Wine Conpany Analysis

Vina San Pedro (VSP)

Question 1) Apply the four-step problem-solving process to the problems facing Matias Elton, who became CEO in 1997:

The problems identified as parts of Matias Elton's charter are:

1) Task of growing domestic market share.

2) Increasing quality to capture higher margin sales.

3) Expanding Export sales.

4) Achieving further economies of scale.

Contributing factors or symptoms to VSP's economic and production issues prior to Matias Elton's position as CEO are:

1) From 1941-1994 the company who purchased the winery from the original family owners, "was however barely profitable and survived by producing inexpensive wines for the domestic market". The assumption is that they could not overcome their business shortfalls making this a performance and opportunity gap.

2) The company, who purchased VSP in 1941, expanded the winery to become the largest single-site vineyard in Chile. The assumption is that they could not make up the cost of expansion over time in order to make the winery more profitable, through marketing and distribution.

3) 1986 economic crisis in Chile. The assumption is that this caused economic issues for VSP, CCU and the consumer markets.

The diagnoses or the root cause of the problems that Matias Elton's faced were centered on:

1) The early years of CCU control; CCU had 3 years of loss, yet they reduced the company's debt by Ch$7.8 billion. The assumption is although CCU quintupled the number of customers to 30,000, it could not overcome the business shortfalls of "reducing costs by increasing distribution and increasing the quality of VSP wines". CCU increased it's ownership to 51.2% by spending Ch$864 million on expanding the wine aging facility, and Ch$178 million on planting new vineyards which would not pay off for several years. Their investment did not change their wine output. Their 11 million liters of wine was sold as exports, and they had to buy 24 million liters from independent growers to meet their domestic market requirements.

2) The wine country of Chile and its production was affected by a Government ban of new plantings in 1938 to curb alcoholism. No quality wines were produced until European vines were introduced in the early 19th century. Poor quality agricultural practices along with poor processing technologies and a government "imposed curfew contributed to a drop in the domestic consumption"of wine. Another factor was that the domestic market was "price sensitive" and did not offer the growth needed for smaller wineries to compete with the larger wineries, so the smaller winery's focused on premium wines.

3) Viniculture and wine production is more art than science. The process of growing grapes is dependent

on many factors like irrigation, sugar content, and the type of wine to be made from the grapes, and the cost of labor. Lower grade wine grapes can be picked manually and the cost of the machines are $130,000 each. Some wines require hand picking and it may require several "waves" to ensure grapes are harvested at their peak. The cost is Ch$17.50 per day per laborer, there are 4 laborers per every 200 hectares. It costs $3500 per day for each wave. The next issue is aging the wine. Most wine is a domestic, lower quality wine and is picked in March and sold in August. The remainder of the wine is aged for several months, this creates varietal wines. Reserve wines take 2 years to see any profit. The costs to export wine are considerable compared to the domestic costs. To export wine, marketing and the purchase of grapes from independent producers drives profitability into negative territory. The adjusted cost to purchase grapes has risen 400% between 1992 and 1998. This equates to going from $.50 to $1.25 per liter when it only costs $.34 to produce one liter.

4) Marketing and consumer research revealed that the perception is that VSP's competitor's products are of better quality. VSP spent only 3% on marketing compared to its competitors Santa Rita's 46% and Concha y Torro's 29%. VSP did "virtually no advertising in other countries". Export sales were subject to exchange rates. The exchange rate is critical because VSP expenses are based on the Chilean Pesos and export revenues are dominated by other global currencies.

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