Boston Beer Case Study Analysis Sample Essay
1. Boston Beer’s scheme is chiefly focused on growing through distinction. The beginnings of its competitory advantage can be classified as a company that provides high quality beer with alone spirits. a market driven attack. and a really efficient contract brewing scheme.
In footings of quality. the company created a premium beer by its selective usage of ingredients and less H2O. Boston Beer has won awards such as being the first American beer sold in Germany due to its usage of lone barley.
barm. hops. and H2O as its ingredients. With the addition in wellness consciousness among beer drinkers and the rise in more typical and flavourful brews. the Boston Beer Company has been able to utilize its packaging and commercials to pass on its quality committedness to consumers. It is its image for quality among consumers that allows the company to maintain high monetary values and net incomes when compared to major beer makers such as Coors. Budweiser and Miller.
Contract brewing has allowed the company to utilize excess brewing infinite among other houses to brew beer. The Boston Beer Company has benefited from such pattern in that no capital was required to buy installations and equipment during a period in which it was turning at a dual figure rate. Additionally. these breweries were distributed throughout the Unites States therefore leting the company to maximise freshness of the beer it sold. Such outsourcing attack has resulted in a higher focal point on selling the merchandise and low transit costs.
Sustainability will depend on the company’s ability to distinguish itself from major American beer makers. It will be critical for the Boston Beer Company to go on concentrating on its committedness to quality as it continues its way for growing by puting extra capital in research and development every bit good as bolstering its image as a company that brews premium beer with alone spirits. In footings of rating. the company is profitable and creates concern value in add-on to holding a trustworthy and capable direction squad able to bring forth stable double-digit returns in equity and gross borders. It is the largest and most successful of the little trade beer makers. generates important hard currency flow. and has minimum debt. It appears that the stock monetary value should be higher than the $ 10 to $ 15 per portion ab initio estimated by investment bankers based on the facts antecedently mentioned.
2. In recent decennaries. the construct of an IPO with double category stock constructions have become progressively popular. particularly in state of affairss when mature and/or family-owned companies go from private to public ownership. By using this construction. companies such as Google. Ford Motor Company. and Facebook have been able to raise significant equity capital without releasing control from the laminitiss and direction of the organisation. From an investor’s position. nevertheless. the purchase of a non-voting portion of common stock relinquishes the voting power that traditionally accompanies such an investing.
As a consequence. investors may necessitate a higher return than if they held Class A vote portions. Jim Koch decided to prosecute a double stock construction for the Boston Beer Company as a consequence of the unprecedented growing of both his organisation and the niche industry in which the company operated. Additionally. by retaining voting power in the organisation. Koch shielded the organisation from a possible coup d’etat from the big and well-capitalized participants in the domestic and import beer markets. While taking this construction provided the operational control the laminitis desired. such a determination potentially impacts sum of capital raised in an IPO. Investors buying a public equity offering in this state of affairs may necessitate a lower purchase monetary value since the ownership involvement in the organisation has been diluted to an undistinguished portion.
3. Investing in IPOs by and large come with hazard. Harmonizing to a recent survey. IPOs by and large increase 18 % in the first yearss of trading. but underperform in the undermentioned 3 old ages when compared to stocks of similar size. 1 The overall beer industry in the US generated 5 billion in grosss in 1994. and analysts expected small to no growing in the industry through 2000. In order to turn. Boston Beer must go on to increase its market portion in the overall beer market. The market continues to be dominated by the big scale breweries like Anheuser Busch. Adolph Coors Co. and Miller Brewing Co. Trade Breweries are get downing to increase their portion in the overall market. It is expected that trade breweries will account for 5 % of the overall beer market in 2000. up from 1. 4 % .
However. there is increased competition in the trade beer market. There were 165 new trade beer makers in 1994. This increased the sum of trade breweries in the US to 750. Boston Beer will be viing with these 750 breweries for 5 % of the 5 billion in US beer grosss. Boston Beer does non be after to pay a dividend. Tax returns from puting in Boston Beer will entirely be from growing. The company plans to let go of 19 million portions in the IPO. At a monetary value of $ 15 per portion. it would be merchandising at over 57 times its 2004 net incomes. This will necessitate important growing from Boston Beer in the coming old ages to recognize returns in this investing. Boston Beer will be viing with a turning market for a little portion of the overall US beer market.
