Water of Life (Eau-de-Vie) Case Study: Alain and Karen had met in graduate school and upon graduation married and moved
Posted: Wed Mar 30, 2022 3:50 pm
Water of Life (Eau-de-Vie) Case Study:
Alain and Karen had met in graduate school and upon graduation
married and moved to Toronto
where they had successful careers in the field of finance and
medical research. But after 15 years in
the city they had moved to Prince Edward County about one hour’s
drive east of Toronto back to
where Karen had grown up. With their two children the couple bought
a century farmhouse and the
apple orchards that came with the farm. Their dream was to launch
an apple cidery and ride the
recent popularity of ciders that had seen a 300% growth in sales of
Ontario ciders over the past 10
years. Fortunately for them, Prince Edward County (PEC) had an
abundance of apple orchards some
of which were transitioning to vineyards to supply the growing
wine-producing that had grown over
the last 20 years, not as fervently as the Niagara region west of
Toronto but still facing the popularity
of weekend trips by Torontonians. Still, there was a significant
production of apples in PEC and all
along the Lake Ontario shoreline communities.
Cider had been produced for centuries in Ontario but had suffered a
major decline during prohibition
in the 1920s and 1930s and had only recently experienced a
resurgence in interest especially among
younger people and apple producers looking to develop new markets
for their products. In the 1980s
cider production had grown slowly but since the popularity of
wineries and micro-breweries grew
across the region, coupled with government support, cideries were
attracting a similar interest among
budding entrepreneurs and investors back in Toronto. In 2015 cider
sales in Ontario grew 17% to $73
million but 73% of the ciders sold were imported. In 2016-17
Ontario cider sales grew 35% to $23.7
million and the Liquor Control Board of Ontario (LCBO) predicted
that sales of ciders would reach
more than $160 million in the early 2020s. The market looked
promising but there was a significant
amount of competition with subsidiaries of Labatt’s and Carlsberg
Breweries (Somersby)
commencing production in Ontario. These investments helped in
fueling the growth of the domestic
industry but there was a fear of the large companies growing into
dominant positions in the industry.
By 2021 there were over 45 craft cideries in Ontario and the large
players still represented less than
25% of the market. Actual percentages were hard to determine as
many of the cideries were family
and closely-held firms, much like Alain and Karen Paquette’s
operation. Karen’s family the Mears’
had lived and farmed in PEC since the 1880s and Alain and Karen
wished to continue the family
history in PEC. The family support was tangible including some
financial assistance from Karen’s
uncle who provided a significant amount of upfront cash but did not
want to be a long-term investor.
The Ontario Apple Growers Association shared the enthusiasm for
cider production as the cideries in
Ontario provided a growing market for their products and especially
the older varieties of apples like
Page 2 of 6
MacIntosh and Spy’s that were less popular as dessert or table
apples but still comprised a significant
acreage on Ontario farms. Apple growers were also happy as cideries
processed apples for about 11
months a year and only shut down production in August in time to
prepare for the new harvest each
year. More recently other varieties of apples had commenced being
tested in Ontario for use in ciders
based on the Hard Cider varieties produced in the United Kingdom
and France. In the UK the value of
cider apples to the growers equalled over $3 Billion in value and
over $13 Billion to the cideries at the
consumer level be it at pubs or stores for home consumption. Over a
dozen varieties were being
tested at the University of Guelph research centre in Simcoe
Ontario and across several other sites
including PEC. Results from the first three years of tests were
promising as the varieties appeared to
survive Canadian winters and any blights, molds, funguses and such
were controlled in the same
manner as for dessert apples.
The Paquette’s farm had evolved into not just an apple farm and
cidery but also into a large venue
that enabled taste testing and meals to be served. Of course, sales
of the ciders and related products
were strongly promoted when customers were tasting the ciders, and
the differences were noticeable.
Some ciders were now incorporating other fruits like pears and
strawberries that could be sourced
locally. The incorporated firm was surviving but the couple wanted
to access a more lucrative and
year-round selling avenue but had been turned down by the LCBO as
their production volume was
inadequate to be listed provincially where any supplier had to be
able to supply the complete
marketing chain that was the LCBO, the world’s largest purveyor of
alcohol. The local LCBO outlets
did, at times carry some of the Paquette’s products but then the
competition was fierce, but friendly
with the other local producers.
