PROFILE ON WINE AND CHAMPAGNE

PRODUCTION
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TABLE OF CONTENTS

PAGE

I. SUMMARY 17-3

II. PRODUCT DESCRIPTION & APPLICATION 17-3

III. MARKET STUDY AND PLANT CAPACITY 17-4

A. MARKET STUDY 17-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 17-7

IV. MATERIALS AND INPUTS 17-8

A. RAW & AUXILIARY MATERIALS 17-8
B. UTILITIES 17-9

V. TECHNOLOGY & ENGINEERING 17-9

A. TECHNOLOGY 17-9
B. ENGINEERING 17-11

VI. MANPOWER & TRAINING REQUIREMENT 17-14

A. MANPOWER REQUIREMENT 17-14
B. TRAINING REQUIREMENT 17-15

VII. FINANCIAL ANLYSIS 17-15

A. TOTAL INITIAL INVESTMENT COST 17-16
B. PRODUCTION COST 17-16
C. FINANCIAL EVALUATION 17-17
D. ECONOMIC BENEFITS 17-19
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I. SUMMARY

This profile envisages the establishment of a plant for the production of wine and
champagne with a capacity of 3,500 hectoliters per annum.

The major raw materials required are grapes and sugar which are available locally. Small
quantity of tartic acid, citric acid and sodium benzonite have to be imported.

The present demand for the proposed product is estimated at 91,674 hectoliters per
annum. The demand is expected to reach 284,725 hectoliters by the year 2018.

The plant will create employment opportunities for 38 persons.

The total investment requirement is estimated at about Birr 8.07 million, out of which
Birr 3.2 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 15.26 % and a
net present value (NPV) of Birr 2.40 million, discounted at 8.5%.

The plant will have a backward linkage effect with grape plantations. The establishment
of such factory will have a foreign exchange saving effect to the country by substituting
the current imports. Moreover, the project also has a foreign exchange earning potential
through export.

II. PRODUCT DESCRIPTION AND APPLICATION

Winery is alcoholic beverage produced from grapes of various species. It is produced by

fermentation of the juice of grape. Wines can be natural, fortified, sweet or dry, still or
sparkling depending upon the alcohol content and test.

Wine is demanded by bars, hotels, pubs, restaurants and groceries as it is occasionally

consumed by human being.
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III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The source of wine and Champagne supply in Ethiopia is both local production and
import. The domestic supplier is Awash Winery. Table 3.1. Shows the apparent
consumption of Wine and Champagne, i.e., domestic production plus imports less exports
in eight years period of time ( 1998/99- 2005/06).

Table 3.1
APPARENT CONSUMPTION OF WINE AND CHAMPAGNE
( IN HECTO LITERS)
Apparent
Year Domestic Import Export Consumption
Production
1998/99 17,913 511 123 18,301
1999/00 23,440 1,632 119 24,953
2000/01 24,829 2,221 339 26,711
2001/02 26,678 2,750 452 28,976
2002/03 32,008 1,402 155 33,255
2003/04 40,107 1,615 120 41,602
2004/05 64,526 2,151 266 66,411
2005/06 64,526 4,638 223 68,941

Source:- Customs Authority for Import and Export Data

:- Central Statistical Agency for Domestic Production Data
*2005/06 domestic production is assumed to be equal to the year 2004/05

Domestic production of wine and champagne has generally shown an increasing trend.
The production level which was 17,913 hecto litres during 1998/99 has increased
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consistently and reached to 64,562 hecto litres by the year 2004/05. Annual average
growth of domestic production during the period considered was about 20%.

The imported quantity of wine has shown an increasing trend for the first four
consecutive years i.e. 1998/99 - 2001/02. The import level which was 511 H.L liters
during 1998/99 has increased to 1632 H.L. 2221 H.L, and 2750 H.L by the year
1999/00, 2000/01 and 2001/02 respectively. But during the following three years the
import level declined to the range of 1402 H.L and 2151 H.L. A sharp increase of import
has been registered during 2006 which was 4,638. H.L.

Export of wine is generally small compared to imports and domestic production.

Exported quantity has been rising during the period 1998/99 to 2001/02. The export level
which was around 120 H.L during the period 1998/99-1999/00 has increased to 339 H.L
and 452 H.L by the year 2001/01 and 2001/02 respectively. The level of export attained
in the year 2001/02 had never been reached again. Exported quantity during 2002/03 and
2003/04 has declined to 155 H.L and 120 H.L respectively. An improvement in the
exported quantity is observed during the last two years which has reached 266 H.L and
223 H.L by the year 2004/05 and 2005/06, respectively.

Apparent consumption of wine and champagne has shown a growth trend during the past
eight years. The apparent consumption which was 18,301 H.L has increased to 24,953
H.L, 26,711 H.L and 28,976 H.L by the year 1999/00, 2000/01 and 2001/02 respectively.
Similarly, the apparent consumption in 2002/03 has increased to a level of 33,255 H.L;
41,602 H.L; 66,411 H.L and 68,941 H.L during the year 2002/03, year 2003/04, year
2004/05 and year 2005/06, respectively.

