GAN EDEN Proposal:  Business Assumptions

In order to forecast the financial needs of this start-up, I needed to make certain assumptions.  When I was getting started in wine making, there were several basic rules-of-thumb under which the wine industry operated.  They were good assumptions then, and I believe they are good now for the purposes of projections, but may not reflect the actualities of the future:

1. The cost of grapes is approximately 1/3 of the finished cost of the wine.
2. A ton of grapes produces 150 gallons of finished wine, equivalent to 63 cases.  I have seen grapes produce far less, as little as 125 gallons per ton (52.5 cases of finished wine), but with lees recovery I have also seen significantly greater yields, 66 or even 68 cases per ton.
3. The retail price of the wine was based upon the cost of the grapes, such that the retail price per bottle is the (cost-of-grapes-per-ton)divided by 100.  In other words, grapes that were $2500 per ton yielded wines that were priced at $25/bottle.  That was not actually the winery's formula, but that was the formula often used by grape growers to assess whether they were setting their prices properly, so in a backwards way, it was eventually reflected in wine prices.  Of course, this was based upon purchasing fruit from independent growers, or fruit available from other wineries beyond that other winery's projected needs.  It follows that even with the extremely high costs of initially establishing a vineyard, the cost of growing those grapes over the long term should be significantly lower than the cumulative prices charged for those grapes, thus introducing potential cost savings to the winery that grows its own fruit and prices its wine as if it had purchased that fruit.
4. The tiers of the distribution channel had prices reflected by the retail price of the wine.  A winery would sell its wine to a distributor for half the retail price to consumers, a retailer would purchase its wine from the distributor (or directly from the winery) for 2/3 the price it charged to consumers.  The distributor would cover the costs of both transportation of the wine from winery (or consolidation warehouse) to the distributor's warehouse, and transportation from its warehouse to the location of the retailer to whom it sold its wine.

• Example:  Winery would sell wine to distributor for $150/case ($12.50/bottle).  Distributor would sell that same case to a retailer for $16.67, a 33% markup (25% gross margin on sales), and the retailer would sell that bottle of wine to a consumer for $25, a 50% markup or 33% gross margin on sales.

I needed to make additional assumptions as well:

1. Any wine, once released to the marketplace, can be sold within one calendar year.  This is no matter how much of it is produced.  Anyone in the industry understands that this does not always happen.  When it doesn't, it requires sensitivity on the part of the winery to modify business plans to reflect an inventory backup, but since no wine has an infinite shelf-life, it is incumbent upon the winery to identify a means of controlling inventory to mitigate the backup, and match production and sales for the future.  (This is a problem I had with the original GAN EDEN, when I suffered tremendous success with our first vintage of Cabernet Sauvignon, the 1986 vintage, only to initially have far more limited success in selling our subsequent vintages, and then carrying tremendous inventories of older wine at a time when the industry had largely moved to new vintages on the shelves, thereby making the vintages I was selling less attractive.  My Cabernet Sauvignons were uniformly excellent, and eventually the wine was sold, but I learned my lesson the hard way. My proposal reflects smaller initial production than in GAN EDEN's previous iteration.)
2. Categories I chose for allocations are very broad, because I did not have the time or patience to break every category down into component parts, but my belief it that they reflect appropriate values.
3. Sometimes money from one allocated category can, if necessary, be appropriated for another.  Values reflected are rough, only for the purposes of this initial projection, and will be sharpened and honed as the business take shape in reality.
4. Overall annual cost projections are reasonable for these purposes. That is my belief, based upon 28+ years of experience.  I don't believe that a typical 5000 case winery will require an annual budget of $800,000, exclusive of equipment costs, but it is reasonable to assume it for the purposes of this projection.
5. This projection reflects production of equivalent amounts of wine in 5 basic categories.  As the business grows, those categories may be populated by more than 1 wine per category.  Initially, I see each category populated by 1 wine per category.  In the future, a disproportionate amount of wine could be produced in some categories relative to others.  This could skew the cash flow projections, if such wines were released at times other than those indicated in the initial projections.