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Portsmouth VineyardNovember 17, 2011
Naian (Tim) Chang, Brandon Foster, Kate Halldorson, Joe Hodges, Billy McCormick
2
Executive Summary
Portsmouth Vineyard management should sell the company to Ocean Spray for $27 million to improve its market position while maintaining its unique culture and story.
Generate cumulative net income of over $14 million with a 22% CAGR over 6 years
Brand Image
Maintain Brand Equity• Sustain culture• Market unique story• Preserve high quality
Market Dynamics
Competitive Industry• Many substitutes• High supplier bargaining power• High buyer bargaining power
Operations
Many Benefits• Economies of scale• Distribution• Access to suppliers
3
Brand Image
Brand Image Market Dynamics Operations Financials
Brand equity is Portsmouth Vineyard’s greatest competitive advantage
4
A continuation of founding principles is key to maintaining competitive advantage with target market
Founding
• Creation of natural fruit beverage
Maintenance
• Pure cane sugar• 4x juice content of
other major brands
Potential
• Quality ingredients in bulk
• Production standardization promotes quality assurance
Founding
• Eccentric Start • 3 Original flavors• Creative Packaging
Maintenance
• Small-scale experimentation to develop new products
• Experience-driven industry expertise
• Resourceful advertising
Potential
• More resources to experiment
• Great fundamental story for larger marketing budget
Quality Image
Brand Image Market Dynamics Operations Financials
Source: Case
5
SWOT analysis suggests selling as the best course of action to improve weaknesses and minimize threats
-Current management
-Brand image/story
-Commitment to quality
-Distribution chain
-Marketing budget
-Plant scheduling-Low profit
margins
-Compromised quality to
improve profit margins-Supply
shortages-Loss of
distributors
-Increase supermarket
access-Increase
marketing budget-Quality controls
-Supply chain advantages
Streng
ths
Weaknesses
Thre
ats
Opportunities
Brand Image Market Dynamics Operations Financials
Source: Case
6
Market Dynamics
Brand Image Market Dynamics Operations Financials
Competitive market conditions expose Portsmouth Vineyard’s weaknesses
7
A five forces analysis shows that Portsmouth Vineyard has many barriers to overcome in the New Age beverage industry
Brand Image Market Dynamics Operations Financials
Rivalry: High
Suppliers: High-Competitors control
suppliers-Commitment to higher fruit content increases supplier dependency
Substitutes: High-Many New Age
beverages-Soda, sport drinks,
etc.
Buyers: High-Price sensitive
-Many substitutes-No switching costs
Entrants: Low-Large startup
costs-Tough existing
competition
Source: IBIS World
8
An acquisition by a company with greater market share would provide multiple benefits for Portsmouth Vineyards
Benefits
Brand Image Market Dynamics Operations Financials
9
Ocean Spray provides the greatest operational benefitswhile maintaining the Portsmouth Vineyard brand image
Brand Image
Op
erat
ion
al B
enef
its
Brand Image Market Dynamics Operations Financials
Source: Case , Company Websites
10
A breakdown of specific criteria emphasizes that Ocean Spray is the best fit
Criteria Ocean Spray
Tropicana Pepsi Triarc Cadbury Starbucks Welch’s Coca-Cola
Culture
Image/ Story
Quality
Distribution
Grocery Stores
Market Share
Supply Chains
Potential Bid
Brand Image Market Dynamics Operations Financials
Source: Case
11
Operations
Brand Image Market Dynamics Operations Financials
Ocean Spray’s infrastructure will improve the efficiency of Portsmouth Vineyard’s operations
12
Portsmouth Vineyard can take advantage of economies of scale to lower production costs
Feature
Economies of Scale Execution
-Tap into larger manufacturing facilities-Bulk or mass production
Benefits
-Decrease costs per unit-Low overhead-Increase margins
Brand Image Market Dynamics Operations Financials
13
Stronger and wider distribution networks can increase market share and lower costs
Feature
Distribution Execution
-Consolidate into one successful network-Increase access to retail markets through existing networks-Entirely in-house salesforce
Benefits
-Increase market share-Reduce cost through abolition of incentive program-Increase control of stocking and merchandising
Brand Image Market Dynamics Operations Financials
14
Working with Ocean Spray’s suppliers would support product consistency and development
Feature
Access to suppliers
Execution
-Integration of purchaser’s supplier network-Long-term supplier contracts
Benefits
-Greater variety of ingredients-Greater competitive advantage-Prevent future ingredient shortages
Brand Image Market Dynamics Operations Financials
15
Financials
Brand Image Market Dynamics Operations Financials
Ocean Spray and its Portsmouth Vineyard division will benefit financially from the acquisition
16
2008 2009 2010 2011 2012 2013 Total0
2000
4000
6000
8000
10000
12000
14000
16000 14324.598243723
Tho
usan
ds o
f D
olla
rsCAGR= 21.8%
Acquisition by Ocean Spray will generate cumulative net income of over $14 million with a 22% CAGR by 2013
Key AssumptionsRevenue increases by 10%, then 15%, and then tapers off• Driven by marketing
and distribution
Cost decreases 15% in the first year and then by less each year thereafter• Driven by economies
of scale and supplier relationships
Costs and expenses are based on DCF assumptions
Source: Case, IBIS World
Brand Image Market Dynamics Operations Financials
17
Conclusion
Portsmouth Vineyard management should sell the company to Ocean Spray for $27 million to improve its market position while maintaining its unique culture and story.
