Assignment 4 – Kingston Family Vineyards case and questions- to be done individually The capstone visit of our trip will be to Kingston Family Vineyards, a winery located in the Casablanca Valley of Chile. Considered pioneers for growing red wine grapes in a valley known for whites, they have been called “one of the area’s most promising producers”. The vineyard was founded in the early 1990s by the Kingston Family https://inmenlo.com/2017/11/13/courtney-kingston-is-fourth-generation-steward-of-family-farm-in-chile-that-now-produces-wine/ , one of the family and business executives writes: “My mother and grandmother on my mom’s side grew up in Montclair, NJ, and my great-grandmother spent her entire life in Upper Montclair. So while our family’s farm in Casablanca, Chile is the foundation of my father’s side of our extended family—Montclair, New Jersey, (and later Princeton, New Jersey) is very special on my mother Louise Lauck Kingston’s side.” Your assignment is to 1. read the Kingston Family Vineyards-Case Study.pdf and check out the https://www.kingstonvineyards.com/ 2. read the article The Chilean Wine Industry.pdf 3. for visual context and more information view this video:https://vimeo.com/201833299 (Links to an external site.)Links to an external site. 3. Answer the following questions: How are Courtney and her team, guided by their mission, purpose and core beliefs, supporting the goal of raising Chile’s position as a country of origin for premium wines? In your opinion, did the family make the right decision in not accepting the hotel chain’s offer and why? Answers should be written and submitted individually, about a paragraph each (250 words total). 4. Along with the answers to the questions above, please formulate two questions to ask the Kingston team at your visit and include them with your submission.
kingston_family_vineyards_case_study.pdf

the_chilean_wine_industry.pdf

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CASE: SM-266
DATE: 10/12/16
KINGSTON FAMILY VINEYARDS
Nearly 20 years ago our family planted grapevines in the far hills of Chile’s
Casablanca Valley. Our goal was to try to ensure that “the Farm” remain a
valuable agricultural asset for generations to come. Today Kingston Family
Vineyards is a successful international operation that produces and markets
high-quality wines and grapes. We consider our Chilean-American family and
our land to be our biggest assets. Today we find ourselves at a crossroads, one
that feels as significant as that of my great-grandfather when he arrived in Chile
almost a century ago.
1
—Courtney Kingston, Founder, Kingston Family Vineyards
In 1998, Courtney Kingston persuaded her family to expand their ranch in Chile from dairy and
cattle into wine. By March 2016, Kingston Family Vineyards had a strong international brand
for its small-production wines and successfully sold the remaining top-tier grapes to other
Chilean winemakers. But they faced key choices regarding focus and growth. As Courtney
packed her bags for Chile to attend the annual meeting of the family business, she considered
three diverging paths.
One option was to increase production of their highly rated, handcrafted wines, which had
established the vineyard’s reputation for quality, pursuing sufficient scale to turn a profit on the
winery. Alternatively, the Kingstons could refocus on the vineyard, as they had originally
planned, playing to their strengths in farming expertise and leveraging their primary asset – the
land. A third possibility was to Invest in Chile’s burgeoning tourism market, and open a
1
Interview with Courtney Kingston, Kingston Family Vineyards, May 17, 2016. Subsequent quotations are from
the author’s interviews unless otherwise indicated.
Kaitlin Malloy and Professor Alyssa Rapp prepared this case as the basis for class discussion rather than to illustrate
either effective or ineffective management.
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Kingston Family Vineyards SM-266
p. 2
boutique hotel in Casablanca’s wine country. Courtney wondered how best to preserve the
family’s land for the next generation while contributing to the greater Casablanca Valley
community.
HISTORY OF THE KINGSTON FAMILY BUSINESS
Carl John Kingston moved to Chile in 1906 from the Upper Peninsula of Michigan in pursuit of
copper and gold. In 1918 he arrived in the Casablanca Valley, 50 miles northwest of Santiago,
with his wife Caroline and settled on a remote ranch that would become known to the family as
“the Farm” (see Exhibit 1). C.J. and Caroline’s eldest son, John C. Kingston, returned to the
United States as a young man to attend Harvard University, and upon graduation in 1935
returned to the Farm with his new wife, Janet. John and Janet raised five children in Casablanca.
For three generations, the Kingston family focused primarily on the cattle and dairy businesses,
becoming a major Chilean producer of high-quality milk and beef.
Michael Kingston, John and Janet’s third child, left Chile to attend Princeton University, where
he met and married his wife, Louise. They settled near Princeton, New Jersey, and raised their
three children: Tim, David, and Courtney (see Exhibit 2). The third generation of Kingstons
traveled during school vacations back to the Farm to be with family and maintained a strong
connection to Chile and the Casablanca Valley.
