Fifth Underground Vodka Business Plan FifthUnderground.com 5thUnderground.com Prepared By: M. G. Shell April 7, 2011
TABLE OF CONTENTS TABLE OF CONTENTS... 2 EXECUTIVE SUMMARY... 3 INTRODUCTION... 5 BUSINESS DESCRIPTION... 6 MANAGEMENT STRUCTURE... 7 INDUSTRY ANALYSIS... 7 EXHIBIT 1... 7 EXHIBIT 2... 8 EXHIBIT 3... 10 VISION STATEMENT... 10 MISSION STATEMENT... 10 BUSINESS OBJECTIVES... 11 BUSINESS OPERATIONS... 12 MARKETING... 12 FINANCIAL INFORMATION... 14 SUMMARY... 15 2
EXECUTIVE SUMMARY The purpose of this business plan is to support a request for a $750,000 equity stake investment in exchange for 20% ownership in the start-up 5 th Underground Distillery, Inc.. The business will be co-owned by Mark Shell and Aliaksei Pustavoitau and will be located in the state of West Virginia 1. The owners will provide a minimum of $50,000 in equity during the 2 year startup phase in addition to the development of processes and production methodologies to produce the 5 th Underground brand of vodka. The business will operate as a Craft Distiller under the classification as a Distillery that produces distilled alcohol products in the state of West Virginia 1 for distribution in the United States. The business also retains the rights to outsource distillery operations through contract distillation arrangements. Under the outsource model of operations, 5 th Underground Distillery, Inc. will supply mash product and processing knowledge to the contract distillery which will produce the distilled products for testing, bottling, inventory and distribution by the 5 th Underground Distillery Bottling Operations. The owners will retain 100% control over all intellectual property and trade secrets associated with ingredients, production processes and distillation methodologies associated with the distillation of all 5 th Underground distilled products. 5 th Underground Distillery, Inc. will license the distillation process from the owners who will operate as either a Sole Proprietorship or LLC. 1 5 th Underground Distillery, Inc. has chosen West Virginia as the primary production location. However, an alternate location may be selected based off of regulatory requirements, licensing and tax laws. Additional location selections include but are not limited to Virgin Islands, Ohio, Virginia, Kentucky, Canada, Belarus, Russia and Ukraine. 3
Significant investment is required during the first year of operation in order to establish distillation capabilities, inventory management and product distribution. Capital expenditures will exceed $500,000 and the expected net income is a loss of $140,000. As a result cash and cash equivalents at the end of the first year of operation are expected to decrease from $750,000 to under $175,000. As sales increase to a projected 90,000 bottles per year by the fifth year, sales are projected to exceed $2,500,000, net income is projected to exceed $150,000 and we are projecting a dividend payment of $75,000 while maintaining cash and cash equivalents of $375,000 or more. Over our 10 year projected operating plan, 5 th Underground Distillery, Inc. expects to reach annual sales of $7,000,000 and a net income of $736,000. Starting in year 5 of operations and continuing through year 10 we are projecting paying out dividends of approximately $1,000,000, while increasing cash and cash equivalents of over $1,900,000 and projected total assets of $2,292,254. A capital investment of $750,000 will return a projected $850,000 in dividends and $235,000 in retained earnings. Calculated projections have not been made past the 10 year point, however based on projected net income we anticipate paying a dividend of $150,000 per year thereafter. 5 th Underground Distillery, Inc. has two primary vodka lines which include a sugar based craft vodka which will be priced in the Premium 2 vodka category and a grain based craft vodka priced in the Ultra Premium 2 vodka category. Our 4
product strategy is to produce both lines of vodka under the 5 th Underground Distillery, Inc. brand name labeling the products as 5 th No. 1 (sugar based) and 5 th No. 7 (grain based). These Craft Distilled products will be hand bottled and inspected for quality prior to distribution through licensed alcohol distributors across the United States. The owners, Mark Shell and Aliaksei Pustavoitau have experience in operations management, production operations, marketing, information technologies, financial management, and the practice of medicine. Together they possess education which includes a Doctor of Medicine, MBA and MS in Information Systems. The products were developed and tested with process refinement completed in the country of Belarus under the close supervision and control of chemical engineer Pavel Shibeko over a 15 year period. The product was test marketed in the Belarus region of Molodechno and received positive acceptance ratings for flavor, tasting and quality. INTRODUCTION People often say that nothing draws us together more than alcohol. Sitting down and having a drink with your friends will usually lead to merriment, laughter, and an all-around good time. The same has been true for as long as alcoholic beverages have been around. That s why vodka has had some huge cultural influences throughout its history. 5 th Underground Distillery, Inc. wants to improve upon this experience by providing premium and ultra premium vodka distilled to produce a unique flavor and drinking experience that is talked about globally. 5
