Oakdale Wines1

Oakdale Wines is a high-end premium wine company which operates across all components of the
winemaking value chain. Oakdale owns and operates its own vineyards which produce
approximately 85% of its grapes. Oakdale also conducts all of its own winemaking and bottling
under the watchful eye of owner and chief winemaker - Kate Bray, who has always believed that
operating in each of these key value-chain components would mean Oakdale had full control over
the quality of the wine. Up until recently this approach has worked really well, with increasing sales
on the back of a number of award-winning wines.

But as has occurred in a number of other industries, the competitive landscape of the wine industry
has altered. New wine companies are structuring their businesses differently. Instead of owning
production-type assets and operating across most segments of the value-chain, many are choosing
to ‘specialise’ in specific segments of the value-chain. Some of these new competitors seem to be
able to produce relatively comparable quality wines for a cheaper price. Backed by strong marketing
campaigns some of these wine companies are performing very well. While surprised by this, Kate
wants to better understand how this is occurring.

Kate has sought your advice. She has had her accountant extract some information from the
accounting system, as well as make some informed estimates of one of the competitors Kate speaks
of: Robyns Wines (Robyns). Robyns buys its wine already processed from the bulk wine market and
uses a local winemaker’s spare capacity to bottle and package the wine. To this end, Robyns has
little in the way of physical assets, other than a small leased office building.

To make the data generated by the accountant, useful for comparison purposes, it focuses on the
cost per case of a popular wine variety (a Pino Gris blend) produced by both wineries, prior to
distribution to a wholesaler or retailer.

Oakdale Pino Gris blend per Robyns Pino Gris blend

case per case
Price to distributor $80 $50
Grapes and vineyard costs 11
Bulk wine 13
Winemaking 21
Bottling and packaging 18 12
Marketing and selling costs 4 12
General administration and overheads 16 6
Profit margin 12 9

Questions

1. How does the structural cost management differ between the two wine companies? What
are the repercussions of these differences?
2. State TWO executional cost management tools most likely in use at each firm.

1
Adapted from: Chalice Wines, IMA 1997.