Freemark Abbey Winery MBA 6621

Justin Lloyd

Madeline Russell Kofi Saahene

Moroni Williams Yin Wong

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Written Case Analysis – Freemark Abbey Winery

Summary Freemark Abbey Winery is a vineyard in the northern Napa Valley. William Jaeger, a member of the owning partnership, is facing a decision about harvesting the riesling crop ahead of an approaching storm. The severity and temperature of the storm can be either beneficial or detrimental to the crop. If a warm, light rain falls, there is the possibility of the mold Botrytis cinerea forming on the exterior of the grapes. This creates a complex, sweet bouquet of flavors that is highly valued by wine connoisseurs. However, if too much rain falls, the grapes could swell with excess water, reducing the harvest quality. Discussion of Decision Point and Options The key decision point of this case is William’s decision to harvest the grapes before the approaching storm or risk the various consequences that could appear by waiting. With the reputation of the vineyard’s quality as one reason to harvest now, the possibility of the mold forming can be a point of distinction for this vintage if the choice to harvest later is made. The probability of each scenario and relative earnings can be used to help organize the decision factors into consequences and numeric values for comparison. Below are the pros and cons for each scenario: Harvest Now

• Pros: There is little to consider with this choice. This is the easy money option. The earnings are calculated at $34,200 if the harvest is performed now.

• Cons: Earnings could potentially be lower than if the mold forms or if a higher sugar concentrations is reached in the grapes.

Harvest Later

• Storm/Mold Forms – Pros: The Botrytis cinerea adds a unique element to the wine produced that is highly valued by connoisseurs. Bottles of wine will sell for a premium more than double the wholesale price of the standard bottle of riesling produced by the vineyard.

• Storm/Mold Forms – Cons: The formation of the mold on the grapes reduces the yield of juice by 30%.

• Storm/No Mold – Pros: The harvest will not be a complete loss and the grapes can still be harvested. The grapes would likely be sold wholesale to a different vineyard in order to avoid damaging Freemark Abbey’s reputation by producing an inferior product.

• Storm/No Mold – Cons: The additional water from the rain will simply swell the grapes. The result will be a thin wine that sells for an overall lower wholesale price. While not a terrible choice, this is the only option that represents a significant loss when compared to harvesting the grapes ahead of the storm.

• No Storm/25% Sugar – Pros: Grapes have a chance to ripen to their natural, desired levels. Highest wholesale price other than the formation of the mold.

• No Storm/25% Sugar – Cons: Not the most desirable option if the decision is made to gamble on the storm hitting the Napa Valley.

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• No Storm/20% Sugar – Pros: Grapes have a chance to ripen beyond the pre-storm harvest levels. Sugar level isn’t as high as would be preferred, but wholesale price is still higher than pre-storm levels.

• No Storm/20% Sugar – Cons: Less desirable than higher sugar content grapes. • No Storm/<0.7% Acidity – Pros: Not a complete loss of the harvest. • No Storm/<0.7% Acidity – Cons: Wine production at this stage would produce a less

