Freemark Abbey Winery Case Study

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Executive Summary

Freemark Abbey Winery is located in St. Helena California, in the northern Napa Valley region. They are located in the region of Napa Valley where they are able to produce grapes from both the central and southern parts of the valley—the ideal climate for harvesting grapes. They produce about 25,000 cases of bottled wine per year. The cases consist of bottles of Cabernet Sauvignon, a red wine, and Chardonnay, a white wine. However, they do produce wines such as, Riesling and Petite Syrah, in cases of 1,000 and 500 respectively.

Freemark Abbey is known for producing extremely high-quality wine from some of the best grapes in the Napa Valley region. They set themselves at an extremely high standard due to being in the most popular winery region in the United States, for this reason, each harvest is required to meet a standard in which preserves their superior reputation.

The nature of the wine market should be considered in this case, as well as, the location of the winery. The wine industry is a competitive market. Prices of wine range from low to extremely expensive depending on the quality of the wine. The income of the wine industry is inelastic in demand in the short run and elastic in demand in the long run—wine is a luxury. and Napa Valley goes back all the way to the 1700’s when the first vines were planted in California by Missionaries. The birth of Napa Valley, however, is said to be in the 1850’s when Joseph Obsorne planted vines birthing some of the “best bench land vineyards in the valley”. Today, Napa Valley has exploded with most, if not all, of the 30 miles of land being planted with vineyards and is known as a major wine region in the United States and the world.

Decision Problem:

A member of the partnership which owns Freemark Abbey Winery, William Jaegar, is faced with the key decision to— leave the Riesling harvest on the vines and reap the consequences if a storm were to hit or remove the grapes early and potentially harvest a ‘thin wine’ which would sell at a lower amount. In making his decision Jaegar should keep in mind which option provides the most profit for his company, and which one continues to promote a superior reputation for the company. Below represents a graph of the potential options Jaegar can choose from when determining his decision. [pic 2]

There are a few pros and cons when looking at the various options depicted above.

Wait to harvest

Pros:

1. Mold – produces botrytis, a mold over the skin of the grapes, creating the best tasting wine and creates the most profit at $67,000
2. Storm / No Mold – Harvest is not wasted and can still be sold. The harvest yields wine that can be sold at at $2.00 per bottle = $24,000
3. No storm/ 25% sugar – Grapes have a chance to ripen to their natural level and would lead to a wine selling around $3.50 = $42,000
4. No storm / 20% sugar – Still salvageable and can sell at $3.00 = $36,000
5. No storm / <19 – Grapes would still be up to standard to sell at $2.50 = $30,000

Cons:

1. Mold – produces a lower quantity of wine by 30%.
2. Storm / No Mold – Produces a ‘swelled’ berry that decreases the concentration of berry and creating a ‘thin wine’
3. No storm/ 25% sugar – a less desirable option compared to the storm producing Botrytis  
4. No storm / 20% sugar – Yield a lighter wine
5. No storm / <19 sugar – Yield a wine that may have too little sugar and may be more acidic in taste

Harvest preformed now:

Pro

1. This is the least risky option Jaegar has. He would only have one outcome from his decision which results in a revenue of $34,200.

Con

1. The earnings from these bottles would be less than if the storm created botrytis or if the grapes would reach their natural sugar levels.

Possible Decision Alternatives

William is faced with several factors which create difficulty in making a decision. First, he does not know whether or not there will be a storm. There is a 50-50 chance that the storm could create either a perfect harvest or one that could not be sold. The range is wide and there is no way to fully predict the storm or the effects the storm could produce. Additionally, there is no information given on what the company values most—is it profitability, the highest quality wine, or the diversity of the wine they offer. There is also only an assumption of the total revenue Freemark Abbey brings in per year, along with the level of risk they would be willing to take on when making this decision. By assuming this information, it can be difficult to determine the optimal choice. However, basing the level of risk off of the base case scenario, which is the option to harvest the grapes before the storm, Jaegar can compare the data to the $34,200 revenue determine the best-case scenario.