Alain had spotted an Ice Cider on the shelf at the LCBO from a
local competitor and considered
producing such a product in their operation. Ice Cider production
was similar to Ice Wine where the
Juice or the apples were frozen and the resulting sweeter juice was
made into Ice Cider or one could
freeze Cider outdoors or in a freezer and filter out the ice
leaving a more potent 12% or higher alcohol
beverage. Ice Wine was a much more developed market totally over
$230 million exported from
Canada in 2018. Ice cider was explored by Alain and Karen as there
would be no need to obtain a
different licence for the production of a different alcoholic
beverage. Cider was classed as a wine for
tax and manufacturing reasons and the technology was not as
expensive as a distillery that required
a different licence from breweries, cideries or wineries.
So research was conducted on the potential of Ice Cider and the
potential market in Canada. It was
quickly discovered that Quebec cideries dominated the Ice Cider
market but after a surge in sales
over two years of up to $9 million in 2010 the market had settled
back to the $3 Million range in 2019.
Page 3 of 6
It would appear that for a few years Ice Cider had been a popular
hostess gift, especially at Christmas
time. The Paquette’s were sure there must be another product that
they could produce that would
generate good revenue and profit on a long-standing basis. It was
at that point that Alain recalled a
beverage that was occasionally consumed in Normandy, northern
France, that was made from
apples. Eau-de-Vie was its name and it was produced in Normandy and
Alsace and Brittany, where
ever they grew apples in France.
Once again the LCBO provided excellent information for Alain and
Karen. Eau-de-Vie was lumped in
with several other beverages that were all similar to brandy in
that they were a distilled product
usually from the cider that was produced from many different fruits
across central Europe right down
into the Balkans. Many of the products were familiar names such as
Tsipouro, Armagnac, Metaxa,
Slivovitz, Palinka, Calvados, Kirsch, Poire Williams etc. Most were
aged in stainless steel for a
mellowing period after the distillation stage of production. Some
processors used old wine barrels for
the ageing/mellowing period and would leave the liquid to age
upwards of 18 months. Prices for Eau-
de-Vie products at the LCBO ranged upwards of $175 per 700 ml
bottle, though most were in the
range of $40 to $60 per bottle. All the prices were significantly
higher than the prices charged for cider
that competed with premium beers. The market also appeared to be in
the hundreds of millions of
dollars annually but was dominated by the European producers.
Alain and Karen now needed to make a case for Karen’s Uncle to
support the new addition to the
business. To date, the company had not returned any money to their
silent investor after 4 years of
operation. Some details had already been worked for producing the
distilled products including
sourcing wine barrels from local wineries. The wineries were
constantly looking for a market for the
used barrels, usually French or American Oak, after the barrels’
use in ageing wine. The barrels could
cost upwards of $1000 to purchase brand new French Oak Barrels and
around $500 for an American
Oak Barrel but after 2 to 3 uses, the wineries that Karen had
talked to would be very happy to sell the
barrels as-is for $100 each. A significant saving for a container
that would hold 225 litres of liquid. The
distilling equipment was the expensive component as it would set
back the company in the range of
$250,000. Fortunately, there were few other capital investments
required as the bottling equipment
could be used for all the different products and sizes of bottles,
and there was plenty of storage space
to “mellow” the Water of Life. The only other major hold-up was the
licencing of a distillery in Ontario.
Fortunately, the provincial and federal government had recently
loosened the rules and regulations
for distilleries and a proposal could be submitted and approved by
both the provincial and federal
governments within 3 to 18 months for the legal costs of $10,000 to
$20,000. Uncle Colin would need
to fund the complete expansion not just the licencing but the
equipment as well.
Page 4 of 6
Production volumes were expected to reach 500 barrels after 3 years
but initially, production would
commence with between 50 and 100 barrels in the first year and the
ageing process would take 12 to
18 months before bottling of the PEC Eau-de-Vie. Though the LCBO
sold the products for $40 to
$175 per bottle the Paquette’s expected that the wholesale price
would be in the range of 15 dollars
per 500 ml bottle. Other sized bottles were also possible on their
bottling line. It was also convenient
that the distillation of cider-based products could be conducted
year-round just like the production of
cider and once distilled and bottled the shelf-life of the product
was extended almost indefinitely.
Some cost of production information had been garnered from a former
classmate who was working at
the Ontario Agricultural College that was casting some significant
light on the project. See the table
below. Another issue was the yield of liquor for the fruit used in
production. The only study that could
be found was from Slovenia and in their experiments using Plums,
Peaches and Pears, 1000 kg of
fruit would yield between 85 and 110 litres of brandy. The use of
other fruits could also be included in
their plans but Karen and Alain knew that accessing the different
fruits like raspberries and pears
would be very time-sensitive as the producers had limited storage
facilities. Still, any fruit could be
used to make some form of Eau-de-Vie.