desirable vintage that would be sold for a loss compared to the pre-storm harvest. Analysis and Recommendation Several factors had made this decision difficult for William. First, unpredictable weather and the formation of the mold are involved with uncertainty. No one can truly predict the course of the storm, amount of rainfall produced, or if the botrytis mold will form on the grapes. Second, the available information provides little to no information of the winery’s objectives. We assume the objectives include generating higher revenue while maintaining their reputation for a high quality product. Finally, there is only assumed information regarding total revenue the winery generates each year or how much risk the winery is willing to assume with each crop. Therefore, we compare all the scenarios to the baseline standard: the no-risk option. By harvesting the grapes before the storm, the vineyard would see earnings of $34,200. All other alternatives should be compared to this value. William’s decision can be analyzed in terms of uncertainty or in terms of risks. As stated in Chapter 7 of Smart Choices, William can use a decision tree (p. 119) to simplify the decision (Exhibit 1) (Hammond, Keeney, & Raiffa, 1999). A decision tree lays out the alternatives, possible outcomes of uncertainty along with the chances of them occurring, and the associated consequences. There is an equal chance of the storm hitting the valley or tracking elsewhere. Looking at the potential options of the storm hitting the valley first, William estimates there is about a 40% chance the rain could produce the desired mold on the grapes (20% overall probability). The winery would see bottles of wine sell for $8.00 per bottle at wholesale prices. Due to the effects of the mold formation, a decrease of 30% in juice yield, the earnings would be $67,200 with this option. All other alternatives, possible outcomes of uncertainty, chances of uncertainties occurring, and the consequence are shown on the decision tree (Exhibit 1). William has a 60% chance of exceeding the baseline earnings by assuming the risk of the unpredictable weather and mold formation. Because Freemark Abbey Winery is known for producing a premium wine, reputation is extremely important for the winery and it is in the best interest of the vineyard to do all it can to maintain quality or produce a product that differentiates itself from other available options. From a risk perspective, William can create a risk profile (p. 136) with a desirability score to quantify each consequence as suggested in Chapter 8 of Smart Choices (refer to Exhibit 2) (Hammond, Keeney, & Raiffa, 1999). The desirability scores that were assigned to each outcome are based on the quantitative factors (expected earnings) and qualitative factors (winery’s reputation). There are some influencing factors that are not mentioned in the available information William might consider in making his final decision. Two examples are: how much ownership does William share in the winery, and will the storm affect the grapes that are used for other types of

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wine and the winery’s overall financial position. Additional questions may need to be answered as well to address if there is a need to harvest the vineyard’s other grape varieties ahead of the approaching storm that are used for other types of wine. If the storm will reduce quality in other wine varieties, the potential losses could be much more significant. If Freemark Abbey Winery’s annual earnings are higher than the approximated $1 million, the potential losses associated with the riesling decision may not impact the overall bottom line by more than 2-4%. That may lower the associated risk factor of the decision to a much more acceptable level. Evaluating all the available information, it appears that one of the primary decision factors of the winery is to maintain their level of quality in the wine produced. The winery maintains an option to not produce any vintage that would reflect poorly on its quality standard. If they are willing to forfeit those earnings in exchange for a perception of higher brand quality, there must be an acceptable level of risk for not reaching their quality indicators. The winery places heavy emphasis on distinction and quality. William should wait out the storm, as that decision provides the highest chance of meeting those goals.

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Exhibit 1

Freemark Abbey Winery Case

Analysis

Harvest 0% Risk $34,200

Don't Harvest

No Storm 50%

Storm 50%

Botrytis

No Botrytis

Acid level < 0.7

20% Sugar

25% Sugar

40%

60%

Overall Probability 20%

40%

40%

20%

Bottle

Don't Bottle

Overall Probability 0%

Overall Probability 30%

Overall Probability 20%

Overall Probability 20%

Overall Probability 10%

$67,200

$24,000

$12,000

$42,000

$36,000

$30,000

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Exhibit 2

Outcome Chance Desirability scoreContribution to Overall

Desirability Expected Profit Expected ValueHarvest prior to storm 0% 50 0 $34,200 $0

Alternative Overall desirability score: 0Storm Hits

Botrytis forms 20% 100 20 $67,200 $13,440No Botrytis forms

Bottle 0% 35 0 $24,000 $0Don't Bottle 30% 0 0 $12,000 $3,600

No Storm25% Sugar 20% 90 18 $42,000 $8,40020% Sugar 20% 60 12 $36,000 $7,200Acid Level < 0.7 10% 50 5 $30,000 $3,000

100%

Alternative Overall desirability score: 55

FreemarkAbbeyWineryRiskProfilewithDesirabilityScore

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References Hammond, J. S., Keeney, R. L., & Raiffa, H. (1999). Smart Choices. New York: Broadway

Books. Krasker, W. S. (1980, 08 01). Freemark Abbey Winery. Retrieved 09 17, 2015, from Harvard

Business Publishing: https://cb.hbsp.harvard.edu/cbmp/product/181027-PDF-ENG