Russia is infamous for its vodka. Depending on who you ask, you may hear that the drink was pioneered in that country. There is a long-standing debate between historians over which country truly invented it. One thing is definitely true of Russia though, and that is that vodka has become quite a national icon. Vodka consumption in Russia is greater than any other country in the world. Our distillation processes were designed and developed in Russia based on distillation recipes dating from the 18 th century, when distillation techniques were perfected. BUSINESS DESCRIPTION 5 th Underground Distillery, Inc. will be a craft distiller of vodka with two primary vodka s which include a sugar based craft vodka which will be priced in the premium range ($30-$40) and a grain based craft vodka priced in the ultra premium range ($50-$60). 5 th Underground Vodka s are differentiated from other vodka s through our mash enhancement processes, MultiStill, and hand bottling processes. Our MultiStill process is a proprietary process by which the vodka is distilled in multiple stages to ensure purity and consistency of taste. 5 th Underground Distillery, Inc. will craft distill vodka which will be hand bottled and distributed throughout the United States. 5 th Underground Distillery, Inc. will operate one distillery located in the state of West Virginia 1 which will produce vodka for distribution within the United States. Two products will be produced, which will include Premium and Ultra Premium versions differentiated by the MultiStill process utilized, filtration processes utilized and the blending processes utilized. 6
During the first year of operation 5 th Underground Distillery, Inc. will select and purchase a site for the distillery location, obtain all permits and licensing for distillery operation, construct and test the distillation equipment, refine distillation operations and begin production of distilled and bottled products with a capacity of 500 gallons per month. The company will produce up to 5000 gallons per year of distilled and bottled products during the first two years of operation (the introductory stage). MANAGEMENT STRUCTURE President / CEO Mark G. Shell Operations Director TBD Managing Director Aliaksei Pustavoitau Director Product Engineering Pavel Shibeko INDUSTRY ANALYSIS Competition in the Vodka Distillation industry is immense with over 500 commercially produced product brands and production in nearly every country. Competition includes well known names such as Absolut, Alexi, Finlandia, Grey Goose, Pirat, Patron, Skyy, Smirnoff, Stolichnaya and Tito s with new products being introduced each year. The good news for Vodka is that consumption remains strong and is growing against traditional distilled spirits such as Whiskey. EXHIBIT 1 World map showing countries by alcohol consumption per capita. 7
EXHIBIT 2 This is a list of the top 50 countries by alcohol consumption measured in liter s of pure alcohol consumed per capita a given year, according to the most recent data from the World Health Organization. Methodology used by the WHO counted use by persons 15 years of age or older. Rank Country Volume 1 Uganda 19.47 2 Luxembourg 17.54 3 Czech Republic 16.21 4 Ireland 14.45 5 Moldova 13.88 6 Hungary 11.92 7 France 13.54 8 Réunion 13.39 9 Bermuda 12.92 10 Germany 12.89 11 Croatia 12.66 12 Austria 12.58 13 Portugal 12.49 14 Slovakia 12.41 15 Lithuania 12.32 16 Spain 12.25 8
17 Denmark 11.93 18 United Kingdom 10.39 19 Switzerland 11.53 20 Cyprus 6.67 21 Saint Lucia 10.45 22 Belgium 10.06 23 Russia 10.58 24 Nigeria 10.04 25 Finland 10.43 26 Netherlands Antilles 9.94 27 Estonia 9.85 28 New Zealand 9.79 29 Netherlands 9.74 30 Romania 7.63 31 Latvia 9.31 32 Swaziland 9.51 33 Niue 34 Burundi 9.33 35 Greece 9.30 36 Bahamas 9.21 37 Australia 9.19 38 Dominica 9.19 39 Italy 9.14 40 Bosnia and Herzegovina 8.62 41 Venezuela 8.78 42 Poland 8.68 43 United States 8.51 44 Argentina 8.55 45 Thailand 8.47 46 Haiti 6.51 47 Canada 8.26 48 Belarus 8.12 49 Gabon 7.97 50 South Korea 7.71 9
EXHIBIT 3 Fifth Underground Distillery, Inc. will introduce the product for distribution and sales in the state of Maryland and will continue promotion and growth of distribution throughout 40 states across the 10 year period. Initial growth will be in the East Coast market, moving into the Mid West around year 6 and into the Western states around year 8. VISION STATEMENT In three years, 5 th Underground Distillery, Inc. will become a full scale distillery with a production capacity of 10,000 gallons per year and product distribution throughout 9 states and an established brand name that is recognized in the US consumer market. MISSION STATEMENT 5 th Underground Distillery, Inc. s mission is to produce and distribute craft vodka s in the US market and to develop international production and distribution to grow business operations annually to achieve production and distribution levels of 250,000 bottles per year. 5 th Underground Distillery, Inc., makes the following commitments: To establish a brand name known for flavor and quality 10
To produce and distribute high quality vodka To ensure the safety of all products To provide consumer products that are valued and respected by the purchasers To manage ingredients and maintain records of birth history for all products To provide financial growth opportunities for investors To reward employees, product developers and management for successful product development and sales growth BUSINESS OBJECTIVES 5 th Underground Distillery, Inc. will achieve the following objectives by the end of its third year of operations: 1. Annual gross revenue of $1,130,000 2. Net income of $15,589 3. Cash and cash equivalents of $241,079 4. Net cash flow increase of $92,732 11