To estimate the current effective demand, the past growth of apparent consumption and
export has been considered. During the past eight years apparent consumption on the
average has been rising annually by more than 20%. Hence, a conservative growth rate
of 15% is taken to estimate the current domestic apparent consumption. Accordingly,
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current domestic demand is estimated at 91,174 H.L. Adding about 500 H.L for export,
total current demand is estimated at 91,674 H.L.

2. Projected Demand

The demand for wine and champagne is mainly a function of urbanization, income
growth, population and growth of catering and recreational centers as well as change in
food habit of the population. From Table 3.1, it is observed that in the last eight years the
apparent consumption of wine and champagne has grown at an average rate of 20%. The
future demand for wine and champagne is forecasted on the assumption that at least a
12% growth rate will prevail during the forecast period. The projected demand is shown
in Table 3.2.

Table 3.2
PROJECTED DEMAND OF WINE & CHAMPAGNE

Year Forecasted Existing local Supply Gap

Demand Supply
2009 102,675 64,526 38,149
2010 114,996 64,526 50,470
2011 128,795 64,526 64,269
2012 144,251 64,526 79,725
2013 161,561 64,526 97,035
2014 180,948 64,526 116,422
2015 202,662 64,526 138,136
2016 226,981 64,526 162,,455
2017 254,219 64,526 189,693
2018 284,725 64,526 220,199
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3. Pricing & Distribution

As per the Survey of Medium and Large scale Manufacturing Industries, CSA,2007, the
average, producers price of Wine is Birr 1914.20 per H.L. This price is adopted for
financial analysis.

The product can be either distributed by the producer or agents in the city and various
parts of the country.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The plant is assumed to cover only 10% of the 2009 demand and hence designed to have
a production capacity of 3,500 hecto-liters of assorted wine products from fresh grapes
based on 300 working days and three shifts per day.

2. Production Programme

The production Programme is indicated in Table 3.3. Initially the plant requires some
years to penetrate into the market. Therefore, in the first and second year of production,
the capacity utilization rate will be 70% and 90%, respectively. In the third year and
onwards, full capacity production shall be attained.

Table 3.3
PRODUCTION PROGRAMME

Sr. Product Production Year

No. 1 2 3-10
1 Wine (hecto litre) 2450 3150 3500
2 Capacity utilization rate (%) 70 90 100
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IV. MATERIALS AND INPUTS

A. RAW & AUXILIARY MATERIALS

The plant uses fresh grapes, dry resin, sugar and chemical additives as major raw
materials for the production of assorted wine products depending upon the market
demand. In addition, glass bottles and packing materials are used as auxiliary materials.
Grapes, sugar, bottles and plastic crates can be sourced from local suppliers, while resin
and chemical additives have to be imported.

Annual consumption and cost of materials is shown in Table 4.1.

Table 4.1
RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST

Sr. Description Unit Qty. Cost ('000 Birr)

No. of FC LC Total
Measure
1. Fresh grape Quintal 207 - 204.60 204.60
2. Dry resin " 147.5 167.95 33.59 201.54
3. Sugar " 575.6 - 411.58 411.58
4. Tartaric acid " 0.44 2.34 0.52 2.86
5. Citric acid " 1.86 3.27 0.72 3.99
6. Sodium benzoate " 2.64 5.00 1.10 6.10
7. Bottles (glass) pcs 468,000 - 1,158.30 1,158.30
8. Plastic crate " 39,000 - 321.75 321.75
Grand Total 178.56 2,132.16 2,310.72
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B. UTILITIES

The major utilities are electricity, fuel oil and water. Annual requirement of utilities is
indicated in Table 4.2.
Table 4.2
UTILITIES REQUIREMENT & COST

Sr. Utility Qty Cost ('000 Birr)

No.
1. Electricity (kWh) 91,000 43.2
2. Furnace oil (lt) 12,285 71.744
3. Water (m3) 2,600 8.45
Total 123.394

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

The technological process of wine production can be categorized into three main stages.
1st stage: Reception of fresh grape. At this stage, the following operations are
carried out:
- Weighing of grape,
- Sampling by automatic extractor for sugar content evaluation, and
- Conveying of grape to pressing operation.

2nd stage: Generally, wine-making operation that take place at this stage are:
- Pressing and desteming of the grape;
- Expulsion of the stalks to the external area; and
- Transfer of the crushed grape to the verification lines.
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Having completed the above operation, crushed grape is further processed according to
the type of wine to be produced (white or red wine). For example, red wine is processed
as follows.

- Partial fermentation (24-36 hrs) in auto-vinificator;

- Extraction of the "flower" must where skins have been already
removed;
- Filtration of must by plate filter and transfer to the secondary
fermentation vats;
- Extraction of pomade from the vinificators and transfer by means of
conveyor to a separator; and
- Extraction of the first pressing must wine from the press separator and
its transfer by pumping to the secondary fermentation vats.
3rd stage: Final operations. This includes:-
- Decanting and filtration in order to remove any impurities;
- Correction if required by various treatment methods;
- Blending with other wine which is commonly known as “Cutting";
- Stabilization by refrigeration in isobaric stainless steel vats (8 days
equal to about 2 years of natural ageing);
- Pasteurization (80oC ) with the effect to remove active ferments; and
- Bottling during pasteurization.