Generate cumulative net income of over $14 million with a 22% CAGR over 6 years
Brand Image
Maintain Brand Equity• Sustain culture• Market unique story• Preserve high quality
Market Dynamics
Competitive Industry• Many substitutes• High supplier bargaining power• High buyer bargaining power
Operations
Many Benefits• Economies of scale• Distribution• Access to suppliers
18
Appendix• Group Members • IBIS
World Report for Juice Production in the US
• Other Options in Depth
• Performance without IPO
• Stonyfield Farms: Case Comparison
• Ocean Spray: Story and Cultural Similarities
• Income Statement- Projected
• Assumptions
19
Group Members
Naian (Tim) Chang, ’13
BSBA
Brandon Foster, ’13
BSBA Consulting
EXSS-Sport Administration
Kate Halldorson, ‘13
BA, Economics and International Studies
Joe Hodges, ’13
BSBA, Consulting and Finance
Billy McCormick, ’13
BSBA, Consulting and Finance
BA, Economics
Back to Appendix
20
IBIS World Report for Juice Production in the US
Key Success Factors
IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:
Market research: Firms must be able to identify the geographic areas and demographics where it would be appropriate and profitable to sell their products.
Economies of scope: Companies that produce a wide range of brands can achieve a cost advantage in distribution and advertising over smaller competitors.
Distribution management: Market power in the industry's distribution networks is very high, so any potential entrant must have access to them to survive.
Economies of scale: The size of the operation will determine unit prices, which is a key variable with respect to competitiveness.
Back to Appendix
21
Other Options in Depth
Criteria Status Quo Ocean Spray Sale
Going public
Culture
Image/ Story
Quality
Distribution
Grocery Stores
Market Share
Supply Chains
Back to Appendix
22
PV for 2003
(year0)$7mil
PV for 2004
(year1)$11mil
PV for 2005
(year2)$14mil
PV for 2006
(year3)$19mil
PV for 2007
(year4)$24mil
PV for 2008
(year5)$27mil
Performance without IPO
AssumptionsFor all years For 2008 and years after 2008
Calculation date for each year
Jan. 1st of each year
Cost of sales as % of revenue 70%
Discount factor 11% Total expenses as % of gross profit 80%Capital expenditure
per year$200 D&A as % of gross profit 5%
Required working capital as % of gross profit 7%Tax rate 40%
Growth rate for 2010 onward 4%
Capitalization rate 0.07%
Back to Appendix
23
0 1 2 3 4 5 60
5
10
15
20
25
30
f(x) = 4.14376209769627 x + 6.57314016562268R² = 0.993733351867575
Portsmouth Vineyard’s Firm Value since 2003
Years
Su
m o
f P
V (
$mil
)
Performance without IPO
The slope suggests a $4 mil average
annual growth, which is a 59%
annual growth rate
Back to Appendix
24
IPO Failure
IPO Data for Other Comparable Companies
Company
Market Value
in 2003 ($ mil)
Current Market
Value ($ mil)
Annual Growth
Rate
Saratoga Beverages
7.7 6.3 -17.8%
Panamerican Beverages
2451.0 3249.2 32.6%
Odwalla 30.0 38.3 27.5%
Redhook Ale Brewery
70.8 49.0 -30.8%
Pete’s Brewing 118.0 52.5 -55.5%0 1 2 3 4 5 6
0
5
10
15
20
25
30
Portsmouth Vineyard’s Data without IPO
Years
Su
m o
f P
V (
$mil
)
59% annual growth
rate
AssumptionsPublic companies have steady linear growth throughout
yearsBack to Appendix
25
Stonyfield Farms: Case Comparison“At first, we sold yogurt only to fund our school….They milked the cows, made the yogurt,
made sales calls and even delivered the yogurt.
