Case of Molson Beer
The most important strategic issue facing Molson Coors today is determining how to increase profits across all geographic regions in which the firm competes - Case of Molson Beer introduction. There are a number of problems that the company faces in the domestic market and abroad. The primary market in which Molson Coors competes is the price segment. The firm’s market share of that segment has leveled off at approximately 10% of the market. The firm’s primary competitor in that market, InBev, who acquired Anheuser-Busch in 2008 for $52 billion, is the world’s largest brewer. Anheuser-Busch controls 50% domestic market share. Because of InBev’s massive size, it can dramatically outspend Molson Coors as far as advertising and marketing. Another part of Molson Coors’s problem is that the market for mass produced malt beverages, i.e. beer, is declining. Growth in the domestic beer market is expected to come from the import and premium segments, segments in which the firm is not strong.
There are certain steps the company should take in order to properly address the strategic issue at hand. Molson Coors should increase its acquisition activity not only of import brands, but also especially of small microbreweries. These actions will allow the firm to participate in the growth segments of the industry. Another option is for the firm to focus on its core business to defend its market share of the price segment. This option would involve cutting costs and possibly raising prices to increase revenue and ultimately profits. The combination of cutting costs and raising prices is the most feasible way to increase profits if this option is ultimately chosen. This third course of action would be to divest itself of brands that are less profitable and use those funds to develop new products and enhance its brand awareness. The three alternatives will be discussed in greater detail, but the first of those options is the strongest recommendation. Snapshot of Molson Coors
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It is clear that the most important strategic issue facing Molson Coors today is determining how to increase profits across all geographic regions in which the firm competes. There is a lot of key evidence that can support this issue. Coors is a company that has continued to evolve and adapt to its environment. It is constantly changing and nothing right now is able to slow it down. A lot of countries have tons of low growth, but China, Russia, and Latin America continue to show the highest growth rates. Facing low prospects for volume growth in mature, developed markets and increased competition, brewers continue to seek growth through acquisitions of other brewers or by aggressive participation in developing markets.
There is room for improvement with mergers and acquisitions with increasing market shares of the industry leaders. Coors is now the eighth largest brewery with a global market share of approximately 2.6 percent. As a result of heavy investment in developing markets, China is now the largest beer producer and consumer in the world. The mini-baby boomers, or the 21 to 25 year old age segment, are anticipated to increase by 11 percent over the next 10 years. Thus, in attempts to gain market share, manufacturers are focusing product preference and advertising within this age demographic. On a global basis, considerable market growth is being experienced within the developing markets as a result of increased buying power and consumer demand. Attempting to boost sales within developed markets, beer manufacturers continue to introduce new products – often creating entirely new segments (i.e., higher quality, specialty beers, etc.) – while increasing the perceived quality and customer value.
Coors has a program that is designed to consolidate vendors that represent approximately $1 billion in annual expenditures. By consolidating these vendors Coors will have more leverage to control, and even reduce, cost. In regards to its financial position when compared to four other larger brewers, Coors appears to be strong in two ratio categories: inventory turnover and fixed asset utilization. Given the cold filtering process and the importance of keeping beer fresh, it is important that Coors turn its inventory quickly. Because Coors guarantees freshness within a specific time period after packaging, Coors must continue to lead the industry in this category.
From a financial analysis perspective, Coors does not perform well against other companies analyzed. In fact, of the thirteen ratio analyses Coors is behind in eleven of them. Although Coors appears to be among many comparable companies with an unfavorable current and quick ratio, it is a key weakness to growth –Coors cannot service its current liabilities with current assets. It is clear that Coors needs to generate better returns for investments in capital assets.
The industry is constantly changing. As part of the process, companies are transitioning from regional brewers to national brewers to international conglomerates. In this expansion environment, Coors has an opportunity to organically grow its current product abroad while acquiring/merging other companies as part of the growth initiative. Developing countries are leading the way to new markets. As far as new entrants, almost all are microbreweries and tend to be mostly localized, regional at best. With the global microbrewers, consumers are becoming more able to try different beers than the brand buyers of the past. Because of this, an opportunity exists to expand lighter beers within traditional heavy beer markets (e.g., Europe) as well as introduce new products in the United States. The change in social behaviors allows expanded consumer acceptance of bringing new products to market, although rivalry remains very high. From a technology and production standpoint, opportunity nearly always exists to drive out inefficiencies and to service the customer more effectively. Suppliers have little power in this industry. As it relates to Coors, the company has established joint ventures with metal and glass container manufacturers to control cost for the most expensive component of delivering product to the consumer.