The spent grapes is the only waste expected in the production process of wine and
champagne. This spent grapes will be used as fertilizer or animal feed and doesnot have
any adverse impact on environment.
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2. Source of Technology

The following Italian company may be contacted for an offer.

I.M.A Industria Macchine Automatiche S.P.A
Via 1o Maggio 16
40064 Ozzano Emilia (Bologna) Italy
Tel. 051.651411 - Fax 051 799330
E-mail: givlianellia@ ima.it

B. ENGINEERING

1. Machinery & Equipment

The major machinery and equipment required for the wine-making plant are shown in
Table 5.1. Total estimated cost of machinery and equipment is Birr 3.2 million.

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT FOR WINE AND
CHAMPAGN PRODUCING PLANT WITH ESTIMATED COSTS

Sr. Description Qty. Cost (‘000 Birr)

No. No F.C L.C. Total
1 Fresh grape reception unit 1 set
320 - 320
2 Wine -making system 1 set
480 - 480
3 Wine juice pumping system 1 set
256 - 256
4 Secondary fermentation 1 set
- 160 160
5 Wine juice and wine filtration 1 set
320 - 320
6 Wine refrigeration unit 1
384 - 384
7 Bottling line 1set
800 - 800
8 Auxiliary equipment 1 set
480 - 480
Grand Total 3,040 160 3,200
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2. Land, Building and Civil Works

The total land requirement is 1000 m2, out of which the built-up area is 500 m2. Out of
the total built-up area, 280m2 will be used for production facility, 140m2 for store and
80m2 for office building. Therefore, the cost of building is estimated at Birr 1.25 million.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.
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Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial
Zone Development and Coordination Committee of the City’s Investment Authority.
However, if the land request is above 5,000 m2 the request is evaluated by the City’s
Investment Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is
adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion
Scored point period Period Payment
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years.
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Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m2, is
estimated at Birr 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years i.e.
Birr 667,286 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The manpower requirement and cost of labour are indicated in Table 6.1.

Table 6.1
MANPOWER REQUIREMENT & LABOUR COST

Sr. Description Req. Monthly Annual

No. No. Salary (Birr) Salary (Birr)
1. General manger 1 3,000 36,000
2. Admin. & Finance head 1 2,000 24,000
3. Secretary 1 700 8,400
4. Accountant 1 1,500 18,000
5. Sales men 1 1,000 12,000
6. Purchaser 1 1,000 12,000
7. Production head 1 2,000 24,000
8. Operators 7 4,200 50,400
9. Laborers 20 6,000 72,000
10. General Service 4 2,400 28,800
Sub-Total 38 23,800 285,600
Benefit (25% BS) 5,950 71,400
Total 29,750 357,000
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B. TRAINING REQUIREMENT

On-the-job training shall be carried out during plant erection & commissioning. This
may cost about Birr 30,000. The experts of machinery and equipment supplier may
provide the training.

VII. FINANCIAL ANALYSIS

The financial analysis of the wine and champagne project is based on the data presented
in the previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material import 90 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost
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A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
8.07 million, of which 38 per cent will be required in foreign currency. The major
breakdown of the total initial investment cost is shown in Table 7.1.

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value 2,076.00 - 2,076.00
2 Building and Civil Work 1,250.00 - 1,250.00
3 Plant Machinery and Equipment 160.0 3040.0 3,200.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 568.3 - 568.30
7 Working Capital 435.56 - 435.56
Total Investment Cost 5,039.86 3,040.00 8,079.86

* N.B Pre-production expenditure includes interest during construction ( Birr 438.30

thousand), training ( Birr 30 thousand) and Birr 100 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning
expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 3.74
million (see Table 7.2). The raw material cost accounts for 61.72 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and labour direct which account for 11.64%, 9.53% and 4.58%
respectively. The remaining 12.53% is the share of repair and maintenance, labour
overhead, utility and other administration cost.
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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
2,310.72 61.72
Utilities 123.39 3.30
Maintenance and repair
160.00 4.27
Labour direct 171.36 4.58
Labour overheads
71.40 1.91
Administration Costs 114.24 3.05
Land lease cost
- -
Total Operating Costs 2,951.11 78.83
Depreciation 435.7 11.64
Cost of Finance 356.9 9.53
Total Production Cost
3,743.65 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 280,150 to Birr
490,130 during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 7.08 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
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dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 28 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 5 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
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in a bank account. Accordingly, the IRR of this porject is computed to be 15.26 %

indicating the vaiability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 2.40 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 38 persons. In addition to supply of the
domestic needs, the project will generate Birr 3.30 million in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports. Moreover, the project also has a foreign exchange
earning potential through export.