for Indian wines would remain in the 10 to 15 percent range, at least out to 2017–2018. 6Imports were also affected by the “trading down” phenomenon and suffered a significant decline since 2009. See Exhibit 6 for 2008 to 2012 data on wine imported to the Indian wine market.

Exhibit 6. Indian Wine Consumption — Imports, 2008-2012 (Thousands of 12 x 750 ml cases)

 
2012
2011
2010
2009
2008
Still Wine
220.00
195.00
140.00
125.00
175.00
Sparkling
41.00
33.50
26.50
18.00
22.50
Fortified
2.75
2.00
2.00
1.50
1.50
Light Aperitifs
12.50
9.00
6.00
6.50
5.50
Total wines
276.25
239.50
174.50
151.00
204.50

 

Source: Smith, A. (2013), International Wine & Spirits Annual Report, 2013: Indian Country Report.

Many Indian wine producers produced lower quality still wines and had more poorly developed marketing strategies than Sula’s.7Prior to the recession in 2008, Sula’s main rivals in India had been Chateau Indage and Grover. Chateau Indage utilized high levels of debt to facilitate a growth via acquisition strategy, leveraging its balance sheet to what proved to be a dangerous level. In 2008 and 2009, as domestic wine demand declined, so did cash flows, and Chateau Indage became insolvent, resulting in a loss of its leading market share to Sula. Grover strengthened its industry position via a merger with Zampa wines in 2012 but was still unable to reach its pre-recession competitive status.8

BUILDING A MORE SUSTAINABLE BUSINESS, 2010-12

From 2010 to 2012, Sula experienced what Rajeev later called the “Great Comeback.” He summarized the moral of the story: “If somebody wants to get on the bandwagon, the pricing had to be right. Once the person is on with the right price, he can climb the ladder.” Yet this was only a part of his strategies for that comeback. His plan was also to persuade Indian consumers to view wine as a social “glue” for a good time rather than as an intoxicant.

SulaFest contributed to expanding consumers’ product awareness, but Rajeev also pointed out on numerous occasions the health benefits of consuming red wine in moderation. These initiatives were used in negotiations with regulators in the federal and local governments concerning permits, tax rates, etc. In discussions with government officials, Rajeev lobbied that taxing wine heavily would hurt grape farmers. Also, growing grapes created rural jobs, an objective critical  to local officials.

Broader economic trends, especially after 2009, contributed to Sula’s successful comeback in production, revenues and profitability. Wine became a preferred drink of growing numbers of young, urban professionals, along with a movement towards “ready to drink” beverages that did not require mixers. Another attribute of wine was that it had a lower alcohol content than hard liquor making it a more food friendly and healthier alternative.

Spearheaded by Sula’s area sales manager Sandhya Suraj, an effort was made to expand its national wine and spirits distribution network during the 2010 to 2012 period. Initially, Sula not only tapped into existing beer and spirits networks for its imported beer (Asahi) but also for its wines. As retailers began to be persuaded to stock wine alongside beer and whiskey, transportation companies were increasingly willing to take smaller additional loads of Sula wines. Rajeev also negotiated links with overseas wine and spirit makers to become an exclusive importer of their brands for India. Sula could offer access to its extensive and growing distribution network so that those brands could ship product into Indian markets in a more cost- effective way.9

“Green Sula”

Rajeev strove to make Sula Vineyards a leader in environmentally friendly winemaking in terms of water use, carbon footprint, recycling, and vermiculture (using worms to compost organic matter). He even had a name for it, “Green Sula.” Most agricultural managers agreed that water was a very precious resource. In order to conserve the water resource, Sula developed drip- irrigation operations in all its vineyards as well as at those of its contract grape growers. These systems reduced irrigation requirements by approximately 50 percent when compared to more traditional flood irrigation. These techniques also reduced soil salinity caused by over irrigation and the pooling of salt laden water. At Sula’s Dindori Vineyard, a water harvesting system was developed that recycled run-off irrigation water directly back to the vineyards. When hillside vineyards were irrigated, excess water hit hard rock underground and was channeled to a reservoir. It was then pumped back into the drip system, reducing water use by 20 percent.