Coors also has opportunities to provide more environmental-friendly packaging, increase pollution prevention goals, and continue to drive production through by-product use objectives. Although great opportunity exists for Coors to expand into other markets, competitors are enjoying the same advantage within Coors home/core domestic market. Rivalry is very high within this industry. Not only are Coors major competitors consolidating, but also the number of microbrewers in the United States has grown to over 1,500 establishments. The top ten brewers in the world hold about 50 percent of the world market share. In the United States, Coors, SAB Miller, and Anheuser-Busch hold about 80 percent of the market share combined. It will be extremely difficult for Coors to maintain market share in the United States, let alone take market share away from its competitors.
In addition to the threat of reduced market share, there is a potential erosion of profitability. Buyers maintain a lot of power within the market due to the incredible variety of beers. From a massive number of producers, brewers do not have the power to determine pricing. Thus, profit margins continue to decline. Since beer consumption can also be linked to certain forms of entertainment, threats of substitutes could also exist from activities that do not involve alcohol consumption. From a social responsibility perspective the consumption of alcohol is continuing to be scrutinized. Both health consequences and socially unacceptable behaviors such as underage drinking and drunk driving are damaging the industry. Additionally, the industry is under constant pressure from political and legal fronts. These pressures include heightened
government intervention, increased taxation burdens, regulations, and legal challenges. Corporate Strategy
The Molson Coors Company is currently using a product differentiation strategy according to Porters generic strategy analysis. When a company chooses this strategy, they are focusing on a broad market and at the same time offering a unique product. Molson Coors believes that building the business and doing the right thing go hand in hand. Even though they may not get it right every time, it still serves at the cornerstone for the company. Since the combination of Molson and Coors, the new Molson Coors Brewing Co., has grown into a global company with a shared commitment to brewing extraordinary beers and running a business focused on respect for their employees, communities and drinkers.
Molson Coors has grown worldwide but their roots and character remain the same throughout. They are made up of local breweries and offices that have been embedded in the communities. These breweries are the places that the employees live, work and connect. The approach to the work that is done is through integrity, responsibility and generosity.
The corporate responsibility and accountability matter to everyone at, Molson
Coors. They depend on consistently delivering exceptional quality, investing in their employees and serving the community. Each department of the corporation is accountable for the corporate responsibility, business ethics and social responsibility. In 2011 Molson Coors played their part in responsibility by being listed on the Dow Jones Sustainability Index for North America for the first time. Molson Coors was featured on both the Carbon Disclosure Project (CDP) Carbon Performance Leadership Index and the Carbon Disclosure Leadership Index. Lastly an employee survey revealed that their employees’ engagement around their environmental performance increased to 89%!
The legacy of Molson Coors has left the company with a strong combination of values. These values include: excelling, passion, integrity and respect, creativity and quality.
To excel they depend on surprising one another and their customers by what is achieved. They also excel by committing themselves to do the things that are key to winning and doing them better then anyone else- which sets them apart from the rest of the industry. Molson Coors passion is shown through: being the beer champions and delighting the world’s beer drinkers with all their extraordinary brands. Being honest, ethical and open is their strategy for building trusting relationships. They always demonstrate their integrity and respect by treating others the way they like to be treated. Creatively they strive to do the unexpected to challenge the norm along with unlocking fresh ideas to make themselves more competitive. Finally, their quality comes from the employees that go the extra mile to deliver “expected quality in everything they do. Molson Coors is obsessed with their quality so they strive to delight their customers at all times.
The corporate approach to responsibility is comprehensive and touches all areas of the business in all geographies. They admit that this can sometimes be complicated. To tackle this challenge Molson Coors has developed a “beer print” which is a framework for talking about their culture in a simple more relevant way. They want to grow their positive Beer Print and shrink their negative Beer Print. This helps to guide purchasing decisions, company goals, community partnerships, employee engagement and profit.