4. The Boston Beer Company filed its initial public offering prospectus with the SEC because they were looking to raise between $ 26 and $ 34 million for capital investings in equipment. support working capital. and general corporate intents. In the past Boston Beer had financed its working capital and capital outgos through hard currency flow from their operations. and had late entered into a $ 14 million line of recognition understanding with the Fleet Bank of Massachusetts. In November 1995 the limited partnership that made up Boston Beer Company was traveling to be dissolved and. “at the clip of disintegration. the company would administer $ 12. 5 million to its bing spouses by utilizing $ 1. 552. 000 in hard currency and borrowing $ 10. 948. 000 against its line of recognition at Fleet Bank” ( pg. 5 ) . The hard currency raised from the IPO was planned to be used to let them to instantly pay back the debt of fade outing the original partnership every bit good. To turn to the inquiry of the possibility of a house being overcapitalized. we can look in even greater item at what Boston Beer plans to make with its returns from the IPO.
The instance states that Boston Beer plans to pay back its debt to Fleet Bank. $ 10. 948. 000. use $ 7 million to fund capital outgos in 1996. and utilize the staying returns to fund working capital disbursals or be invested into investing class securities. Since refunding the debt and funding capital outgos add up to about $ 18 million. it leaves about $ 8 to $ 16 million for working capital disbursals and investing class security investings. Judging by Boston Beer’s past fiscal information. working capital disbursals will non eat up an overpowering part of the staying returns. therefore go forthing a significant sum of money to be invested in investing class securities. One of the causes of over-capitalization is idle financess. This means that a company may hold such a big sum of financess that it can non utilize them decently. That money may be sitting lazily in Bankss or in the signifier of low output investings. The investing class securities that Boston Beer plans to put in seems to connote that although they would be safe investings. they will non offer a high output. Following this line of concluding one could presume that it’s non merely possible for a house to be over capitalized but it could besides be argued that Boston Beer would be over capitalized after its IPO depending on how profitable they can be with the investing of their extra financess.
5. If we analyze the other two similar beer companies that went public. Redhook Ale Brewing Co. and Pete’s Brewing Co. . their IPO Market Prices were $ 17. 00 and $ 18. 00 consequently. If we besides analyze their estimated EPS of $ 0. 45 and $ 0. 15. their P/E ratios turned out to be 38 for Redhook Ale Brewing Co. and 120 for Pete’s Brewing Co. Assuming Boston Beer Company is a comparable house. its P/E ratio could reasonably run anyplace from 38 to 120. Besides. taking into history that Boston Beer is non be aftering on paying out dividends in the close hereafter. one can presume investors would anticipate higher net incomes growing in the hereafter and hence a higher P/E ratio would break reflect Boston Beer’s current province. If we assume a P/E ratio of 100. together with its estimated EPS of its ’95 Income Statement of 0. 26. that gives an estimated portion monetary value of $ 26. 00 dlls ( P= ratio x EPS ) . Table 1. page 5
6. Harmonizing to Beer Institute figures. per capita ingestion for beer has remained dead in the last 10 old ages at 30. 6 gallons in 2003 compared to the current 30. 4 gallons per individual. The existent addition in beer ingestion will be reflected in more specific sections such as imports and trade beers. It is no secret that consumer penchants have been altering and younger coevalss are now looking for more alone spirits and high quality ingredients as opposed to the uniform gustatory sensations being offered by big beer makers. The trade beer industry has increased in the signifier of production and dollars in recent old ages. Growth of the trade brewing industry in 2011 was 13 % by volume and 15 % by dollars compared to growing in 2010 of 12 % by volume and 15 % by dollars. Trade beer makers sold an estimated 11. 468. 153 barrels of beer in 2011. up from 10. 133. 571 in 2010. 2 Both the short- and long-run chances appear favourable for well-run domestic trade breweries. given the attraction of their alone attack. comparative to their big rivals such as Anheuser-Busch. Adolph Coors. and Miller Brewing Company. These organisations continue to keep some competitory advantage to their international opposite numbers due to the progressively efficient production. bottling. and distribution throughout the United States and internationally.
The potency for continued growing for the industry does non come without hazards of continued globalisation and consolidation in the industry. An illustration of this was InBev’s acquisition of Anheuser-Busch in 2008. Prior to the consolidation of these two entities. the economic systems of graduated table and range associated with production and distribution of domestic and import were non available to derive extra market portion.
Table 1If we besides take into history the estimated stock growing rates:
Boston Beer Company’s stock is expected to turn an extra 28. 7 % . therefore a just IPO Share Price for Boston Beer would be anything in between $ 26. 00 and $ 33. 00 dlls.
1. Eckbo. B. Espen and Norli. Oyvind. Liquidity Risk. Leverage andLong-run IPO Returns. Tuck School of Business Working Paper No. 2004-14 ; Journal of Corporate Finance. Vol. 11 2. hypertext transfer protocol: //www. brewersassociation. org/pages/business-tools/craft-brewing-statistics/fact