Sula operated state-of-the-art wastewater treatment plants. All wastewater from cleaning and other winery operations was treated and recycled for landscape irrigation. Sula recycled many of the bottles it used. Water from bottling line saturation looped back to a storage tank for re-use. Gray water from restrooms was also treated and re-used. During the annual monsoon season, a rainwater harvesting system kicked into gear, further conserving precious groundwater. Stored rainwater had an added benefit; it did not require softening or filtration, further cutting power costs and reducing waste. Sula’s water saving strategies were shared with contract growers and other wineries in the Nashik region through educational seminars, with future plans to educate and expand water saving practices across India.

In order to reduce Sula’s carbon footprint, power usage per bottle sold was reduced by 30  percent from 2010 to 2012. Fermentation and storage tanks were insulated. All incandescent bulbs were replaced by energy-efficient CFLs. Solar panels were installed for all hot water needs while a heat-exchange system brought warm outlet water from the chilling system to the boiler feed, further reducing power consumption. Sula production engineers analyzed Sula’s energy usage patterns and designed a system that reduced consumption during expensive peak hours and took maximum advantage of rebated off-peak hours. By early 2013, Sula already controlled 1,500 planted vineyard acres, with most operations performed by hand. These strategies minimized tractor use, thus reducing carbon emissions, but also avoided soil compaction by heavy machinery. Compaction degraded soil quality, so these methods contributed to the sustainability of vineyard production.

Another “green” initiative involved recycling glass bottles. The firm arranged to have empty Sula bottles picked up by one of its four recycling centers in Bangalore, Bombay, Delhi, and Goa. They were then sent back to the winery for thorough cleaning and sterilization before beginning a second life as a bottle for Sula’s second label, Samara wine. That’s how Sula kept the sand dunes of Goa glass-free! Another initiative involved “worms and other friendly creatures.” After the grapes were crushed each year, the remaining pomace, composed of stems, seeds and skins, was mixed with manure and turned into rich compost by thousands of wriggly worms in the vermin-compost pits. Vermiculture composting was key to reducing the use of chemical fertilizers, by producing compost so rich that the vineyards would not need any other nutrition. By cutting out chemical usage, the vineyards were transformed into havens for a multitude of birdlife and frogs, indicators of a thriving eco-system.

Diversification

One major thrust for Sula over the 2010 to 2012 period was to grow winemaking capacity. A second thrust was to fund Sula’s diversification into the Hospitality marketplace, in order to add stability to revenues. Rajeev recalled:

Our Little Italy restaurant, opened back in 2009, has been doing quite well recently, especially with upgrades to the Nashik highway, especially from Mumbai. Little Italy is India’s first vineyard restaurant, a partnership between Sula and Little Italy, India’s most popular Italian restaurant chain. Food and beverages are served Mediterranean style in this 50-seat facility. Our 2,000 square foot tasting room has also been a tremendous success in introducing visitors to our wine portfolio and generating growing revenues from direct sales. Designed by a California architect and located atop the Nashik winery, it provides spectacular 180-degree views of the vineyards and surrounding lakes and hills.

Our open-air Greek-style amphitheater, where SulaFest is held, is set in the middle of Sula’s estate vineyards. It is also suitable for weddings, parties, art exhibitions, commercial events and shows, theatrical performances, banquet catering, etc. The amphitheater is located next to the Little Italy and Soma (Indian) restaurants. Also nearby is Vinoteca @ Sula, a wine bar inspired by Spain’s quaint neighborhood wine bars that serve wine cocktails, tapas (small plates), and pintxos (Basque-style skewered appetizers) prepared by a Spanish chef. With 1,600 square feet and a 50- seat capacity, Vinotecha provides visitors with an authentic, healthy, affordable, and very social atmosphere to enjoy traditional Spanish dishes matched with Sula wines.

Also important to our hospitality strategy has been our three-bed bungalow, Beyond, designed for guests who would like to stay in the area for a few days. With capacity utilization reaching over 90 percent in the last year, perhaps an expansion of this extended stay strategy should be explored in more detail. While not a high priority under current austerity conditions, in a year or two, this plan should be revisited and explored in more detail. I have estimated that more than 100,000 visitors can be expected this year in the Nashik region.

 

These initiatives were financed by internally generated cash flow, company borrowings, and sales of equity to both Indivision India Partners in 2010 and to Verlinvest S.A., a Belgian family owned investment holding company (USD 15 million) in 2011. Funds raised from these sales of equity were allocated to double the capacity of Sula’s winemaking operations.

