Case Analysis

Kangaroo Tail Winery Limited

Step 1: The Facts

Summarize the key information from the case and the current situation.

WHO is the decision maker?	Anna Amphlett and Andrew Ferris
WHAT is the business decision we are trying to make? What are some of the underlying issues?	Anna and Andrew are trying to distribute high-quality premium wine.
WHY has this a decision that needs to be made? How do we know this? What led to the current situation?

Step 2: In-Depth Analysis - Questions related to the case:

Question 1: What are Kangaroo Tails variable and fixed costs?

Variable Costs per Liter

Total variable costs per liter

Annual Fixed Costs

Total annual fixed costs

Question 2: Based on your classification of fixed versus variable costs, what is Kangaroo Tails break-even point (in liters of wine)? Show your work.

Question 3: What would be Kangaroo Tails profit before taxes (or net income) if the winery operated at its capacity production level? Show your work.

Kangaroo Tail Winery Limited (A) Two Australian entrepreneurs, Anna Amphlett and Andrew Ferris, considered starting a new venture to produce, market, and distribute high-quality premium wine. Tasmania, an island off the southern coast of Australia, produced wines with a distinctive character drawn from the island's soil and water formations. Amphlett and Ferris initially conceived the idea of the business based on a new brand to be called Kangaroo Tail. The brand would reflect the distinctive local character of family-run wineries in Tasmania. Soils in Tasmania were characterized as ferrosols that were deep and well-structured with a red or red-brown color. Much of the soils in Tasmania were formed from the weathering of basalt, a volcanic rock extruded as lava by numerous small volcanoes in northern Tasmania about 10-50 million years ago. Consequently, the basalt had long periods to weather, which explained why the soils were so deep, with usually more than one meter to unweathered rock. 1 Tasmania now produced elegant cool-climate wines such as Pinot Noir, sparkling wines, Riesling, Chardonnay, Sauvignon Blanc, Cabernet Sauvignon, and Pinot Grigio. Tasmania enjoyed a national and international reputation as a leading producer of some of Australias premium wines, with its Pinot Noir and sparkling wines, in particular, winning high praise and plenty of trophies from wine judges and critics. 2 Amphlett and Ferris thought the Kangaroo Tail Winery could operate from Richmond, Tasmania, Australia, about 27 kilometers from Hobart, the capital city of Tasmania (see Exhibit 1). The area around Richmond was situated about 350 meters above sea level and experienced a relatively mild climate all year round. Richmond received about 600mm of precipitation per year, generally evenly throughout the year but with slightly more in November and December. The average high (low) temperature during the winter months (June-August) was around 11C(5C) Centigrade, while the average high (low) temperature during the summer months (November-January) was around 20C(10C). Forestry products, agriculture, and tourism were the region's other key industries. Wineries and winemaking grew rapidly during the last five years, offering several regions in the state for wine tours. 3 Tasmanian Wines Tasmania's cool climate was heavily influenced by its position in the cool waters of the Southern Ocean. The first commercial vineyards were planted in Tasmania in 1865 , but the industry collapsed a decade later largely due to the gold rush on the mainland of Australia. The modern wine industry in Tasmania began as a rebirth in the late 1970s. Tasmania had a diverse set of wine regions, from the Pipers River and Tamar Valley areas in the north, to the Coal River, Derwent Valley, and Huon-Channel districts in the south. It developed a reputation, both nationally and internationally, for producing high-quality premium wine from its pristine and natural environment. With its cool climate of long, sunny, and dry autumns, Tasmania experienced ideal growing conditions for developing naturally elegant, intensely flavored, and aromatic wines, particularly Chardonnay and Pinot Noir. As well as producing stunning wines, Tasmania was also a picturesque gourmet paradise. 4 Company Background Ferris, a retired executive, spent more than twenty years at Constellation Brands Inc., a leading global wine, beer, and spirits company, with New Zealand headquarters in Auckland. After graduating from the University of Sydney, Ferris began his career as an accountant in the Controllers unit of Constellation Brands, rising to chief financial officer (CFO) at his retirement. Amphlett retired as a brand manager from Treasury Wine Estates, a spinoff from Foster's Brewing Company. Treasury Wine now managed the various wine brands Foster's had acquired over many years. Amphlett, a marketing major at the University of Sydney, managed many Foster's brands, including Lindeman's, Penfolds, Rawson's Retreat, Wynns, Rosemount, and Sterling. They would purchase or lease a former dairy farm that had an old farmhouse on the property, where they might live. The 100-hectare property also had some barns with milking equipment. Amphlett and Ferris believed that Kangaroo Tail Winery would operate from this facility. Production Techniques The couple decided that Kangaroo Winery would initially be focused on being a wine producer from grapes they would acquire from local Tasmanian wineries. If wine production and marketing was successful, the business might plant vines on the property and become a wine grower, acquiring their grape stock from a variety of growers located throughout Tasmania. Kangaroo Tail wines would be made using old-world, labor-intensive techniques, in small batches under carefully controlled conditions, with a minimum of processing. No sulfites would be added to the red wines, and they would be made in a natural unfiltered style. The business would hand-sort all fruit as it was brought in and put through a crusher/stemmer. Yeast would then be added as it was transferred to small open-top containers that were carefully hand-stirred several times a day during the primary fermentation process. The output was to be transferred to small basket presses that would be slowly ratcheted down by hand to carefully extract the juice. The wine would then be moved into oak barrels to finish its fermentation and aging process. The wines would be gently racked from barrel to barrel several times to remove the spent yeast that settled to the bottom. The wines would be aged in a variety of French oak, Hungarian oak, and American oak barrels for a minimum of one year (see Exhibit 2). They would then be bottled and corked, and held for a minimum of an additional six months before release. Costing and Pricing For over a year, Amphlett and Ferris experimented with a variety of grapes, different crushing and pressing techniques, and several types of barrels to store and age the wine they had blended. Finally, they hit upon a recipe that yielded wines with the right aroma, taste, and color. To their many family members and friends, the entrepreneurs had a winning premium wine. Based on commercial Australian dollar (\$AUD) prices, they estimated that per liter of wine it would cost $7.45 of grapes, direct labor of $3.20, utilities and power of $0.50, and labeling and packaging about $1.30. Based on extensive market research, they estimated that the wine could wholesale for about $25.50 per liter. Annual rent costs would be $560,000 for the oak barrels, $745,000 for the crushing equipment, and $1,355,000 for the production facility. Amphlett and Ferris would each draw annual salaries of $60,000 per year. A production supervisor would be hired and paid $65,000 per year. A marketing and sales person would be paid a base salary of $80,000 per year plus a commission of $0.05 per liter. Amphlett and Ferris would lease the dairy farm in Richmond for about $1,900,000 per year for the wine operation. They would engage an advertising agency to promote Kangaroo Tail for about $50,000 per year. They estimated that with these production and marketing arrangements, the winery had the capacity to produce about 550,000 liters per year. Market research suggested that the market size of quality premium Tasmanian wines was about one (1) million liters per year, but expected to grow at 15 percent per year over the next ten (10) years. They estimated about 250,000 liters of premium wine per year was already produced by the two largest existing winery operators