The issue for Colin Mears, should he continue to support this pair
of budding entrepreneurs? Can
they generate at least a 10% return on his investment of $450,000?
What are the chances of this
venture being profitable?
Page 5 of 6
Description of Expense Cost for 1L of Apple Brandy
($CAN)
Raw Materials and Fermentation Process 3.0
Distillation Process 0.5
Aging (minimum 2 years) 1.0
Bottling 1.5
Labelling 1.0
Packing 0.4
Capital Cost and Operating Cost 2.6
Total Cost 10.0
Capital cost includes equipment, land, building etc.,
Operating cost includes rent, salaries, taxes, utilities, repairs,
sales & marketing etc
PROVIDE 2 TO 3 ALTERNATIVES AND A RECOMMENDATION USING
THE INFORMATION PROVIDED.
Balance Sheet 2020 2019 $ $ $ $ 56,210 78,550 102,550 15,875 $ $ $ $ 64,500 89,540 86,450 15,875 $ 253,185 $ 256,365 Cash Accounts Receivable Inventory Other Current Assets Current Assets Equipment Vehicles Buildings Accrued Depreciation Land Fixed Assets Total Assets $ 509,567 $ 145,875 $ 650,000 $ 198,025 $ 850,000 $ 486,500 $ 124,600 $ 650,000 $ 135,450 $ 850,000 $ $ 1,957,417 2,210,602 $ $ 1,975,650 2,232,015 $ $ $ 92,575 9,875 64,850 $ $ $ 87,750 8,740 56,885 $ 167,300 $ 153,375 Accounts Payable Wages Payable Other Payables Current Liabilities Long Term Debt ShareHolder Loan Net Worth Total Liabilites and Equity $ 262,500 $ 450,000 $ 1,330,802 $ 262,500 $ 450,000 $ 1,366,140 $ 2,210,602 $ 2,232,015 Income Statement 2020 2019 $ 945,040 $ 739,545 $ 875,428 $ 654,225 $ 205,495 $ 221,203 Revenue Cost of Goods Sold Gross Profit Sales and Admin Expenses Utilities Travel and Entertainment Depreciation Operating Profit Taxes Net Income $ $ $ $ 115,758 42,875 24,568 62,575 $ 125,478 $ 46,525 $ 36,575 $ 66,545 -$ 40,281 -$ 53,920 $ $ -$ 40,281 $ -$ 53,920
Alain and Karen had met in graduate school and upon graduation
married and moved to Toronto
where they had successful careers in the field of finance and
medical research. But after 15 years in
the city they had moved to Prince Edward County about one hour’s
drive east of Toronto back to
where Karen had grown up. With their two children the couple bought
a century farmhouse and the
apple orchards that came with the farm. Their dream was to launch
an apple cidery and ride the
recent popularity of ciders that had seen a 300% growth in sales of
Ontario ciders over the past 10
years. Fortunately for them, Prince Edward County (PEC) had an
abundance of apple orchards some
of which were transitioning to vineyards to supply the growing
wine-producing that had grown over
the last 20 years, not as fervently as the Niagara region west of
Toronto but still facing the popularity
of weekend trips by Torontonians. Still, there was a significant
production of apples in PEC and all
along the Lake Ontario shoreline communities.
Cider had been produced for centuries in Ontario but had suffered a
major decline during prohibition
in the 1920s and 1930s and had only recently experienced a
resurgence in interest especially among
younger people and apple producers looking to develop new markets
for their products. In the 1980s
cider production had grown slowly but since the popularity of
wineries and micro-breweries grew
across the region, coupled with government support, cideries were
attracting a similar interest among
budding entrepreneurs and investors back in Toronto. In 2015 cider
sales in Ontario grew 17% to $73
million but 73% of the ciders sold were imported. In 2016-17
Ontario cider sales grew 35% to $23.7
million and the Liquor Control Board of Ontario (LCBO) predicted
that sales of ciders would reach
more than $160 million in the early 2020s. The market looked
promising but there was a significant
amount of competition with subsidiaries of Labatt’s and Carlsberg
Breweries (Somersby)
commencing production in Ontario. These investments helped in
fueling the growth of the domestic
industry but there was a fear of the large companies growing into
dominant positions in the industry.
By 2021 there were over 45 craft cideries in Ontario and the large
players still represented less than
25% of the market. Actual percentages were hard to determine as
many of the cideries were family
and closely-held firms, much like Alain and Karen Paquette’s
operation. Karen’s family the Mears’
had lived and farmed in PEC since the 1880s and Alain and Karen
wished to continue the family
history in PEC. The family support was tangible including some
financial assistance from Karen’s
uncle who provided a significant amount of upfront cash but did not
want to be a long-term investor.