Specifically, funds were used to (1) plant an additional 1,000 acres of grapes out to 2015, in order to bring the total number of acres under vine to 2,200; (2) finance the construction of Sula’s new 2 million liter winery at Pimpane, near Nashik; and (3) increase staff counts to nearly 300 in order to run the new winery. After this infusion of capital, the Samant family’s ownership position was reduced to 50 percent.

By 2011 and 2012, Sula’s revenues had grown significantly faster than those of the Indian wine market, resulting in annual increases in Sula’s market share. Product pricing had stabilized and “premiumization” — consumers trading –up in prices paid for table wines — allowed Sula to increase prices slowly on its higher priced brands, while sales volumes continued to rise.

Sula’s 2008 to 2012 income statements and balance sheets are shown in Exhibits 7 and 8. Sula’s 2009 to 2012 statements of cash flow are shown in Exhibit 9.

Exhibit 7. Sula Vineyards —Income Statements, 2008–2012 ($000 omitted)

FY March 31
2012
2011
2010
2009
2008
Revenues
$24,473
$19,378
$14,313
$11,054
$9,714
Less: Cost of Goods Sold
 
 
 
 
 
Purchases
6,114
4,916
4,034
3,121
3,020
Mfg. & Operating
4,264
3,019
2,226
1,708
1,528
Direct Labor
3,207
2,850
1,892
1,409
1,143
 
 
 
 
 
 
Total COGS
13,585
10,785
8,152
6,238
5,691
 
 
 
 
 
 
Gross Margin
10,888
8,593
6,161
4,816
4,023
 
 
 
 
 
 
Advertising Expenses
1,912
1,498
1,224
1,364
1,022
Selling & Marketing
2,729
2,206
1,589
1,412
1,151
Sales Tax
1,403
1,062
877
783
721
Total Expenses
6,044
4,766
3,690
3,559
2,894
 
 
 
 
 
 
EBITDA
4,844
3,827
2,471
1,257
1,129
 
 
 
 
 
 
Depreciation
929
712
404
298
289
 
 
 
 
 
 
EBIT
3,915
3,115
2,067
959
840
 
 
 
 
 
 
Interest
1,721
1,367
1,123
606
324
 
 
 
 
 
 
Profit Before Tax
2,194
1,748
944
353
516
 
 
 
 
 
 
Tax (10%)
219
175
94
35
52
 
 
 
 
 
 
Net Income
1,975
1,573
850
318
464

 

Source: company reports.

Exhibit 8. Sula Vineyards — Balance Sheets, 2008–2012 ($000 omitted)

FYE March 31
2012
2011
2010
2009
2008
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash
$512
$427
$353
$252
$246
Accounts Receivable
5,276
4,166
3,710
2,646
2,433
Inventories
17,145
12,981
9,802
8,075
7,812
Loans & Advances
882
766
781
644
856
 
 
 
 
 
 
Total Current Assets
$23,815
$18,340
$14,646
$11,617
$11,347
Fixed Assets
 
 
 
 
 
Property, Plant & Equipment
12,816
10,647
8,673
6,304
5,476
Less: Accum. Deprec. & Amort.
2,787
1,858
1,146
742
444
 
 
 
 
 
 
Property, Plant & Equipment, net
$10,029
$8,789
$7,527
$5,562
$5,032
 
 
 
 
 
 
Other Assets
136
107
96
83
81
 
 
 
 
 
 
Total Assets
$33,980
$27,236
$22,269
$17,262
$16,460
 
 
 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Accounts Payable
$1,076
$812
$606
$510
$447
Other Liabilities
426
322
215
166
112
Notes Payable (Bank)
9,499
8,525
6,889
6,860
6,675
Accrued Expenses
1,114
887
642
549
471
 
 
 
 
 
 
Total Current Liabilities
$12,115
$10,546
$8,352
$8,085
$7,705
 
 
 
 
 
 
Secured Loans (Net)
8,800
7,600
6,400
4,700
4,600
Deferred Tax Liability (Net)
 
 
 
10
6
 
 
 
 
 
 
Total Long Term Commitments
8,800
7,600
6,400
4,710
4.606
 
 
 
 
 
 
Equity
 
 
 
 
 
Share Capital
600
500
500
300
300
Capital Surplus
7,700
5,800
5,800
3,800
3,800
Retained Earnings
4,765
2,790
1,217
367
49
 
 
 
 
 
 
Total Equity
$13,065
$9,090
$7,517
$4,467
$4,149
 
 
 
 
 
 
Total Liabilities and Equity
$33,980
$27,236
$22,269
$17,262
$16,460

 

Source: company reports. 

