Freemark Abbey Winery

Case 21: Freemark Abbey Winery

MANA 6302-N1

Dr. Danxia Chen

Dallas Baptist University

By:

Josh Braddy

Caleb Carlisle

John-David Culbertson

Executive Summary

In September 1976, William Jaeger, a partner in the Freemark Abbey Winery, is faced with a decision concerning the winery’s approach to the grapes necessary for their Riesling wine.  Northern Napa Valley, where the winery is located, is facing the possibility of a storm.  Although in many cases rain is beneficial to a crop, the timing of the storm, which is just before the harvest, can be devastating and ruin the crop entirely.  However, the possibility exists where the storm produces just enough water to create Botrytis mold.  This mold is beneficial in that it ultimately results in a “luscious, complex sweet wine, highly valued by connoisseurs”, thus drastically increasing the value of Freemark Abbey’s Riesling wine (Bodily, 475).

Aside from these two extremes exists several possible outcomes.  First, the winery could harvest the grapes immediately, thus locking in a specific value. Although this option offers relatively lower return than others, it ensures the winery experiences some sort of return while also eliminating risk.  The winery could also delay harvesting the grapes and, in turn, not experience the storm building over the waters off Mexico.  The scenario in which the storm does not come presents several possible outcomes – most of which are out of the winery’s control due to the volatile nature of vinification.  It is between the information at hand and these various alternatives that William Jaeger and Freemark Abbey Winery must make their decision.

Decision Problem

The central decision in the case is centered around whether to harvest the grapes now, giving the winery the certainty of a specific profit, or to forgo harvesting now in hopes of higher returns as a result of the potential storm.  This decision is affected by a number of factors including educated guesses on the likelihood of the storm and the probability that the Botrytis mold will form if the necessary rain does indeed come.  The winery must decide, based on probabilities, if the potential for gain outweighs the potential for loss.  This decision is the wait or harvest now decision.

There is a second decision the winery must face should they wait to harvest and the botrytis mold does not form, the grapes would swell and lose their concentration.  This worst case scenario situation would force the winery choose how to sell the, now, less valuable grapes.  Freeman Abbey could proceed with vinification and make a lower quality wine under their own label. They could, however, also sell the grapes and/or the finished, less concentrated wine in bulk to other labels.  Selling in bulk will protect Freemark Abbey’s brand as a high quality wine, but will reduce the revenue from harvest in half.  This decision is the bulk or bottle decision.  Since there is no way to statistically determine a decision centered on protecting a brand’s image, the calculations for this paper will be done twice – first accounting for a preference for bottling and again for a preference regarding bulk sale.