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Student: Sergei Bugrov

MGMT 634 79B1-SP16-8W2-BUSINESS STRATEGY

Assignment: Frogs Leap Winery in 2011 the Sustainability Agenda

Introduction
Frog's Leap Winery is a California wine producer that operates from
Rutherford. It was founded in 1981 on a spot along Mills Creek known as Frog
Farm. Frog's Leap Winery was established by John Williams and Larry Turley.
In addition to their accolades for their wines, Frog's Leap is also noted for its
humorous approach to winemaking, down to their "Ribbit" corks. The winery
got its name by combining "Frog Farm" (where its first wines were made)
with "Stag's Leap" (where John Williams had his first winemaking job).
John Williams and Larry Turley formed Frog's Leap in 1981 at the site of the
historic Adamson Winery, producing 700 cases of sauvignon blanc. When
they started, Turley was a doctor and Williams was a winemaker at Spring
Mountain Vineyard. They took the winery into organic farming and made it
the first Napa winery with certified organically grown grapes. They built up
the winery in Saint Helena, California together until 1994, when John Williams
took Frog's Leap to the Red Barn Ranch in Rutherford, California, and Larry
Turley established what is now Turley Wine Cellars. In 2004, Sunlight Electric
met with Frog's Leap discussing how the winery was spending around
$50,000 annually on electricity. In 2005, the photovoltaic system went live
over Frog's Leap's fields. With the system's annual output of 260,000
kilowatt-hours, it produces about 85% of the site's energy usage.
Frog's Leap features organically grown grapes and dry-farmed vineyards.
Owner John Williams believes dry-farming results in stronger, healthier vines.

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Frog's Leap engages in other green practices as well. They were one of the
first wineries to use solar power to run their entire operation. The winery also
includes the use of compost and cover crops to organically enrich the soil, as
well as dry farming to conserve water and reduce soil erosion.

Issues

The market is highly segmented and therefore competitive

They were unable to transfer the savings from sustainability programs

to the customers
There is no other clear and significant reason for the customers to buy

the wine produced by green wineries

Frogs Leaps leadership believes that their sustainability programs

(e.g. solar power, waste control, etc.) will bring them more customers
John Williams believes that it is fine to have $20 million debt
Frogs Leap is simply following the competition reducing the costs.
They, however, need a strong differentiator in order to deal with the

competition
80% of the net sales in the U.S. can be attributed to the resellers
They underestimate the value of the reviews and believe that the
customers will be able to fall in love with their wine without any third

party information
The company will not enjoy the economy of scale
The majority of their workforce is immigrant laborers, availability of

which is regulated by immigration laws and subject to political risks

Their business subjects to a variety of environmental risks

Analysis
SWOT
Strengths

Relatively cheap and skilled labor force

Savings on electricity

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Committed leadership

Weaknesses

Increasing long-term debt

Low profit margins
John Williams thinks that they have margins above average, which is

not true
Lack of general management experience in John Williams

Opportunities

Growth of the U.S economy, declining unemployment, and rising

income per capital will drive the companys sales and profits
The company has opportunities in more aggressive promotion of their

products
One of Johns children works at another winery and is likely to replace
him as CEO of Frogs Leap after he retires

Threats

Financial risks associated with significant debt amount

Environmental threats, such as drought and global warming
Fierce competition kills profits
Johns children might refuse to work at Frogs Leap
Any major financial crises in the U.S. might kill the whole business
eventually

Porters 5 Forces
Buyer power - strong. Switching costs do not exist - buyers will choose
whatever is a better match for their dinner. Buyers tend to prefer the less
expensive option if the difference between $20 and $3 per bottle wine is

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poorly communicated or irrelevant. The case does not provide a clear
explanation why people should prefer organic wine over the regular one.
Supplier power - significant. First, utility companies are the major suppliers in
the industry. On the one hand, they are usually local monopolies. On the
other hand, these companies are highly regulated by state and federal
government laws. It is highly unlikely that a company like Frogs Leap could
switch its supplier of the water or electricity. Second, employees usually have
a significant influence over the whole business.
Threats of substitutes - strong. There is always a variety of alcoholic
beverages in stores. In fact, virtually every beverage might substitute the
glass of wine.
Threat of new entrants - significant. It does not take much to start a small
winery. The biggest barrier is the proficiency in this field. It is, however, the
basic requirement in any business.
Competition - fierce. The market is highly segmented with a significant
number of competing businesses. It is extremely difficult to differentiate the
product in this industry. At the end of the day, businesses have to focus on
reducing their cost in order to survive. Low-cost leadership is, however,
highly unlikely to become a reality until technologies not only save money on
the electricity but also increase the effect of economy of scale.

Alternatives.

Sell the business to one of the larger wineries.

Bankrupt the business and let the children start their own winery with

zero debt.
Employ any possible incentive (even those that will make their wine

less green) that will allow the further decrease in the costs.
Merge with another winery to become stronger rather than compete

with each other.

Start a winery consulting business.

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Build an alternative source of water for the winery.

Continue improving their value proposition rather than regular

business aspects such as marketing or finance.

Start a reality TV show exposing the various aspects of their life and

work.
Invest in information technologies that can help them.
Start an education program in partnership with some educational
institution.

Recommendations

Employ Internet of Things technologies to improve the productivity and

decrease the production costs.

Start consulting new and struggling wineries.
Merge with another or even a number of other wineries to become

stronger.
Employ a more aggressive marketing strategy - do not expect that

customers are not to be retained.

Develop a distinguishing and attractive package design.
Start a delivery service in partnership with the other wineries.
Develop exclusive offers for the restaurants and hotels.

Conclusions
While the company is cash positive, it experiences several significant
problems that they need to solve in order to survive. From a financial point of
view, the long-term debt has quadrupled since 2000; cash has decreased
more than four times; inventory has almost doubled; accounts receivable
have increased almost five times. On the other hand, their sales have
increased insignificantly from 61,000 cases ($9,638,000) to 62,000 cases
($12,152,000).
They have relatively low gross profit margin (59.2% in 2010) and EBITDA
(only $2,372,000) while their peers have 70% gross profit margin and

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$4,269,000 EBITDA. Their sales and marketing expenses have grown more
than twice since 2000 ($1,580,000 in 2000 to $3,337,000 in 2010) without
any significant improvements in the sales and operating income.