Exhibit 9. Sula Vineyards — Statements of Cash Flow, 2009–2012 ($000)

 
2012
2011
2010
2009
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net Income
$1,975
$1,573
$850
$318
Depreciation
929
712
404
298
Increase in Receivable (Net)
1,110
456
1,064
213
Increase in Inventories
4,164
3,179
1,727
263
Increase in Loans and Advances
116
(15)
137
(212)
Increase in Accounts Payable
264
206
96
63
Increase in other Liabilities
104
107
49
54
Increase in Bank Notes Payable
974
1,636
29
185
Increase in Accrued Expenses
227
245
93
78
 
 
 
 
 
Net Cash Provided (used) by Operating Activities
(917)
859
(1,407)
732
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Purchase of Property, Plant and Equipment
2,169
1,974
2,369
828
Other Assets
29
11
13
2
 
 
 
 
 
Net Cash used for Investing Activities
(2,198)
(1,985)
(2,382)
(830)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Increase (Decrease) from Secured Loans
 
 
1,200
 
 
1,200
 
 
1,700
 
 
100
Increase (Decrease) from Deferred Tax Liabilities
 
 
(10)
4
Increase (Decrease) in Share Capital
100
 
200
 
Increase (Decrease) from Capital Surplus
1,900
 
2,000
 
 
 
 
 
 
Net Cash Provided (used) for Financing Activities
3,200
1,200
3,890
104
 
 
 
 
 
Net Change in Cash
84
74
100
6
Cash at the Beginning of the year
427
353
252
246
Cash at the End of the year
$512
$427
$353
$25

 

Note: numbers may not agree due to rounding.

Source: company reports.

FUTURE SCENARIOS

At the April 2013 meeting, the two co-founders, Rajeev and Kerry, were joined by Sula’s general manager of winery operations, Rohan Shahi, as well as by area sales manager, Sandhya Suraj. Rajeev reportedly began the meeting by sounding a familiar optimistic note, “We are moving in the right direction, to generate benefits for all of our stakeholders.”10Rajeev then shared more granular revenue data by varietal wine and by activity with his team, as shown in Exhibits 10-14.

Exhibit 10. Sula Vineyards — Annual Sales by Varietal Wine, in cases, 2008–2012

 
2012
2011
2010
2009
2008
Wine Categories
 
 
 
 
 
Whites
 
 
 
 
 
Sula Sauvignon Blanc
29,800
26,600
24,700
25,300
24,200
Sula Chenin Blanc
38,300
36,000
28,000
24,200
21,800
Dindori Reserve Vi ogni er
2,500
2,200
2,000
1,600
1,200
Samara White
25,700
22,400
18,000
13,000
11,400
Madera White
21,100
14,300
8,900
6,200
-
Dia White
20,800
15,100
9,200
4,800
-
Total Whites
138,200
116,600
90,800
75,100
58,600
 
 
 
 
 
 
Reds
 
 
 
 
 
Sula Cabernet Shiraz
68,600
53,400
39,600
28,500
27,600
Sula Zinfandel
7,750
4,900
4,500
5,000
6,000
Dindori Reserve Shiraz
9,800
6,300
3,500
1,500
1,000
Merlot
23,600
18,200
14,700
12,600
11,400
Sula Grenache Shiraz
7,700
6,100
3,000
1,200
1,000
Samara Red
27,300
21,400
14,100
7,200
4,800
Madera Red
36,400
31,400
24,200
17,600
15,700
Sula 1000
96,600
70,900
35,300
30,500
45,500
Total Reds
277,750
212,600
138,900
104,100
113,000
 
 
 
 
 
 
Rosé
 
 
 
 
 
Sula Zinfandel
8,700
6,200
3,700
2,000
2,000
Madera Rose
3,900
3,100
2,100
1,000
-
Total Rosé
12,600
9,300
5,800
3,000
2,000
Dessert
 
