The purpose of this report is to provide the Executive team with a series of recommendations to minimize the impact of the current production deficit of our Chilean joint venture, Caliterra, and therefore minimize lost revenue. This report also
aims to provide recommendations to put in place an infrastructure that will support the Mondavi Corporation’s strategy of growth through international expansion.
Since the inception of the joint venture between the Mondavi and the Errazuriz wineries, sales have been extremely positive. The outlook for Caliterra remains positive, with sales estimated to increase 20% in the coming year, it is important due to the negative impact of poor weather conditions and a phylloxera outbreak on Mondavi’s California harvest coupled with the drought conditions in Europe.
Acknowledging that we cannot rely on the opening of our new winery at La Arboleda within 10 months, below are my recommendations to minimize lost revenue while putting in place the infrastructure to take advantage of increased harvest sizes predicted by the Wine Availability Reports:
? Appoint a joint Caliterra-Mondavi project team to oversee the build of the La Arboleda winery with the project goal to complete within 10 months;
? Approve financial and contractual terms with the “lost merlot” winery for the investment and implementation of modern equipment and technology to be installed within six months;
? Organize a Mondavi based team to oversee modernization of the “lost merlot” winery and subsequent fermentation; and
? Move the less premium wine to the lost merlot” winery for production replacing the higher end Merlot.
Poor quality control and the “lost merlot” are two of the underlying root causes of our involvement with Caliterra. After entering into the joint venture, we quickly discovered that the focus on cost versus quality was very different. The focus was in part due to the traditional market that Chilean wine was marketed to – locals who preferred value for money over product quality and also due to the operational and cultural differences between Mondavi and Caliterra. Quality has always been critical to Mondavi and it will continue to be, even in our Chilean operations. The analysis below is aligned with each of the recommendations.
La Arboleda winery is currently scheduled for completion in 2000 based on a conservative project plan. There are a number of geographical and logistical challenges that need to be addressed in progressing with the build, namely accessibility and supply of water and utilities. In order to complete the project in a 10 month period in time for the Caliterra harvest, we need to acceleration the above geographical and logistical challenges, which will increase costs in the short term. However, the cost increase (estimated at 11% compared with the current build timeline and budget) will be more than offset by the additional production capacity it will provide in the future. La Arboleda would be able not only be able to accommodate the five million liter shortfall we currently have but also the harvest projections deliver the needs from the Wine Availability reports for the foreseeable future.
To successfully complete the build we need to have the correct management team in place and to motivate workforce. The ideal management team should be a mix of Mondavi and Caliterra staff, bringing the wine growing expertise and quality control procedures of Mondavi while taking advantage of local staff to bridge the cultural and linguistic challenges. A portion of the planned additional expenditure is allocated to bonuses payable to the workforce and management team upon successful completion of the winery in 10 months.
Lastly, we need to understand the benefits of using the “lost merlot” winery. There is not enough time to use or to buy a competing winery that has a successful infrastructure to manufacture wine to our quality levels. Aiding the “lost merlot” winery will initiate discussions surrounding a future reduced price for wine in exchange for modern technology and processes. All of the above will help in reducing any net cost to Mondavi over a five year period.
The ability to take advantage of the growth within the Caliterra brand and the Errazuriz wines is crucial; therefore immediate additional capacity resources need to be discovered.
? Appoint a joint Caliterra-Mondavi project team, one that understands both the culture and the quality constraints needed to succeed. The construction of the La Arboleda winery project will be aimed for completion within 10 months. When completed, La Arboleda will have all the capacity to produce all the ultra-premium product while the remaining wineries handle the lower end product and overflow.
? As a long term and contingency plan we need to agree to financial and contractual terms with the “lost merlot” winery for the provision of modern equipment and technology to be installed within six months. The improved technology includes standing a team from Mondavi to oversee the modernization of the “lost merlot” winery and subsequent fermentation process. These improvements will bring the standards to the winery up par with the Errazuriz and surrounding wineries. Additionally it will be a fail safe if the La Arboleda project slips its deadline for completion and will give us additional capacity for short term and long term growth.
? Move the less premium wine to the “lost merlot” winery for production helps our business control the quality of the higher end product by keeping in within the Errazuriz wineries walls. By avoiding these risks, the higher margin product would get the attention it needed compared to the earlier “lost merlot” example and leave the lower end product for the “lost merlot” winery, where the quality will not be as crucial immediately.
In conclusion, to minimize the impact of the current production deficit of our Chilean joint venture, we need to act immediately by moving forward with the La Arboleda project as well as aiding the “lost merlot” winery by “Mondavi-izing” it. This will give us the capacity we need and will support the Mondavi Corporation’s strategy of growth through international expansion. Following these recommendations will be set up to win for years to come!