Mountain Man Brewing Company Situation
Mountain Man lager, a premium beer distributed in the central east since 1925, has become a beloved choice. The company has built a strong brand image by highlighting their family-owned business and appealing to blue-collar, middle-aged workers. Unfortunately, changing preferences among beer drinkers have caused sales to decrease significantly, resulting in a downturn for the company. However, Chris Prangel, an MBA degree holder and member of the family, has returned and is ready to assume control of the business.
With the support of his father and other important members within the organization, he must make a decision regarding the future direction of the company, taking into account the current market conditions.
Decision to be Made
Given the decline in sales for Mountain Man Lager, Chris faces the critical decision of determining the company’s future. He must weigh the potential benefits of entering a new customer segment with a light beer offering, considering whether it would bring immediate financial gains within a two-year timeframe. Alternatively, he could choose to stick with the current strategy, known as the “status quo,” and examine whether this alone would maintain the company’s profitability.
He would have to come up with a plan that would not estrange the current faithful customer pool but at the same time attract new younger consumers with a fresh offering.
Alternatives
It is recommended to maintain the current strategy and not introduce a light beer product line. This decision offers several advantages: firstly, it will prevent any negative impact on the brand image among current customers. Additionally, there will be no need for significant initial SG&A expenses associated with launching a new product. The contribution margin per barrel may remain comparatively lower. Lastly, the company can continue advertising itself as a family-owned business with just one product.
There will be no need to compete with major light beer distributors like Anheuser-Busch, Coors Brewing Company, and Miller Brewing Company.
- Can continue to focus on what they know best, producing premium beers.
- Can continue using sales force to push product at off-site distributors.
Disadvantages
Due to a shrinking market, the overall profit will eventually diminish to zero. The company will continuously experience a decreasing contribution margin, making it impossible to compete with the distribution power of larger players in the premium market. Moreover, there has been a 4% decline in the premium market within the East Central region.
The text suggests that Mountain Man Brewery (MMB) is missing out on the growth of the light beer industry because its current target market consists of older drinkers, while the light beer market is dominated by younger consumers. The recommendation is to introduce a light beer product line to tap into this potential growth. Although there is risk associated with implementing a new product line, a statistical analysis indicates some potential for growth in the light beer market. However, the challenge lies in minimizing the impact on current consumers who have developed loyalty towards Mountain Man Lager, which is known for its premium beer brand name.
Despite the risks involved, MMBC can overcome them by creating a high-quality product coupled with a strong brand name. By doing so, MMBC can enter a new and expanding market of younger consumers while still staying true to its established reputation as one of the region’s longstanding breweries. Targeting the younger audience can be challenging because of their constantly evolving preferences, but this segment mainly consists of individuals who have yet to establish a strong loyalty towards any particular brand.
This market is characterized by smaller companies challenging larger corporations. As long as Mountain Man Light produces a quality product, there is potential for it to establish a foothold in the light beer market. However, smaller companies like Mountain Man Light cannot compete with the advertising power of more popular light beers. Even with a modest advertising campaign, Mountain Man Light will struggle to achieve 60% Brand Awareness. Nevertheless, the growth of the light beer industry cannot be overlooked. In order for MMBC to remain profitable, it must take the risk and enter this market before it becomes too saturated.
Quantitative
Chris Prangel must demonstrate the potential success of a new product line to persuade the board members to launch it. This involves proving that the product can generate a profit within two years and be beneficial for the company in the long run. To assess the viability of introducing a new product line, an analysis was conducted on the contribution margin. This analysis took into account an income statement from 2005 and a 2% decrease in sales for the premium beer. Despite a 4% growth in the light beer market, there were expenses associated with introducing this new product line.
Before the light beer could become profitable, several challenges had to be overcome, including a smaller contribution margin, additional SG&A and advertising costs, and a loss of sales in the premium market. Projections for the light beer market anticipate a 0.25% market share in 2006, with a 0.25% annual growth rate until it matures. This growth rate is considered reasonable since the premium beer brand represents about 7% of premium beer sales in the east region. Achieving a 0.25% growth rate would require more than 20 years to attain the same market share in the light beer industry. This timeframe provides ample opportunity to establish brand awareness among younger consumers.
The decline in premium beer sales to the increasing light beer market can range from 5% to 20%. This assessment considers both the most optimistic scenario (5%) and the most pessimistic scenario (20%). The accuracy of this analysis heavily depends on projected sales and future expansion of the light beer market. Launching a new product entails significant risks, which might necessitate additional advertising expenses to achieve growth objectives. Nonetheless, these risks can be mitigated by presenting a high-quality product with a well-known brand name.
Two scenarios were evaluated for calculating the net present value and conducting a breakeven analysis during the first and second year of production. These calculations took into account the market variables and projections discussed earlier.
- 5% loss of premium beer sales
- 20% loss of premium beer sales
MMBC faces the challenge of overcoming the initial advertising campaign and additional incremental SG&A costs due to a 5% reduction in premium beer sales. The breakeven units for the first and second year are projected to be 95,200 and 160,246 respectively. However, based on sales projections, both years will fail to meet the breakeven point for light beer sales.
The net present value was determined using a 12% cost of capital. The NPV for the initial two years stands at -$318,000, while the NPV for the first five years is $7,075,000. MMBC will need to overcome the initial advertising campaign and additional incremental SG&A costs in light of a 20% decrease in premium beer sales. The breakeven units for the first and second year are 185,766 and 339,566 respectively. According to projected sales, both years will fail to reach breakeven in light beer sales. The net present value was determined using a 12% cost of capital.
The net present value (NPV) for the initial two years is -$4,170,000, while the NPV for the initial five years is -$922,500. Regardless of the scenario, it is evident that investing in a light beer product line would not be advisable based on the 2 year NPV analysis. However, when considering a longer-term perspective and assuming some growth in the light beer market, both products display significant improvement in net present value. Given MMBC’s long-term intentions, Chris Prangel needs to persuade the board to look beyond the first two years.
The initial $700,000 advertising skews the payback analysis in the short-term, though it could be argued that this same investment will need to be made for the premium beer to overcome the reduction in sales. Thus, it is necessary to consider the long-term potential. Further examination of the numbers reveals that even if the premium beer experiences an 18% decrease in sales, nearly the worst-case scenario, the new present value of the investment in the light beer product would become positive after five years.