 
 
 
 
Late Harvest Chenin Blanc
2,700
2,600
2,300
2,000
3,000
 
Sparkling
 
 
 
 
 
Sula Brut
24,500
20,700
17,500
12,000
11,000
Sula Seco
10,200
8,200
4,700
2,600
-
Total Sparkling
34,700
28,900
22,200
14,600
11,000
Total Cases
465,950
370,000
260,000
198,800
187,600
Winery Capacities
 
 
 
 
 
Cases
500,000
416,666
316,666
216,666
216,666
Liters
4,500,000
3,750,000
2,850,000
1,950,000
1,950,000
Bottles
6,000,000
5,000,000
3,800,000
2,600,000
2,600,000

 

Source:  Company reports.

Rohan had a suggestion to make from an operational perspective: “A hiring freeze on personnel seems reasonable, at least for now. Vineyard expansion could be put on hold. All elements of ‘cost’ might also be examined critically.”

Sandhya also weighed in from the sales and distribution side:

Over the years, we have developed an extensive and sophisticated distribution system for our own products. Since we are using this system to sell a growing variety of imported wine from Chile, Australia, Italy, and the United States, could it also be used for other “beverages” that might sell well in India?

 

Exhibit 11. Sula Vineyards — Annual Revenues by Varietal Wine, per case, 2008–2012

Wine Categories
2012
2011
2010
2009
2008
White wines
 
 
 
 
 
Sula Sauvignon Blanc
$59.20
$58.90
$58.70
$56.60
$57.60
Sula Chenin Blanc
56.40
56.20
55.60
54.20
54.60
Dindori Reserve Viognier
67.80
67.60
67.10
66.70
66.60
Samara White
27.70
27.40
27.20
26.80
26.40
Madera White
34.60
34.40
34.30
33.50
0.00
Dia White
32.70
32.70
32.20
30.70
0.00
Average Whites
51.55
52.31
51.30
52.04
55.50
Red wines
 
 
 
 
 
Sula Cabernet Shiraz
67.70
64.80
63.70
62.30
62.20
Sula Zinfandel
59.40
58.20
57.90
56.60
57.70
Dindori Reserve Shiraz
84.80
83.20
80.90
78.60
78.20
Merlot
65.30
63.10
62.30
61.40
61.30
Sula Grenache Shiraz
38.60
38.40
37.90
35.50
35.10
Samara Red
28.10
27.80
27.60
27.10
26.80
Madera Red
34.70
34.50
34.40
33.70
19.40
Sula 1000
19.90
19.60
19.50
19.40
19.40
Average Reds
61.30
66.96
60.06
60.11
60.62
Rosé wines
 
 
 
 
 
Sula Zinfandel
59.80
59.20
58.70
58.30
58.10
Madera Rosé
34.50
34.30
34.20
33.40
0.00
Average Rosé
47.15
46.75
46.45
45.85
29.05
Dessert
 
 
 
 
 
Late Harvest Chenin Blanc
47.20
46.60
46.30
44.60
45.30
Sparkling
 
 
 
 
 
Sula Brut
69.80
68.70
67.90
65.70
65.60
Sula Seco
61.20
60.90
60.60
60.20
 
Average sparkling
65.50
64.80
64.25
62.95
65.60

 

Source:  Company reports.

Sandhya also reminded the team about Sula’s 2007 decision to import Asahi beer from Japan. This was the 9th largest beer brand in the world and another premium beverage for the Indian marketplace. More recently, Mateus, a Portuguese wine, had been added to Sula’s product portfolio. A variety of single malt whiskeys and vodkas were also under consideration for addition to Sula’s roster of alcoholic beverage imports. Over 60 percent of company revenues were now being generated by wine sales to pubs, bars, caterers, restaurants and five-star hotels.

Kerry had brought along a handout of his own to share, which included some specific guidelines for the management team to evaluate (see Appendix A and supporting tables). Each guideline included the projected portfolio mix of wine brands and other activities, as well as his pricing and forecasting assumptions. From these revenue streams, guidelines for expected growth in expenses would aid the development of pro forma income statements. Kerry provided estimates for Sula’s future assets and liabilities accounts to help the team construct pro forma balance sheets. Once these projections were agreed upon, the team would be able to estimate Sula’s ability to generate future internal cash flows. The final step in the process would be to estimate the amount and composition of external financing that would be needed to support asset expansion. These plans and projections would later need to be presented to Sula’s board of directors, in order for them to determine the most advantageous path for Sula’s future growth, how to finance that growth, and Sula’s eventual position in the future development of the Indian wine industry.

