Case Analysis: “Sula Vineyards”

Case Analysis: “Sula Vineyards”

                                                                                                            

Abstract

The Sula Vineyards (Sula) case analyzed strategic and financing decisions in the context of a growing Indian wine industry. The case analyze the the entrepreneurial experience of entrepreneur Rajeev Samant a native of India who had previously completed graduate studies in engineering at Stanford University, worked for Oracle in Silicon Valley, and subsequently returned to his homeland in 1997 to create Sula Vineyards in India. Sula Vineyards was a pioneer in creating wine brands and developing sufficient volumes of products to meet the growing domestic demand for Indian wine. This case further analyze what is need to do before establishing any company.  SWOT analysis, Industry analysis of wine market, strategic analysis, financial analysis and global environment analysis determine the success rate of industry. At the beginning he had very difficult time to meet breakeven point but his past experience helped him to go right way for that Rajeev had sold a 33% stake in Sula in return for a private equity investment in 2005. The case described the critical factor that drive him to the success, challenges his faced, and type of industry he wanted to penetrate.

Entrepreneurial experience of Rajeev Samant:

Rajeev Samant is one of the oracle’s youngest financial managers who earned master’s degree in industrial engineering from Stanford in 1990. The news to ease trade barriers of India with the rest of the world motivate Rajeev to do his own business in India and finally it turns into as Sula Vineyard wine industry. The story begin from on his own land which is situated at gently rolling hills, a large lake and have rich clay soil. His first experiment with agriculture entailed planting and harvesting mangos followed by Thompson seedless grapes. Most of the grapes are used for making honey and other purpose. Nobody thinks to make wine from grapes.

The idea came to him “if table grapes would grow there why not grapes for wine” then he did extensive research on grapes needed to make wine. He did various analysis to establish the Sula vineyards industry. It remains a major challenge to be able to even maintain market share when the Indian wine industry is experiencing revenue growth at 30 percent per year and beginning to export wines to North America and Western Europe. Merely to remain a “major player” in the Indian wine industry will be a challenge for Sula Vineyards. He made various strategy to short out the challenges and APEDA’S country wine promotion strategies included easing trade barriers and developing an awareness of Indian wine helped Sula’s wine to go globally. The five year financial data shows that the first two year the company are in lost as establishing industry require a lot of investment but due to the consistent improvement and by making partnership with other company it helps to earn net income after taxes in 2007 is $195,000

Driving global demand for Indian wine:

·         The Indian government showcase “wines of India” across the globe open the opportunity to do business globally across the USA, France, Italy, Germany and the UK Singapore.

·         APEDA’S country wine promotion strategies included easing trade barriers and developing an awareness of Indian wine motivate Rajeev to expand his business

·         Regulation of Maharashtra promote the winemaking as a food processing industry, which deduce excise duty and tax from wine.

The above all the factor have direct impact on the success of Sula’s industry. Sales are slow for six months. The original winery had a capacity of 150.000 liters per year. At the year of 2006 it reached 1.6 million liters per year. His decision to design wines to meet global standard of taste and quality makes him success. He formed Wine board to encourage the wine industry of India.

Some of Challenges Rajeev faced:

·         Rajiv determine he wants to establish the industry but to do he doesn’t have knowledge of wine industry. The main challenges to learn the process of making wine

·         The climate provide a major challenges for Rajeev dream. Dusty heat and dryness possess challenges.

·         Some adjustment needed to make to grow the grapes in the land. The soil needed to be graded into slope.

·         The main challenged the Sula’s faced is in registration process. The law and regulation at that time doesn’t promote the wine industry and he faced a lot of challenges and licensing and planning permission takes so much time.

·         The target market is local though the quality is high class. To maintain it the pricing strategy is one of major challenging task.

·         Rajeev noted that winemaking was a challenging blend of art and science, a complicated process, from growing the raw materials, to processing, packaging, marketing and financing.

SWOT analysis of Sula Vineyards:

Although wine is a relatively new beverage being consumed in India, consumption growth has been explosive in the last five years. By adopting the strategy of going globally, Rajeev faced so many challenges but it also creates new opportunity to set up Sula’s wine as branded wine in the world. Rajeev has been at the forefront of this movement, and Sula’s portfolio of brands has been carefully designed to meet evolving domestic tastes and performances as well as those of more developed wine markets around the world.

Strength:

• Team up with experienced management and consultants teams like Kerry and his firm.
• Availability of Locally supported raw material and further good relationship with farmer and other foreign distributor of grapes helped him to success.
• Proper Sula financial strategy to maintain growth in industry.

