Vine San Pedro Harvard Case Solution & Analysis

Vine San Pedro Case Study Solution
Introduction:

Vina San Pedro is the third largest producer and seller of wine in the Chile, the initial days of the company, proves to be very profitable for the company and the operations grew rapidly. However, the middle life of the company is not so favorable, and VSP generates consecutive losses in the late 1980s .Since its incorporation, the management of VSP remains enthusiastic and keen to expand the operations of the company, and for this purpose, they invest heavily in the capital equipment.

In the year 1992, CCU a large diversified beverage company purchases 48.4% of the stocks of VSP and gains control over it, the performance of VSP has seen a turn around after the acquisition, and it generates little profit just after the acquisition. The group management sees great potential in their recent acquisition, and they classify VSP as a diamond in the rough. The debt levels of VSP has also been reduced by the group management in order to increase the share price and profits. Not only has this, but the operational policies implemented by the CCU also proved to be critical for VSP, the group management has decided to deliver the wines of VSP in most remote locations of Chile.

The legal environment of Chile also supports the operation of VSP as the government is encouraging the producer of wine to produce more wine for the export. On the other hand, the natural environment of Chile is also supporting the production of wine, the climatic conditions of Chile allow the farmers to grow highest quality grapes which are used in the production of wine.

The wine of VSP is sold in two primary markets i.e. domestic and international market, the domestic appears to be very fragmented, the profit margins are very lower, and the market share is also minimal while the international market has some lucrative opportunities such as the profit margins and demand is very high.

Main problems and key issues:

Although the financial and operational performance of VSP appears to be improving, there are still many issues and problems that pertain to the business model of the VSP, in order to sustain the competitive advantage and to remain profitable for long-term VSP will have to develop strategies that protect itself from the materialisation of these issues.

The increasing costs are one of the biggest problem facing by the VSP;the costs are representing very high portions of the revenues. The higher cost problems have caused great tension among the management at all levels, they have implemented many strategies to reduce the costs, but they fail to make the cost lower in the long run. There are many reasons for this high cost, inflation and poor strategies of management appear to be most prominent reasons for this high cost.

Another main issue that is facing by the VSP is the increased competition in the domestic market; there are many large players in the market along with many other small players as well. Although a significant portion of the market is held by the VSP, there is still a big part of the market not in the hand of VSP. However, it can be argued that due to the better decision making of the management this problem has been reduced to some extent in the recent past.

The inflation is also one of the biggest problem facing by VSP; this is the biggest problem outside the control of VSP. Due to inflation and stressed economic environment of Chile, the customers are spending less on the expensive food. Even if they spend, they spend lower which is causing some adverse impacts on the growth of VSP. Furthermore, the value of Chilean pesos is also decreasing due to this inflation; this is also having some serious consequences on the profitability of the company as the amounts that would be received in the foreign currencies from the exports is fluctuating. The management of VSP is failing to avoid this uncertainty in the earning, the revenues are denominated in the foreign currency while the expenses are denominated in Chilean pesos, and this mismatch between the currencies is causing lower cash inflows as compared to the cash outflows.

Analysis:

High costs:

The costs to produce all types of wines are increasing drastically for VSP; there are many reasons which led to the higher costs and reduced profit margins. The management of CCU has taken many steps to reduce the costs, but they are still unable to mini mise the cost to acceptable lower level. They have upgraded various production plants in order to increase the efficiencies and reduce the costs Moreover; they also implement various cost cutting strategies which mainly includes the elimination of the non-value adding activities.

Vine San Pedro Harvard Case Solution & Analysis

 

 

Despite the implementation of these cost reduction activities, VSP fails to reduce the costs, the cost of goods sold is increasing in the recent years and is also anticipated to increase further due to the higher farming cost of grapes. Not only the production cost but the non-production cost such as taxations are also increasing, the government has implemented various additional taxes on the producers of wines because of the potential of the industry. The taxes are also increased in order to reduce the consumption of wine among the local citizens of Chile. In addition to this, the increasing utility expenses are another core reason for the rapid increase in the cost of production...................

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