In particular Molson Coors would like to grow their: governance and ethics, alcohol responsibility, environmental stewardship, employees and community, and responsible sourcing. Within those areas, the most important to their stakeholders is alcohol responsibility, water and community investment. Those are core elements to their product, heritage and capabilities.
The Beer Print is unique to Molson Coors, it engages their employees and brings the corporate responsibility to life. It gives the external stakeholders a look at what is going on inside the company and together they can look for ways to shrink and grow the negative and positive parts of the Beer Print.
The stakeholders of Molson Coors are proactively engaged with the corporate strategy through many different channels. They are asked to provide insight into the company’s material corporate responsibility issues. They set corporate responsibility priorities and targets. The stakeholders enhance the company’s reputation for accountability and transparency in corporate responsibility. Molson Coors, through their stakeholders “review,” has set annual targets for their priority areas. In reference to the revenue obtained by Molson Coors products as a company,
Exhibit CS-1 and CS-2* show how it was allocated. In 2011, Molson Coors Brewing Company received US$5.2 billion in revenue, well over 99% from beer sales in Canada, Europe and in Asia. Governments, through excise and other taxes, took the biggest slice of the revenue, 342% or US$1.6 billion. Their employees received 12% or US$635 million in compensation and benefits. Another 25% or US$1.3 billion went to agriculture, other brewing materials, cans, bottles and other packaging. An increased proportion, 5%, was returned to shareholders in the form of dividends resulting in no retained earnings. To gain insight on how Molson Coors corporate strategy is working there is a few accomplishments that should be acknowledged. “Molson Coors was included in the Dow Jones Sustainability North America Index, marking the first year that the company has been listed. Of the 143 companies listed on the 2011/12 North American Index, Molson Coors is one of only six Food and Beverage companies. They were recognized as a leader in transparency and performance by the Carbon Disclosure Project, an accomplishment shared with only nine other S&P 500 companies. Between 2008 and 2012, reduced our Green House Gas (GHG) emissions per unit of production by 14%, exceeding our original target of 7%. Our director of water resources was named to the board of the UN’s CEO Water Mandate. We continue to apply the mandate principles in our global water strategy, emphasizing sustainable watershed management. Corporate and environmental responsibility was one of the top three drivers of engagement for our employees in 2011, with scores that outperform the norm for high performing companies in these categories.”(www.molsoncoors.com)
Based upon the results and implications from a detailed analysis, several resources were identified that play a critical role within the firm’s capabilities. Those resources include: Logistics, brand loyalty, point of sales (POS), research and development (R&D), and taste and quality. (Refer to Exhibit 1: RBV table page 16). The implications of the resourced based view are as follows: Research and Development (R&D), and taste and quality were identified has being two sustainable competitive advantages for the firm. Although inbound logistics is valuable, hard to imitate, and difficult to substitute do to the high degree of rivalry and competitive capabilities, this resource is considered competitively equal. Based on annual financial trends point of sale or POS has been a competitive disadvantage for the Molson Coors firm. The firm’s sustainable advantage of research and development does not completely lye on their actual product line but their innovations within the manufacturing department as well. These two different aspects of the firm play a large roll in their continuous success. (Refer to Exhibit 3: Molson- Coors Value Chain Page 18). Molson-Coors was the first
mover within the industry to create innovated packaging within there operations segment. In 2005, research and development created a cooler box that allowed consumers to have an ice ready box within there packaging. This gave the consumers the ability to eliminate the need to carry a convectional cooler. Along with the cooler box, Molson Coors created a wide mouth aluminum can that allowed consumers for effortless drinking that poured more smoothly then another other aluminum or bottle product on the market. This innovated bottling technique was a huge success and other competitors imitate this still today. Through there research and development and quality of taste, Molson-Coors
should take advantage of these sustainable resources by expanding them onto other markets.
Alternative 1-focus on core products
The first alternative strategy for Molson Coors to increase earnings involves focusing on core products, such as Coors Light for example. The main focus of this alternative is to cut costs as much as possible. The price segment of the beer industry is in decline, so it will be difficult for the firm to increase profits with this strategy in such an environment. Cutting costs is the most feasible way to improve the bottom line. There are a few different ways in which Molson Coors and potentially lower its costs of production and distribution. A secondary part of this recommendation is to increase prices of the firm’s products. An increase in price should only be done after a thorough examination to determine effects on sales.