Exhibit 12. Sula Vineyards — Revenues by Product Category, 2008–2012

Wine Categories
2012
2011
2010
2009
2008
White wines
 
 
 
 
 
Sula Sauvignon
Blanc
 
$1,764,160
 
$1,566,740
 
$1,449,890
 
$1,431,980
 
$1,393,920
Sula Chenin Blanc
2,160,120
2,023,200
1,556,800
1,311,640
1,190,280
Dindori Reserve
Viognier
 
169,500
 
148,720
 
134,200
 
106,720
 
79,920
Samara White
711,890
613,760
489,600
348,400
300,960
Madera White
730,060
491,920
305,270
207,700
 
Dia White
680,160
493,770
296,240
147,360
 
Total Whites
6,215,890
5,338,110
4,232,000
3,553,800
2,965,080
Red wines
 
 
 
 
 
Sula Cabernet Shiraz
4,644,220
3,460,320
2,522,520
1,775,550
1,716,720
Sula Zinfandel
460,350
285,180
260,550
283,000
346,200
Dindori Reserve
Shiraz
 
831,040
 
524,160
 
283,150
 
117,900
 
78,200
Merlot
1,541,080
1,148,420
915,810
773,640
698,820
Sula Grenache
Shiraz
 
297,220
 
234,240
 
113,700
 
42,600
 
35,100
Samara Red
767,130
594,920
389,160
195,120
128,640
Madera Red
1,263,080
1,083,300
832,480
593,120
304,580
Sula 1000
1,922,340
1,389,640
688,350
591,700
882,700
Total Reds
11,726,460
8,720,180
6,005,720
4,372,630
4,190,960
Rosé wines
 
 
 
 
 
Sula Zinfandel
520,260
367,040
217,190
116,600
116,200
Madera Rosé
134,550
106,330
71,820
33,400
 
Total Rosé
654,810
473,370
289,010
150,000
116,200
Dessert
 
 
 
 
 
Late Harvest Chenin
Blanc
 
127,440
 
121,160
 
106,490
 
89,200
 
135,900
Sparkling
 
 
 
 
 
Sula Brut
1,710,100
1,422,090
1,188,250
788,400
721,600
Sula Seco
624,240
499,380
284,820
156,520
 
Total sparkling
2,334,340
1,921,470
1,473,070
944,920
721,600
Total revenues,
wine
 
$21,058,940
 
$21,058,940
 
$12,106,290
 
$12,106,290
 
$8,129,740

 

Source:  Company reports.

Exhibit 13. Sula Vineyards — Volume / Price Relationships, 2008–2012

 
2012
2011
2010
2009
2008
Volume (cases)
17,760
13,320
10,140
8,976
7,712
Average Price
$57.04
$56.24
$55.38
$58.25
$56.53
Revenue
$1,013,030
$749,117
$561,553
$522,852
$435,959

 

Source:  Company reports.

Exhibit 14. Sula Vineyards — Revenues by Activity, 2008–2012

 
2012
2011
2010
2009
2008
Wine sales (domestic
production)
 
$21,058,940
 
$16,574,290
 
$12,106,290
 
$9,110,550
 
$8,129,740
Wine sales (imports)
1,013,030
714,117
561,553
522,852
435,956
Beer sales (imports)
1,178,490
963,814
726,530
686,200
548,000
Hospitality revenues
(food & lodging)
 
1,222,099
 
1,125,516
 
918,937
 
734,330
 
599,954
Total revenues
$24,472,559
$19,377,737
$14,313,310
$11,053,932
$9,713,650

 

Source:  Company reports.

 

Wrapping up the team meeting, Rajeev reminded the others that he expected to continue to be extremely active in promoting Sula Vineyards and the Indian wine industry, now almost one and one-half decades old. Stanford Magazine had once dubbed him the “Mondavi of Mumbai,” and more recently, he had begun calling himself a “wine evangelist” for the Indian industry. 11 Showing no signs of slowing down in his support for sustainable growth in both Sula’s and India’s wine demand, in the back of his mind, he wondered how rapidly Sula revenues, from both wine products and wine tourism, would grow over the next few years, and what level of financings would be needed to support that growth.

