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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 hours 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 Labatts 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 Paquettes operation. Karens 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 Karens 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

MacIntosh and Spys 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 Paquettes 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 worlds largest purveyor of alcohol. The local LCBO outlets did, at times carry some of the Paquettes 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.

It would appear that for a few years Ice Cider had been a popular hostess gift, especially at Christmas time. The Paquettes 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 Karens 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. 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 Paquettes 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?

Balance Sheet 2020 2019 $ $ 56,210 $ 78,550 $ 102,550 15,875 $ $ $ 64,500 89,540 86,450 15,875 Cash Accounts Receivable Inventory Other Current Assets Current Assets Equipment Vehicles Buildings Accrued Depreciation $ 253,185 $ 256,365 $ 509,567 $ 145,875 $ 650,000 $ 198,025 $ 850,000 $ 486,500 $ 124,600 $ 650,000 $ 135,450 $ 850,000 Land Fixed Assets Total Assets $ 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 $ 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 $ 875,428 $ 654,225 $ $ 125,478 $ 46,525 $ 36,575 $ 66,545 $ $ $ $ $ 40,281 53,920 $ $ 40,281 53,920 Description of Expense Cost for 1L of Apple Brandy ($CAN) 3.0 Raw Materials and Fermentation Process 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. Balance Sheet 2020 2019 $ $ 56,210 $ 78,550 $ 102,550 15,875 $ $ $ 64,500 89,540 86,450 15,875 Cash Accounts Receivable Inventory Other Current Assets Current Assets Equipment Vehicles Buildings Accrued Depreciation $ 253,185 $ 256,365 $ 509,567 $ 145,875 $ 650,000 $ 198,025 $ 850,000 $ 486,500 $ 124,600 $ 650,000 $ 135,450 $ 850,000 Land Fixed Assets Total Assets $ 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 $ 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 $ 875,428 $ 654,225 $ $ 125,478 $ 46,525 $ 36,575 $ 66,545 $ $ $ $ $ 40,281 53,920 $ $ 40,281 53,920 Description of Expense Cost for 1L of Apple Brandy ($CAN) 3.0 Raw Materials and Fermentation Process 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

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