§  Successful marketing strategy of industry

• Expanding market strategy to go globally and to be number 1 wine industry in India
• The product portfolio and brand , quality is main strength of industry

Weakness:

• Not sufficient capital to sustain growth strategy, to maintain it he takes loan from bank.
• Growing globally require a lot investment as it makes decline net worth to total assets ratio.
• Inventory management is one of the weakness of industry.
• Weak distribution strategy. The average price of a case of wine is about about $4.80 per bottle, whereas the average selling price of a bottle in retail is around $13-$15.

Opportunity:

·         Indian wine market is growing industry so there is high potential to growth.

·         The laws and regulation promote a business to go globally. So Sula have an opportunity to expand worldwide as braded wine.

·         The climate for growing grapes is suitable as it creates opportunity to produce other type of wine too.

·         The people taking wine as daily meal and their living standard is rising. It will increase consumption of wine. Such that there is more opportunity to take growth strategy.

Threat:

§  The potential threat for Sula’s industry in expected entry of other wine industry into Indian wine market as there is already other big competitor like Constellation Brands, Gallo, Diageo, Seagram’s, Fosters, etc.

§  The changing weather is threat for producing raw material i.e. grapes for producing wine.

§  Government rule and regulation about wine distributing channel and their policy.

§  Imbalances between wine production and demand

§  Effects of diseases and pests on grape vines

Sula’s financial strategy analysis:

Rajeev formed Sula vineyards with $1 million. The firm’s equity was 200,000 shares at $1 each by taking loans from diverse group. Due to successful marketing strategy and because of expert team Sula’s continue to growth. Sula’s balance set seemed to be in need of strengthening. Sula’s financial strategy shows that GEM purchased 33% of Sula’s share. It helps Sula’s as he got partners who have the right experience.

 Estimated income statement

The estimated income statement shows that net result has been an increase in profits before interest and depreciation. The first two years net income after taxes is in negative because of it require a lot of investment initially.  Sula has shown growth in net income in each of the last three years. While profit margins remain quite small, the trend implies that they are improving, thereby enhancing the enterprise value of the Sula entity.

Estimated balance sheet:

The balance sheet shows that at the year 2003 the Sula hold total current asset of $ 1,072.000 while the total current liabilities is $ 937,000. It’s because it is the year when the Sula started to produce wine and for that it require a lot of infrastructure. At the end of year 2007 their retained earnings is (415) as it require investment to support growth strategy.  By 2007, loans were growing once again, as internally generated cash flows remained too small to support the firm’s rapid growth in revenues with the concomitant asset needs required to support growth.

Estimated statement of cash flow:

The cash flow of Sula vineyards shows cash remaining at the end of year is in increasing order. That shows the industry is growing and making a balance between cash in and out. The data shows that the net cash used for investing activities is high in the year of 2006. It shows that they are adopting their growth strategy and they develop third winery producing infrastructure

Conclusion:

The Indian wine industry is growing and due to the liberalization of number of laws and regulation it makes easy to do wine business. After wine has completed the fermentation process it is transferred into oak barrels for aging. This process can take up to one year for white wine but two or three years for premium red wines. Hence by depending the type of wine it require various type of raw material i.e. grapes type. Sula has planted grapes on hundreds of acres of land so that it has the control of the quality of grapes produced.  It has also signed long-term contracts with local farmers and wine producers. 

Sula Vineyards was a pioneer in creating wine brands and developing sufficient volumes of products to meet the growing domestic demand for Indian wine. Rajeev faced so much challenge in the early year of operation and financial table shows that the net profit after tax is in negative. He continued to improve the operation and relationship with farmer and expert to grow their industry. He need to analyze and project the market values, product prices and revenues for the firm over the five-year forecast period. Using the evaluation of past trends in quantities demanded and prices for the firm’s brands they need to setup their own adjustments to the baseline data. Changing lifestyles of middle-class Indians and growing awareness have been critical factors driving the growing power of consumers and the attractiveness at which this market will grow. There are other factors that Rajeev needs to take into account when analyzing his business strategy. Some of them include: frequent travel abroad, growth of women in the labor force, growing income, and international research on health benefits of wine.

                                                                                              

Bibliography

Narasimhan, A., & Dogra , A. M. (2011, Dec 05). Developing Indians’ taste for wine. (For The Financial Times) Retrieved from http://sulawines.com/Newscategory/Newsdetails/Case-study--Developing-Indians%E2%80%99-taste-for-wine-/1/161/

 Robinson, R. B., & Pearce, J. A. (2011). Strategic management: formulation, implementation and control . New york: The McGraw Hill.