The Ontario Apple Growers Association shared the enthusiasm for
cider production as the cideries in
Ontario provided a growing market for their products and especially
the older varieties of apples like
Page 2 of 6
MacIntosh and Spy’s that were less popular as dessert or table
apples but still comprised a significant
acreage on Ontario farms. Apple growers were also happy as cideries
processed apples for about 11
months a year and only shut down production in August in time to
prepare for the new harvest each
year. More recently other varieties of apples had commenced being
tested in Ontario for use in ciders
based on the Hard Cider varieties produced in the United Kingdom
and France. In the UK the value of
cider apples to the growers equalled over $3 Billion in value and
over $13 Billion to the cideries at the
consumer level be it at pubs or stores for home consumption. Over a
dozen varieties were being
tested at the University of Guelph research centre in Simcoe
Ontario and across several other sites
including PEC. Results from the first three years of tests were
promising as the varieties appeared to
survive Canadian winters and any blights, molds, funguses and such
were controlled in the same
manner as for dessert apples.
The Paquette’s farm had evolved into not just an apple farm and
cidery but also into a large venue
that enabled taste testing and meals to be served. Of course, sales
of the ciders and related products
were strongly promoted when customers were tasting the ciders, and
the differences were noticeable.
Some ciders were now incorporating other fruits like pears and
strawberries that could be sourced
locally. The incorporated firm was surviving but the couple wanted
to access a more lucrative and
year-round selling avenue but had been turned down by the LCBO as
their production volume was
inadequate to be listed provincially where any supplier had to be
able to supply the complete
marketing chain that was the LCBO, the world’s largest purveyor of
alcohol. The local LCBO outlets
did, at times carry some of the Paquette’s products but then the
competition was fierce, but friendly
with the other local producers.
Alain had spotted an Ice Cider on the shelf at the LCBO from a
local competitor and considered
producing such a product in their operation. Ice Cider production
was similar to Ice Wine where the
Juice or the apples were frozen and the resulting sweeter juice was
made into Ice Cider or one could
freeze Cider outdoors or in a freezer and filter out the ice
leaving a more potent 12% or higher alcohol
beverage. Ice Wine was a much more developed market totally over
$230 million exported from
Canada in 2018. Ice cider was explored by Alain and Karen as there
would be no need to obtain a
different licence for the production of a different alcoholic
beverage. Cider was classed as a wine for
tax and manufacturing reasons and the technology was not as
expensive as a distillery that required
a different licence from breweries, cideries or wineries.
So research was conducted on the potential of Ice Cider and the
potential market in Canada. It was
quickly discovered that Quebec cideries dominated the Ice Cider
market but after a surge in sales
over two years of up to $9 million in 2010 the market had settled
back to the $3 Million range in 2019.
Page 3 of 6
It would appear that for a few years Ice Cider had been a popular
hostess gift, especially at Christmas
time. The Paquette’s were sure there must be another product that
they could produce that would
generate good revenue and profit on a long-standing basis. It was
at that point that Alain recalled a
beverage that was occasionally consumed in Normandy, northern
France, that was made from
apples. Eau-de-Vie was its name and it was produced in Normandy and
Alsace and Brittany, where
ever they grew apples in France.
Once again the LCBO provided excellent information for Alain and
Karen. Eau-de-Vie was lumped in
with several other beverages that were all similar to brandy in
that they were a distilled product
usually from the cider that was produced from many different fruits
across central Europe right down
into the Balkans. Many of the products were familiar names such as
Tsipouro, Armagnac, Metaxa,
Slivovitz, Palinka, Calvados, Kirsch, Poire Williams etc. Most were
aged in stainless steel for a
mellowing period after the distillation stage of production. Some
processors used old wine barrels for
the ageing/mellowing period and would leave the liquid to age
upwards of 18 months. Prices for Eau-
de-Vie products at the LCBO ranged upwards of $175 per 700 ml
bottle, though most were in the
range of $40 to $60 per bottle. All the prices were significantly
higher than the prices charged for cider
that competed with premium beers. The market also appeared to be in
the hundreds of millions of
dollars annually but was dominated by the European producers.