Courtney Kingston attended Princeton University and worked as a consultant at Deloitte in San
Francisco before getting her MBA at the Stanford Graduate School of Business in 1997. While
at Stanford, Courtney evaluated alternatives to diversify and secure a more solid footing for the
Farm beyond the increasingly unattractive economics of the commodity dairy business.
A Plan to Diversify: Wine
Throughout the 1990s the price of raw milk in Chile declined steadily, putting pressure on the
Farm’s operating margins (see Exhibit 3). They sold cattle for beef to cover short-term cash
flow needs and developed additional revenue streams, including equipment rentals and forestry
services for nearby farms. By the mid-1990s, the family was beginning to consider options for
greater diversification that would leverage their land and farming expertise.
At Deloitte, Courtney worked in the firm’s wine industry practice, and began to learn the ins and
outs of the California wine business. The Chilean wine industry was then experiencing strong
growth, and Kingston neighbors in the Casablanca Valley had recently planted Sauvignon Blanc
and Chardonnay vines on the valley floor.
Larger U.S.-based wineries like Seagram, Beringer, Robert Mondavi, and Kendall Jackson were
expanding into Chile to meet growing global demand for their wine and to take advantage of the
lower costs of land and labor abroad. Smaller, entrepreneurial “flying winemakers” explored
smaller production ventures working two harvests a year in the northern and southern
hemispheres, but the challenging nature of starting a business in a developing economy sent
many American and European entrepreneurs back home. The Kingston Farm’s roots and
connections in Chile and California put them in a strong position to grow grapes in Chile and
market premium wines in the United States.
It was clear to Courtney that they were in the best
Kingston Family Vineyards SM-266
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position to enter the market as an independent vineyard. “We knew the old adage ‘You make a
small fortune in wine by starting with a large one’ quite well,” she explained. “Our family had
neither. Our background was in farming, not winemaking or sales and distribution. We decided
to stick to what we knew best.”
While most vineyards in Casablanca were planting warm climate white grapes in the flats of the
valley, the Kingston property covered more mountainous areas on the western edge. Due to the
terrain and interest in pursuing higher-quality, more unusual grapes than what Chile was
typically know for, the Kingston family, with encouragement from consulting winemakers from
California, decided to plant Pinot Noir and Syrah grapes. This was a bold choice given the
association of Chile with the highly commoditized grapes used in the large-production, entrylevel wines commonly exported to the U.S. market. However, the Kingstons were interested in a
niche play that might protect them from the volatility of the commodity markets.
We were particularly interested in high-end grape growing, having dealt with the
vagaries of commodity pricing for dairy and beef for the past two generations.
We wanted to find a business that was stable and sustainable, and if we got it
right, it could be something that could differentiate us and insulate us a bit from
the inevitable booms and busts of Chile’s commodity export economy.
At Stanford, Courtney wrote a business plan to develop the vineyard and began working with her
father Michael and her older brother, Tim, to get the rest of the family on board. Extended family
buy-in for the new venture was critical. Not only did they know the local agriculture market
well, but they also gave the Kingstons their firm footing operationally in Chile. Some family was
initially skeptical of the economics of independent vineyards due to large, vertically integrated
wineries’ domination of the Chilean market. At the time, vineyard owners had no leverage and
wineries were the market makers. But based on Courtney’s projections, the venture was
attractive enough to explore seriously (see Exhibit 4).
In the late 1990s, Chile was best known for producing large-production wines at low prices. The
large players in the Chilean wine industry also created premium brands like Concha y Toro’s
Don Melchor and Almaviva. Several large California-based wineries were also exploring
opportunities to expand into Chile. Courtney initially explored a joint venture with a California
winery to produce quality grapes for the label’s first expansion to Chile. The Kingstons
negotiated a long-term partnership in which the California producer would provide the capital to
establish the vineyard as well as expertise in vineyard management. The Kingstons would
contribute the land and on-the-ground management. They planned to sell their grapes
exclusively to their partner and ownership would be split 50/50. In final negotiations, the
California winery pushed for a majority stake, and the Kingstons walked away rather than cede
control of the Farm to outsiders.
After that joint venture fell through, the Kingstons regrouped and decided to develop a vineyard
independently, to maintain control of the land and to target local Chilean wineries as their
customers. In 1997, the family decided to invest in establishing the 120-hectare vineyard over
five years. The family’s goal was to grow high-quality grapes and sell them to local wine
producers like Concha y Toro and San Pedro as inputs to their premium wines, Courtney
recalled.