ENDNOTES

1 For more information about Sula Vineyards’ early challenges and its evolution to 2008, see Lopez, R. H., Gilinsky, A., & Shah, J. (2008), “Sula Vineyards”, Case Research Journal, 28(3/4), Summer/Fall, 17-40.

2 Maharashtra and Nashik tourism information can be obtained from: https://www.maharashtratourism.gov.in/destination/nashik, retrieved March 15, 2016.

3 For more information about Sula Vineyards’ diversification activities since 2008, see Narasimhan, A. and Dogra, A. M. (2011), “Developing India’s Taste For Wine,” The Financial Times, December 5.

4 All quotations from company principals are based on e-mail correspondence with case author and facts were later verified by Shardul Ghogale, Senior Manager, International Business, Sula Vineyards.

5 Chandra, A. (2016), “The Business of Wine,” Business Standard, March 5, retrieved from http://www.business- standard.com/article/beyond-business/the-business-of-wine-116030401522_1.html , accessed March 6, 2016.

6 Mahathi, A. R. (2012), “How Sula Got It Right,” August 1, retrieved from: http://www.thesmartceothe.in/index.php?option=com_content&view=search, accessed June 1, 2015.

7 Chandra, A. (2014), “Investment Required in Wine,” Business Standard, July 26, retrieved from: http://www.business-standard.com/article/beyond-business/investment-required-in-wine-114072501471_1.html, accessed June 1, 2015.

8 Chandra, A. (2014), “The Rise and Return of Grover Vineyards,” Business Standard, November 1, retrieved from: http://www.business-standard.com/article/beyond-business/the-rise-and-return-of-grover-vineyards- 114103101609_1.html, accessed June 1, 2015.

9 Narasimhan and Dogra (2011), op. cit.

10Ibid.

11 Rigoglioso, M., (2004), “The Mondavi of Mumbai,” Stanford Magazine, January/February.

Appendix A

Kerry Damskey’s Pricing and Production Forecasts

My Expectations for Sula Vineyards’ Financial Performance over the Next Five Years: Three Alternative Plans

Pursuant to our recent conversation concerning the future operations and financial performance of Sula Vineyards, the data in Table A-1 below have been prepared to analyze prospects for the marketing of our current product portfolio. While new wines may be designed, produced and sold in future years, they have not been included in this report, because of uncertainty as to timing and brand type. Prospects for the pricing of our Indian wine portfolio appear bright. Demand is growing very rapidly, but our market penetration remains quite small. Therefore, steadily rising price realizations at moderate rates would appear to be quite reasonable. In recent years, prices have been firm, and there is every reason to expect this strength to continue. Any price increases above these rates would not adversely affect quantity demanded, and, therefore, could only enhance projected cash flows. With respect to production growth, three alternative sets of rates in Table A-1 are provided for discussion. The choice of which one to follow will be based on market demand as well as resource utilization of our asset portfolio and the ability to continue to expand production in an efficient and effective manner. Financing sources will also play key roles in our final decision.

Table A–1. Sula Vineyards — Product Category Pricing and Production Assumptions, 2013-2017

Growth rate in production
 
Wine Categories
Growth rate in unit
prices
Scenario
A
Scenario
B
Scenario
C
White wines
 
 
 
 
Sula Sauvignon Blanc
2.5%
6.0%
14.0%
23.0%
Sula Chenin Blanc
3.0%
6.0%
14.0%
23.0%
Dindori Reserve Viognier
3.0%
10.0%
15.0%
20.0%
Samara White
2.1%
12.0%
18.0%
24.0%
Madera White
2.5%
12.0%
18.0%
24.0%
Dia White
3.0%
10.0%
15.0%
20.0%
Red wines
 
 
 
 
Sula Cabernet Shiraz
2.5%
15.0%
20.0%
25.0%
Sula Zinfandel
2.0%
15.0%
20.0%
25.0%
Dindori Reserve Shiraz
3.0%
10.0%
15.0%
20.0%
Merlot
2.5%
15.0%
20.0%
25.0%
Sula Grenache Shiraz
2.5%
20.0%
25.0%
30.0%
Samara Red
2.5%
20.0%
25.0%
30.0%
Madera Red
2.5%
12.0%
18.0%
24.0%
Sula 1000
3.5%
20.0%
28.0%
36.0%
Rosé wines
 