Alain and Karen now needed to make a case for Karen’s Uncle to
support the new addition to the
business. To date, the company had not returned any money to their
silent investor after 4 years of
operation. Some details had already been worked for producing the
distilled products including
sourcing wine barrels from local wineries. The wineries were
constantly looking for a market for the
used barrels, usually French or American Oak, after the barrels’
use in ageing wine. The barrels could
cost upwards of $1000 to purchase brand new French Oak Barrels and
around $500 for an American
Oak Barrel but after 2 to 3 uses, the wineries that Karen had
talked to would be very happy to sell the
barrels as-is for $100 each. A significant saving for a container
that would hold 225 litres of liquid. The
distilling equipment was the expensive component as it would set
back the company in the range of
$250,000. Fortunately, there were few other capital investments
required as the bottling equipment
could be used for all the different products and sizes of bottles,
and there was plenty of storage space
to “mellow” the Water of Life. The only other major hold-up was the
licencing of a distillery in Ontario.
Fortunately, the provincial and federal government had recently
loosened the rules and regulations
for distilleries and a proposal could be submitted and approved by
both the provincial and federal
governments within 3 to 18 months for the legal costs of $10,000 to
$20,000. Uncle Colin would need
to fund the complete expansion not just the licencing but the
equipment as well.
Page 4 of 6
Production volumes were expected to reach 500 barrels after 3 years
but initially, production would
commence with between 50 and 100 barrels in the first year and the
ageing process would take 12 to
18 months before bottling of the PEC Eau-de-Vie. Though the LCBO
sold the products for $40 to
$175 per bottle the Paquette’s expected that the wholesale price
would be in the range of 15 dollars
per 500 ml bottle. Other sized bottles were also possible on their
bottling line. It was also convenient
that the distillation of cider-based products could be conducted
year-round just like the production of
cider and once distilled and bottled the shelf-life of the product
was extended almost indefinitely.
Some cost of production information had been garnered from a former
classmate who was working at
the Ontario Agricultural College that was casting some significant
light on the project. See the table
below. Another issue was the yield of liquor for the fruit used in
production. The only study that could
be found was from Slovenia and in their experiments using Plums,
Peaches and Pears, 1000 kg of
fruit would yield between 85 and 110 litres of brandy. The use of
other fruits could also be included in
their plans but Karen and Alain knew that accessing the different
fruits like raspberries and pears
would be very time-sensitive as the producers had limited storage
facilities. Still, any fruit could be
used to make some form of Eau-de-Vie.
The issue for Colin Mears, should he continue to support this pair
of budding entrepreneurs? Can
they generate at least a 10% return on his investment of $450,000?
What are the chances of this
venture being profitable?
Page 5 of 6
Description of Expense Cost for 1L of Apple Brandy
($CAN)
Raw Materials and Fermentation Process 3.0
Distillation Process 0.5
Aging (minimum 2 years) 1.0
Bottling 1.5
Labelling 1.0
Packing 0.4
Capital Cost and Operating Cost 2.6
Total Cost 10.0
Capital cost includes equipment, land, building etc.,
Operating cost includes rent, salaries, taxes, utilities, repairs,
sales & marketing etc
- Water Of Life Eau De Vie Case Study Alain And Karen Had Met In Graduate School And Upon Graduation Married And Moved 1 (61.56 KiB) Viewed 45 times
THE INFORMATION PROVIDED.
Balance Sheet 2020 2019 $ $ $ $ 56,210 78,550 102,550 15,875 $ $ $ $ 64,500 89,540 86,450 15,875 $ 253,185 $ 256,365 Cash Accounts Receivable Inventory Other Current Assets Current Assets Equipment Vehicles Buildings Accrued Depreciation Land Fixed Assets Total Assets $ 509,567 $ 145,875 $ 650,000 $ 198,025 $ 850,000 $ 486,500 $ 124,600 $ 650,000 $ 135,450 $ 850,000 $ $ 1,957,417 2,210,602 $ $ 1,975,650 2,232,015 $ $ $ 92,575 9,875 64,850 $ $ $ 87,750 8,740 56,885 $ 167,300 $ 153,375 Accounts Payable Wages Payable Other Payables Current Liabilities Long Term Debt ShareHolder Loan Net Worth Total Liabilites and Equity $ 262,500 $ 450,000 $ 1,330,802 $ 262,500 $ 450,000 $ 1,366,140 $ 2,210,602 $ 2,232,015 Income Statement 2020 2019 $ 945,040 $ 739,545 $ 875,428 $ 654,225 $ 205,495 $ 221,203 Revenue Cost of Goods Sold Gross Profit Sales and Admin Expenses Utilities Travel and Entertainment Depreciation Operating Profit Taxes Net Income $ $ $ $ 115,758 42,875 24,568 62,575 $ 125,478 $ 46,525 $ 36,575 $ 66,545 -$ 40,281 -$ 53,920 $ $ -$ 40,281 $ -$ 53,920