Kingston Family Vineyards SM-266
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THE CHILEAN WINE INDUSTRY
History of Wine in Chile
Chile’s wine industry dated back to the 1500s, when the first Spanish settlers in the region
brought vines from Europe. These settlers established early vineyards with cuttings from France
and other parts of Europe, brought to Chile before the European phylloxera epidemic in the late
1800s.2 It was not until the 1990s, after the country had stabilized politically and undergone a
period of economic reforms that the wine industry began to grow, modernize, and compete on a
global stage.3 From 1992 to 2014 total production grew from 40 million cases to 140 million
cases and the share of exports increased from 20 percent to 80 percent, definitively establishing
the strong export focus of the Chilean wine industry (see Exhibit 5).
During this time of global expansion, Chile developed a clear reputation with consumers in the
United States and Europe for consistent, low-priced wines, particularly Cabernet Sauvignon and
Sauvignon Blanc. The price per case for exported wines highlighted this trend. While in the
1990s and 2000s volume grew enormously, the price per case stayed quite low. In 2014 the
average price per exported case was $20.76, which would imply a price per bottle in the United
States of roughly $5 to $6 in retail stores. In 2016, while high-end Chilean wines of excellent
quality definitely existed, premium Chilean wines struggled to overcome the brand and customer
perception abroad that wines from Chile were affordable and drinkable, but unsophisticated.
Chile exported its wines to more than 150 countries, but the U.S. was the largest destination and
accounted for 18 percent of Chile’s wine exports by volume and 14 percent by value in 2014 (see
Exhibit 6).4 Other important export destinations for Chile’s wines are the U.K., China, Japan,
Germany and Canada. In the United States, Chilean wines represent 6.8 percent of the total
value of wine imports after Italy, France, New Zealand, and Australia (see Exhibit 7). The focus
on exports was so prevalent that most Chilean wines were bottled as “shiners,” the shiny bottles
without labels, so that wineries could apply country-specific labels just prior to export.
Chilean wine industry major players
The Chilean wine industry was highly concentrated, with the top three players accounting for
over 80 percent of production in 2009 (see Exhibit 8). Concha y Toro, the largest wine producer
in Chile and all of Latin America, was established in 1883 and had grown to $957 million in
sales and over 30 million cases in 2013, with a presence in 145 countries worldwide. Concha y
Toro produced wines across a broad spectrum of prices—from its premium wines like Don
Melchor and Almaviva to cheap bulk wines.5 Santa Rita, Chile’s second-largest producer, was
2
Asimov, Eric, “From Chile, History in a Bottle,” The New York Times, October 17, 2007.
http://www.nytimes.com/2007/10/17/dining/reviews/17wine.html?_r=0 (October 1, 2016).
3
Zunino, Hugo Marcelo, “Global economy case study: How does wine reach the global market – Chile,” AAG
Center for Global Geography Education.
4
“Chile Wine Annual: Chilean Wine Production 2015,” Global Agricultural Information Network, March 4, 2015.
http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Wine%20Annual_Santiago_Chile_3-4-2015.pdf
(October 1, 2016).
5
http://www.conchaytoro.com/concha-y-toro-holding/investors-corporate-profile/ (October 1, 2016).
Kingston Family Vineyards SM-266
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owned by Grupo Claro, one of Chile’s major conglomerates.6 The third-largest player in Chile’s
wine industry was Compania Cervercerias Unidas (CCU), a large beverage company that
included a variety of wineries, breweries, soft drink brands, and other beverage companies.
Through its 65 percent ownership stake in VSPT Group, a major wine group, CCU controlled the
third-largest wine producer in Chile as well as the second-largest wine exporter. Major Chilean
wineries owned by CCU include San Pedro, Tarapaca, Leyda, and Santa Helena.7 CCU was a
publicly traded company but the majority of shares were owned by the Luksic family and
Heineken.8
Escaping Chile’s Reputation for Low-end Wine
Since the 1990s, Chile had developed a global reputation for “commercial value wines” that
were predictable and drinkable. In the United States, this reputation came partly from the limited
exposure of U.S. consumers, who generally encountered the wines from a few large producers.
Critics of Chilean wine classified the wine industry as being “too industrial and fixated on
volume,” producing wines that “had quality but lacked character,” according to one of Chile’s
top wine writers, Patricio Tapa.9
Over the past decade, however, a small group of independent winemakers, including Kingston
Family Vineyards, had sought to change that image by producing small-lot wines that were
sophisticated, complex, and able to stand up to great wines from all over the world.