The use of derivatives could potentially lower several costs for the firm. The cost of goods sold increased $1.23 per hectoliter of product produced. A primary driver of that increase was increased fuel costs. A strategy the firm could use would be to enter into forward agreements to hedge against the risk of fuel costs increasing further. This is a strategy employed that
Southwest Airlines with a great deal of success. Forward agreements could also be used to hedge against rising ingredient costs, such as barley or hops for example. Packaging materials were also a driver of the increased cost of goods sold. Over half of the products sold in the United States in 2010 were sold in aluminum cans. Therefore, the cost of aluminum is a significant factor of cost of goods sold. A forward or swap arrangement could be beneficial in limiting the risk of rising aluminum prices. Using these strategies along with raising prices should have a positive effect on
earnings going forward. While there is always downside risk when dealing with derivatives, if the firm does its due diligence prior to entering a position that downside risk should be mitigated.
Alternative 2-divest or license less profitable brands
The second alternative that Molson Coors can take to address the issue of increasing profitability involves includes divesting itself of less profitable brands or licensing those brands. There are a number of brands in the firm’s portfolio, some of course are much more profitable than others. For example Carling represented 78% of the European segment sales in 2007. If the firm sold certain brands that do not have great levels of profitability, that would allow Molson Coors to focus on core brands and invest more in research and development.
Research and development is the main competitive advantage that Molson Coors possesses over its competitors. The money that the firm takes in from selling the less desirable brands can be used to develop new products that are more in line with consumer preferences. Ideally, the new beverages would be part of the craft beer segment of the market, which would allow Molson Coors to take part in the main driver of growth in the industry. The firm needs a larger presence in the super premium segment and this strategic alternative satisfies that need. The problem with this recommendation is
that it may take a great deal of time for the firm to design and test new products before they come to market. Also, the head brewers for the firm may not have the specific skill set to compete strongly in the super premium segment. The super premium segment customer has a much more discerning palate then the cost segment customer. The craft beer consumer may expect a level of sophistication in the beer that is outside of the framework
for the brewers at Molson Coors, which leads to the third alternative. Alternative 3-acquire import and craft brands
The final recommendation for Molson Coors consists of acquiring microbreweries and premium import brands of beer. The reasoning behind this strategy is to allow the firm to take greater part in the growth segments of the industry. Across all geographic regions in which Molson Coors competes, the price segment of the industry is stagnant or in decline. In Canada, the premium segment has lost volume to the above premium (craft or import beer) segment. This is a signal that in this region it would be prudent for the firm to take part in that growth. Between Molson and its principal competitor in Canada, InBev, the two firms control 82% of the beer sold in that country. Acquiring small craft breweries can give Molson Coors an edge over InBev.
Consolidating the fractured above premium segment in the United Kingdom would also be good for Molson Coors. In the U.K. sales at on-premise locations (bars, restaurants, etc.), is in decline. On-premise sales offer a higher profit margin then offpremise sales, so income in the region has been affected negatively. Selling more brands in the above premium segment will offset this trend. Buyers of above premium beer are willing to pay a higher price by definition, so selling more of these brands should have a positive impact on net income going forward. Acquiring craft breweries would be an efficient way to gain exposure to that market segment.
Taking over microbreweries would also have a positive impact for Molson Coors. The firm’s main competitor Anheuser Busch InBev controls 50% of the U.S. market and has a significant advantage in its marketing budget. Competing more aggressively in the less advertising heavy segment of craft beers will allow the firm to gain market share of
the total beer market and also of the biggest driver of growth of beer consumption. This recommendation would be the most effective for the firm to take.
Exhibit CS-1: 2011 allocation of gross Revenues in %
Exhibit 1: Molson-Coors Resource-Based View (RBV)
Hard to Imitate
Hard to Substitute
TREND: ALLOCATION OF GROSS
Agriculture, other brewing materials
Cans, bottles, other packaging
Media, advertising & sponsorships
General & administrative, including donations
Equipment & other assets (depreciation)
Invested in the business (retained earnings)
Financial institutions (interest)