Mountain Man Brewing Company Case Analysis

1. Industry

“The beer industry in the United States generates $75 Billion in annual sales.” (Abelli, 4)

Light beer sales have increased at a compound annual rate of 4% over the previous six years. Traditional premium beer sales have also declined annually by the same percentage.

The beer industry can be considered a monopoly since large national brewers maintain economies of scale in brewing, better distribution tactics, spend heavily on advertisement, and create barriers of entry for other smaller brands.

Brand plays a key role in the beer-purchasing process, along with taste, price, special occasion, brand image, authenticity, and tradition.

Four different categories in the U.S. beer market-major domestic producers, second-tier domestic producers, import beer companies, and the craft beer industry.

2. Company

According to the case, “By 2005 Mountain Man was generating revenues just over $50 million and selling over 520,000 barrels of Mountain Man Lager.”

Mountain Man Brewing Company creates an aura of authenticity with its status of an independent, family-owned brewery.

Mountain Man’s revenue declined in 2005 by 2%. Assuming 2% drop in revenues every year, I have calculated the following: By 2006 revenues will drop to $49,431,200; 2007-$48,442,576; 2008-$47,473,724; 2009-$46,524,250. (See Appendix)

The main competition in Mountain Man’s region is the major domestic producers, Anheuser Busch, Miller Brewing Company, and Adolf Coors Company, which control 74% of beer shipments in the East Central region.

Anheuser-Busch, Miller, and Coors also accounts for 84% of market share in light beer in 2005.

Mountain Man is part of the craft beer industry, but it has a higher craft beer volume than most of the other four markets (brewpubs, microbreweries, contract breweries, and regional craft breweries). Craft brewers account for 1.5% of the total beer market in the East Central region.

Strong brand recognition among working class-males (blue-collard males) in the East Central region for which 60% of these consumers purchased beer at off-premise locations.

Mountain Man has reached a mature phase over the past few years, but might be reaching a declining phase in the industry.

3. Trends

Recent increase in demand for “light beer” due to taste preference.

A higher percentage of females are consuming domestic light beer in comparison to domestic premium beer.

The beer industry tends to be cyclical in the business cycle. Especially in recent years due to an increased awareness in personal responsibility and health concerns that encourage moderation in alcohol consumption.

Problem Definition

Mountain Man Beer Company (MMBC) is facing its first decline in revenue since the company was founded. Chris Prangel needs to decide if MMBC should introduce a new product, Mountain Man Light, due to rising popularity of light beer among young consumers.

Alternatives and Evaluation

Alternative 1: Introduce Mountain Man Light

Advantages:

1. Cater to a market that is growing at 4% CAGR.

2. MMBC revenue in 2006 from light beer can be expected to be $4,727,295. (See Appendix)

3. MMBC already has high brand awareness with Mountain Man Lager (A.K.A “West Virginia’s beer) among young consumers, but they simply prefer a different taste.

4. There is a need to increase distribution on bars, which are on-premise locations and only 30% of current sales.

5. While their target market brings them loyalty, MMBC is not considering other market segments and potential niches, like white-collar workers who account for 24% of domestic light beer consumption in 2005 and make more than $100k a year.

6. Mountain Man Lager counts for 81% male drinkers and it would be a great opportunity to bring out a lighter beer for the female drinker that is
already consuming 42% of the domestic light beer.

Disadvantages:

1. If MMBC faces cannibalization by 5% just in 2006 it will experience a loss of $2,471,560. (See Appendix)

2. The brand can also have a product failure if the consumers do not like the taste.

3. Limited advertising and other budget resources to compete with large, well-established breweries

4. Brand erosion is also a key factor to take into account. MMBC is doing things right in the eye of the core consumer and can possibly stumble with its brand equity if they introduce a new product.

Alternative 2: Do not introduce Mountain Man Light (Status quo)

Advantages:

1. Continue to manufacture an exceptional beer with a great brand name

2. Not lose sight of its loyal and core customer.

3. Will not erode sales of the core brand, Mountain Man Lager.

4. Maintain brand equity with the distinctive bitter flavor and slightly higher-than-average alcohol content of Mountain Man Lager.

5. Will not experience any cannibalization.

Disadvantages:

1. Their current customer segment is a demographic that is aging rapidly, you
can expect a shrink in sales.

2. MMBC is ignoring the shift in the consumer segment for beer companies. 21-27 year olds are spending more on liquor and most have not yet developed brand preference.

3. Increase in expenses for marketing efforts and expanded distribution even if you do not introduce a new product.

Recommendation and Justification

Mountain Man Brew Company should launch Mountain Main Light.
Rationale/Support:

1. Based on the premise that MMBC will be targeting young consumers of ages 21-27, this segment accounts for more than 27% of total beer consumption.

2. MMBC needs to take advantage of the potential .25% market share annually from regional light beer market.

3. Mountain Man is the only brewing company in its region and amongst the major beer companies that has not expanded its product line.

4. MMBC will need to sell 65, 012 of barrels to break-even, which is a realistic capability for the brewing company. (See Appendix)

Appendix

1. Calculating 2% decrease in revenue for the future four years

Year 2005: Net revenue is $50,440,000 (from Income Statement)
2006: $50,440,000 * .98%=$49,431,200
2007: $49,431,200 * .98%=$48,442,576
2008: $48,442,576 * .98%=$47,473,724
2009: $47,473,724 * .98%=$46,524,250

2. MMBC expected revenue in 2006
-Net Revenue: $50,440,000; 520,000 barrels sold; $97 is the selling price per barrel.

-With a .25% market share every year in 2006, light beer market share for MMBC will be:

$18,744,303 * .04%=$749,772.12 + $18,744,303=$19,494,075.12 * .25% = 48,735 (market share in 2006) * $97 per barrel = $4,727,295

2005
2006
2007
2% decline in sales
$50,440,000
$49,431,200
$48,442,576.00
%5 cannibalization

$46,959,640
$46,020,447.20

$49,431,200-$46,959,640= $2,471,560

3. Break-Even point: FC/VC (numeric values gathered from page 6 in the case)

Values: $750k (6-month ad campaign), $900k (Annual, SG&A cost), $66.93 (variable cost per barrel of the lager beer), $4.69 (additional variable cost on top of the $66.93 to produce MM light), and $97 (selling price per barrel)

($950,000 + $750,000) / $97 -($66.93 + $4.69) = 65,012 barrels