BUSINESS OPERATIONS The operation of 5 th Underground Distillery, Inc. will be described using the main functions of the business: marketing, competitive analysis, legal structure, management expertise, support personnel, and financial information. MARKETING Fifth Underground is poised to take advantage of social networking media such as MicroBlogging, Tweeting, Social Networking, Streaming Video and Viral Marketing. Fifth Underground will produce a series of short films and full length feature films to embed product placement within econtent movies in order to build brand name recognition as a Vodka company with a Film problem. Fifth Underground will maintain a strong web presence utilizing Web 2.0 technologies and developing technologies to distribute product information, marketing information and to encourage discussion chains to distribute information globally in an effort to establish a brand name and create product recognition and demand. In addition to Web 2.0 marketing, we will employ traditional marketing techniques such as print advertising, television advertisements, radio advertisements and promotional events to create demand for our products. We realize that marketing is a critical success factor in creating demand for our products and expect to invest significant financial resources into marketing efforts during our first five years of operations. 12
Price 5 th Underground Distilleries, Inc. will produce and distribute premium and ultra premium vodka for sale in the United States and internationally as demand for our product increases. Our two primary vodka s include a sugar based craft vodka which will be priced in the premium range ($30-$40) and a grain based craft vodka priced in the ultra premium range ($50-$60). Sales Strategy 5 th Underground Distilleries, Inc. will partner with liquor distributors in the Baltimore Washington metropolitan region such as Churchill Distributors LLC, Charmer-Sunbelt group, The Bees Distributing Company, HTR Maryland Wholesale, Winner Distributing Company and Harford Beverage Company to effectively distribute our products to regional retail outlet stores. Distributors will receive invitations to sampling and promotions events intended to create an interest in our products and to drive sales through wide scale distribution. Place Our products will initially be sold in the Baltimore - Washington metropolitan area through distributors and through large corporate retail stores such as Total Wine & More. As sales of our products increases, we will continue to develop relationships and partnerships with distributors along the East Coast to increase our sales and distribution. LEGAL STRUCTURE 5 th Underground Distillery, Inc. will operate as a Corporation incorporated in the state of West Virginia 1. 13
Revised 4/18/11 FINANCIAL INFORMATION Production and Sales Estimates Projected Income Projected Cash Flows 14
Projected Balance Sheet SUMMARY 5 th Underground Distillery, Inc. will be successful. This business plan has documented that the establishment of 5 th Underground Distillery, Inc. is feasible. All of the critical factors such as industry trends, marketing analysis, business operations, competitive analysis, management expertise, and financial analysis support this conclusion. We invite you to review our website at www.5thunderground.com www.fifthunderground.com and www.wix.com/kasart/5th-underground where you 15
can find out about product development and product sampling and tasting in your area. 16
Supporting http://www.wvabca.com/download/minidistillery/mini%20distiller y%20licensing%20packet.pdf http://www.legis.state.wv.us/bill_status/bills_text.cfm?billdoc=s b234%20intr.htm&i=234&yr=2005&sesstype=rs&btype=bill http://www.wvsos.com/csrdocs/pdfdocs/175-10.pdf 60-4-3a. Special mini-distillery license to manufacture and sell. (a) Sales of liquor- An operator of a mini-distillery may offer liquor for retail sale to customers from the mini-distillery for consumption off premises only. Except for free complimentary samples offered pursuant to section one, article six of this chapter, customers are prohibited from consuming any liquor on the premises of the mini-distillery. (b) Retail sales- Every licensed mini-distillery shall comply with the provisions of sections nine, eleven, thirteen, sixteen, seventeen, eighteen, nineteen, twentytwo, twenty-three, twenty-four, twenty-five and twenty-six of article three-a of this chapter, and the provisions of article three and four of this chapter applicable to liquor retailers and distillers. (c) Payment of taxes and fees- The mini-distillery shall pay all taxes and fees required of licensed retailers and meet applicable licensing provisions as 17
required by this chapter and by rule of the Commissioner. (d) Payments to market zone retailers- Each mini-distillery shall submit to the Commissioner ten percent of the gross sales price or each retail liquor sale for the value of all sales at the mini-distillery each month. This collection shall be distributed by the Commissioner, at least quarterly, to each market zone retailer located in the mini-distillery's market zone, proportionate to each market zone retailer's annual gross prior years pre-tax value sales. (e) Limitations on licensees - No mini-distillery may sell more than three thousand gallons of product at the mini-distillery location the initial two years of licensure. The mini-distillery may increase sales at the mini-distillery location by two thousand gallons following the initial twenty-four month period of licensure, and may increase sales at the mini-distillery location each subsequent twentyfour month period by two thousand gallons, not to exceed ten thousand gallons a year of total sales at the mini-distillery location. No licensed mini-distillery may produce more than twenty thousand gallons per calendar year at the minidistillery location. No more than one mini-distillery license may be issued to a single person or entity 18