bcg case competition team 2 final for linked_in

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


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


Source: Case

6

Market Dynamics


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


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


9

Ocean Spray provides the greatest operational benefitswhile maintaining the Portsmouth Vineyard brand image

Brand Image

Op

erat

ion

al B

enef

its


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


Source: Case

11

Operations


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


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


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


15

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


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

bcg case competition team 2 final for linked_in

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