(Movimiento de Viñateros Independientes, or MoVI, a trade organization that promotes Chilean
independent winemakers, had become a voice for the growing number of small Chilean
wineries.) But despite a growing community of high-end winemakers, it was an uphill battle to
convince influencers in key markets abroad to buy in to high-end Chilean wines. Courtney
Kingston recalled that when she first began marketing Kingston Family Vineyards wine in the
United States, many sommeliers were strongly prejudiced against Chilean wines:
[Many sommeliers] thought Chilean wines were ‘cheap and cheerful’ and didn’t
want to taste our wines. I would often lead without specifying where the wines
were from to overcome any preconceptions about Chile.
ECONOMICS OF THE WINE VALUE CHAIN
A bottle of wine sold at a restaurant or wine shop travels a convoluted road through a heavily
regulated distribution chain from farmer to consumer. In the United States, the 21st Amendment
to the Constitution repealed Prohibition and gave each state control over regulation
of
6
Santa Rita Winery, “Historiy of Santa Rita Winery,” http://www.santarita.com/international/history/?f=1 (October
1, 2016).
7
VSPT Wine Group, “About Us,” http://www.vsptwinegroup.com/en/relacion-con-inversionistas/quienes-somos-2
(October 1, 2016).
8
Compania Cervecerias Unidas, “About Us,” http://ccuinvestor.com/bienvenidos-inversores/the-company/quienessomos/ (October 1, 2016).
9
Henao, Luis Andres, “New wave of bold organic winemakers is challenging Chile’s industrial vineyard giants,”
Fox News, February 18, 2014. http://www.foxnews.com/world/2014/02/18/new-wave-bold-organic-winemakers-ischallenging-chile-industrial-vineyard.html
Kingston Family Vineyards SM-266
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production, distribution, and sales of wine and other alcoholic beverages. Most states adopted a
three-tier distribution system designed to mitigate overly aggressive sales tactics common in the
pre-prohibition era, ensure collection of tax revenues, increase state control and encourage
moderation.10
The three-tier system of domestic producers/importers (Tier 1), distributors/wholesalers (Tier 2)
and retailers/restauranteurs (Tier 3) introduced forced “double marginalization” into the wine
value chain with mark-ups from both tier two and tier three driving up the cost to the final
customer. A U.S. Supreme Court case, Granholm v. Beer Wholesalers of Michigan (2005),
resulted in opening up of the supply chain for domestic wineries (Tier 1) only. 11 As a result,
wineries with proper state-by-state permitting could now sell directly to consumers from a
winery tasting room or through a wine club to end-consumers in 43 of 50 U.S. states.12 The
main players in the wine value chain operated and interacted with one another within the
framework of this three-tier system.
Tier 1 of the Supply Chain: Growers, Wineries, and Importers
Grape growers
Wine grapes were grown either by the winery itself or by independent farmers who sold their
grapes to wineries through both long-term contracts and spot markets. In the United States, the
average price per ton of wine grapes was $767 in 2014.13 However, the price that growers
received for their grapes varied dramatically based on region, varietal, planting, growing and
harvesting techniques, yield, and the reputation of the grower. In California in 2015, the average
price per ton of grapes was as low as $296/ton—and as high as $4,336/ton in the Napa Valley
(see Exhibit 9). The value of the land, initial capital outlays to establish the vineyard, labor
costs, labor intensity of farming technique, and yield were the key cost drivers.
Cost of establishing a vineyard
To establish a new vineyard required clearing and preparing the land; installing stakes, trellises,
and irrigation systems; planting the initial vines; and training and pruning the vines as they grew
to establish the vineyard structure. Most vineyards took two or three years before they could
produce a useable harvest, with full target yield only achieved after approximately five years. In
California, the first-year cost to establish a vineyard, excluding the cost of the land, could vary
from about $5,000/acre to over $30,000/acre.14
Planting, growing, and harvesting decisions
Key decisions related to planting, growing, and harvesting techniques determined a vineyard’s
operating costs. Primary vineyard activities like pruning, thinning and harvesting could be done
10
Associated Beverage Distributors of Nebraska, “Three-tier system,” http://www.abdne.org/resources/the-threetier-system/ (May 4, 2016).
11
James Thornton, American Wine Economics (University of California Press, 2013) pp. 125-139.
12
The Wine Institute, http://wineinstitute.shipcompliant.com/Home.aspx?SaleTypeID=1 (June 24, 2016).
13
National grape and wine initiative, “U.S. Grape Industry Stats” http://www.ngwi.org/us-grape-industrystats_220.html (May 4, 2016).
14
U.C. Davis Cost and Return Studies. http://coststudies.ucdavis.edu/en/current/ (May 5, 2016).
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