As our business grew, we realized a successful yogurt company could make a bigger difference for family farms and the environment than our school could, so we decided to run with yogurt.
Now our organic business helps to support hundreds of family farms and keep over 200,000 agricultural acres free of persistent pesticides and other chemicals commonly used on nonorganic farms and known to contaminate soil, drinking water, air and food.”
• Organic focus for health, taste, and environment
• Drawback: Extensive agricultural techniques, on large scale, also have detrimental effect on environment
• Dedicated to using 100% fruit juice, pure cane sugar
• Further Advantage: No regulatory certification required; much easier to grow than organic
Founder’s Commitments
• Network of small, family-run dairy farms
• Distribution similarities: haphazard at first, now include supermarkets, colleges, and other outlets
• Drawback: Much criticism that they have lost sight in creating “Big Organic”
• Jack-of-all-trades businessmen with experience-based expertise
• Further Advantage: Culture not difficult to incorporate on larger scale
Atypical Business Model
Stonyfield Portsmouth
Back to Appendix
Ocean Spray: Story and Cultural Similarities
26
• 3 growers embrace opportunity • 2 friends found companyHumble Beginnings
• Started with just cranberry jelly• First to blend juices• Created juice boxes
• Started with just peach drink• Experimentation to diversify flavors
and product lines• Resourceful packaging
Creativity and Innovation
• Cooperative-based model• Commitment to farmers across
entire history
• Quality• Relaxed company culture
Commitment to Founding Principles
Ocean Spray Portsmouth Vineyards
“Ocean Spray was formed in 1930 by three cranberry growers with a simple love of cranberries…Since then, the Ocean Spray cooperative has grown to more than 600 grower families all across North America.
The cooperative’s first product was jellied cranberry sauce, followed by original Ocean Spray Cranberry Juice Cocktail hitting the shelves in the early 1930s, beginning a long tradition of quality, innovation, and success.”
Back to Appendix
27
Income Statement- ProjectedDecember 31 of each year (000s) 2008 2009 2010 2011 2012 2013Total CAGR
Total Revenue $37,448.0041192.8 47371.72 51161.46 54231.15 55858.08
Cost of Sales $26,213.6022805.83 20981.37 19827.39 19232.57 19040.24
Gross Profit11234.4 18386.97 26390.35 31334.07 34998.58 36817.84
Marketing and Advertising
3370.32 6343.504 10470.37 13053.38 15308.97 16909.98
General and Administrative
5617.2 8366.07 10641.91 12013.87 12689.89 12544.29
Total Expenses8987.52 14709.57 21112.28 25067.25 27998.86 29454.27
EBITDA2246.88 3677.394 5278.071 6266.813 6999.715 7363.567
Depreciation & Amortization (D&A) 561.72 919.3484 1319.518 1566.703 1749.929 1840.892
EBIT1685.16 2758.045 3958.553 4700.11 5249.786 5522.675
EBIT Margin %4.50% 6.70% 8.36% 9.19% 9.68% 9.89%
Income Tax Expense 674.064 1103.218 1583.421 1880.044 2099.915 2209.07Net Income (Loss) 1011.096 1654.827 2375.132 2820.066 3149.872 3313.605 14324.6 21.88%
Back to Appendix
28
Assumptions
Growth Rates 2008 2009 2010 2011 2012 2013
IRG- Total 10% 15% 8% 6% 3%
IRC- Total, Net Inflation -13% -8% -6% -3% -1%
GP
Increased Advertising Budget 15% 15% 5% 5% 5%
General and Administrative 0% 0% 0% 0% 0%
Total Expenses
EBITDA
D&A 0% 0% 0% 0% 0%
EBIT
EBIT Margin %
Income Tax Expense 0% 0% 0% 0% 0%
Assumptions
IRG- Marketing 4% 6% 5.0% 4% 2%
IRG- Distribution 6% 9% 3.0% 2% 1%
IRG- Total 10% 15% 8.0% 6% 3%
IRC- Ingredients -5% -5% -4% -2% -1.0%
IRC- Economies of Scale -10% -5% -3.5% -4% -2.0%
IRC- Total -15% -10% -7.5% -5% -3.0%
Inflation Rate 2% 2% 2% 2% 2%
Increased Advertising Budget 15% 15% 5% 5% 5%
Year on Year Growth Rates Incremental Benefits from Sale
Definitions
IRGIncremental Revenue Growth
ICD Incremental Cost Decline
Ocean Spray Supermarket Market Share 6.60%
Portsmouth Vineyards Supermarket Market Share 0.288% Back to Appendix