Pravin Mangal

Stuart Cellars Case

07/21/08

Davenport University

Review Video Case 12 - Stuart Cellars: Price Is a Matter of Taste on page 108 of the text.
After reading the case and viewing the video; please answer the following questions:

1) What factors related to a) demand, b) cost, c) profit, and d) competition are used by
Stuart Cellars to arrive at an approximate price level?

2) Assume that Stuart cellars annual fixed costs are $1,000,000. With an average retail
price of $28 per bottle and assuming estimated unit variable costs of $11.50, calculate
break-even volume. If there are 12 bottles per case, how does the break-even volume
compare to Stuart Cellars capacity?

3) You are a Stuart Cellars Wine Club member. You want to order Cabernet Sauvignon
that normally retails for $45 per bottle. The following discount structure applies: 20%
discount for purchases of 11 bottles or less; 30% discount for purchase of 12 bottles or
more. Add 7.75% sales tax for California residents. What price before shipping and
handling, would you pay if a) you order 10 bottles? b) you order 12 bottles? What are the
implications of this discounting structure?

4) What pricing strategy(ies) does Stuart Cellars appear to be following? What will be the
key factors in making these strategies a success?

In the Stuart Cellars business model, the three factors that contribute the most

and which have an influence on demand of wines is, global supply, ratings from
publications and of course the quality of the wine. The major factors in

determining cost for these wines is winery location, number of years in the

business, small verses large boutique, labor to grow and harvest grapes, buying

land, planting costs, winery equipment, advertising, public relations, point of sale,

materials, promotions, sales force and shipping and distribution are the major

determinants for cost.

Factors that contribute to profits are distribution systems like California’s three tier

system of wineries, wholesalers and retailers. Wholesaler markups, high volume

wines and retailer markups are the main profit generators. It is common knowledge

that profits in the wine industry is not fast but rather is made over the long term.

Stuart Cellars approaches competition by targeting the upper wine collectors and

professionals, creating an image for their own brand of wine. By creating an image

and targeting professionals, Stuart Cellars is able to offer a price per bottle of wine

that allows customers to make an informed decision on buying from them or their

competitors. Their competitors might not be able to match Stuart Cellars image

and marketing promotions.

By taking all these factors mentioned above, Stuart Cellars is able to offer a

reasonable price per bottle. Another rule of thumb to keep in mind is that a bottle

of wine should be priced at 1/1000 the cost of a ton of grapes. Another important

factor in determining price is image. Bottling, fancy labels, advertising, celebrity

endorsements and wine reviews can all affect the image of a wine.
For calculating Stuart Cellars break even volume, we would use the simple formula

of (Fixed Costs)/ (Unit Contribution Margin). Unit contribution margin is calculated

using (selling price per unit)- (variable cost per unit). By substituting 1,000,000/

16.50 = 60,607 is the break even unit.

For ordering ten bottles of Stuart Cellars Wines at $45.00 per bottle but with a 20%

discount, consumers would be paying $36.00 per bottle before shipping and

handling. If ordering 12 bottles or more as a Stuart Cellars Member, we would be

paying $31.50 per bottle of wine. This is before shipping and handling. The

implications of this discounting structure is that Stuart Cellars is able to provide

members with discounted pricing when buying bulk. It also allows Stuart Cellars to

increase their inventory turnaround. In addition to selling more units, they will be

able to negotiate better prices with their suppliers which in turn will benefit the

consumer. Stuart Cellars pricing strategy is what the larger companies often follow.

Stuart Cellars pricing strategy involves targeting the professionals and collectors of

the wine world. By targeting this group, they are able to implement higher prices

while at the same time being competitive and maintaining a unique image. By

offering bulk discounts on their wines for members, Stuart Cellars is taking

advantage of faster turnaround and inventory run through. By running through

their inventory, Stuart Cellars is able to offer bulk prices and discounts while at the

same time charging higher retail prices compared to their competitors.

The key factors that will make Stuart Cellars strategy a success are pricing, image,

costs and turn around time. The factors are crucial not just in the wine industry but

they are the essentials in any

business that wants to succeed. Stuart Cellars seems to know what they are doing

for the current time. They are published in numerous articles for industry

professionals and consumers to experience them, they participate in community

and national events which creates promotion and marketing opportunities and they

are able to create an image and price that is virtually unique compared to their

majority of competitors.