 
 
 
Sula Zinfandel
3.0%
10.0%
15.0%
20.0%
Madera Rosé
2.5%
12.0%
18.0%
24.0%
Dessert
 
 
 
 
Late Harvest Chenin Blanc
4.0%
15.0%
20.0%
25.0%
Sparkling wines
 
 
 
 
Sula Brut
3.0%
10.0%
15.0%
20.0%
Sula Seco
3.5%
15.0%
20.0%
25.0%

 

Source:  Company reports.

After we examine the market for Indian wines and project possible revenue growth streams, based on acceptance and extrapolation from Table A-1 data, we can generate alternative financial forecasts of income statements and balance sheets for Sula Vineyards. A number of assumptions have been incorporated into Tables A-2, A-3, A-4, and A-5, such as the changing product mix towards more red wines and economics of scale and scope as the firm grows. Note: The impact of each growth plan can only be finalized after pro forma statements have been generated and analyzed.

Table A–2. Sula Vineyards — Assumptions For Pro Forma Income Statements (Items as a percentage of revenues).

Scenario
A
B
C
Revenues for each business segment:
 
 
 
Domestic wines
 
 
 
Imported wines
 
 
 
Beer sales (imports)
 
 
 
Hospitality
 
 
 
Cost of Goods Sold
 
 
 
Purchases
25.0%
24.5%
24.0%
Manufacturing and Operating Expenses
18.0%
17.0%
16.0%
Direct labor
13.0%
12.7%
12.5%
Advertising
8.0%
7.8%
7.7%
Sales and marketing
11.3%
11.0%
10.8%
Sales taxes
6.0%
6.0%
6.0%
Interest and financing costs
(7% of average borrowings)
Depreciation
(See balance sheet)
Provision for taxes
(10% of net income)

 

Source:  Company reports.

Table A–3. Sula Vineyards — Assumptions For Pro Forma Balance Sheets (Items as a percentage of revenues)

Scenario
A
B
C
Cash
2.1%
2.0%
1.9%
Accounts Receivable
22.0%
23.0%
24.0%
Inventories
71.0%
73.0%
75.0%
Loans and Advances
4.0%
4.0%
3.9%
Fixed Assets
 
 
 
Property, Plant and Equipment
55.0%
56.0%
57.0%
Accumulated Depreciation
12.0%
11.5%
11.0%
Net Property, Plant and Equipment
43.0%
44.5%
46.0%
Other Assets
0.6%
0.6%
0.6%
 
 
 
 
Accounts Payable
4.5%
4.6%
4.8%
Other Liabilities
1.8%
1.9%
1.9%
Accrued Expenses
4.6%
4.8%
5.0%
 
 
 
 
Additional Funds Needed (AFN)
[“Plug figure”]
Secured Debt (percentage of net PP&E)
79.0%
81.0%
83.0%

 

Source:  Company reports.

Table A–4. Sula Vineyards — Import Sales and Net Revenue Forecasts, 2013–2017

 
2013
2014
2015
2016
2017
 
Cases of wine sold
 
21,200
 
24,380
 
26,860
 
29,700
 
32,430
Revenue per Case
$57.54
$58.14
$58.78
$59.32
$59.85
Import Revenue
$1,219,848
$1,417,453
$1,578,830
$1,761,804
$1,940,936
 
Beer Revenue
 
$1,414,188
 
$1,640,458
 
$1,902,864
 
$2,188,200
 
$2,494,600

 

Source:  Company reports.

Table A–5. Sula Vineyards — Assumptions For Hospitality Revenues, 2013–2017

Available Rooms
45
Capacity Utilization
(Occupancy rate, percent)
60 percent  in 2013
Rising by 5 percentage points per year to reach 80 percent in 2017
Room Prices
(Revenue per average room or RevPar)
$145 in FY 2013
Increasing by $3, $4, $5 and $6 per year to $163 in 2017
Food & Beverage Revenues
$340,000 in FY 2012
Growing by 15 percent per year through 2017

 

Source:  Company reports.