Mountain Man Brewing Company SITUATION: Mountain Man lager has been a long standing premium beer distributed in the central east since 1925. The company has built a brand image around its blue-collared, middle-aged workers by relying on the authenticity of their family owned business to position themselves with their core customers. Recent changes in beer drinker preferences have resulted in a decrease in sales for the first time in the company’s long history. Chris Prangel has returned from earning his MBA and is in line to inherit the family business.
With the aid from his father and other key members in the organization, he must decide the best direction for the future of the company based on the current market conditions. DECISION TO BE MADE: With the reduced sales for Mountain Man Lager over the past years, Chris must decide on the future of the company. He will need to decide if pursuing a new customer base by introducing a light beer would yield immediate dividends (within 2 years), or if remaining with the “status quo” strategy would be enough to keep the company profitable.
He would need to decide on a strategy that did not alienate the existing loyal customer base while enticing new younger drinkers with a new product. ALTERNATIVES: Do not introduce light beer product line, continue “status quo” strategy. Advantages Will not tarnish brand image with existing customers Will not have large initial SG&A expenses to pay for new product. Contribution margin per barrel will remain lower. Can continue to advertise as family owned business with only one product.
Will not have to compete with large distributors of light beer such as Anheuiser-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 With shrinking market, total profit will eventually decrease to nothing. Company will continue to see a diminishing contribution margin No way to compete with distribution power of bigger players in premium market. 4% decline in premium market in East Central region.
Not capitalizing on light beer industry growth. Younger drinkers dominate the light beer market. MMB premium targets older drinkers. RECOMMENDATION: Introduce Light Beer product line. Qualitative While the decision to implement a new product line has significant risk, a statistical analysis reveals that there is some potential growth in the light beer market. The difficult part of opening the new line will be reducing the affect on current consumers who have become loyal to the premium beer brand name of Mountain Man Lager.
However, this risk can be overcome by producing a good product with a well identified brand name attached to it. MMBC can begin to penetrate a new, younger growing market while staying true to its core competencies that has established it as one of the long standing breweries in the East Central region. Targeting a younger audience can be extremely difficult due to the ever changing preferences in the market, however this segment is made of mostly of younger men and women who have yet to establish a “favorite” brand.
This market identifies with smaller companies going against the large corporation, and as long as a quality product is produced, there is no reason that Mountain Man Light can’t establish a small foothold in the light beer market. Unfortunately, the muscle behind the more popular light beers can’t be matched by a smaller company, and even a small advertising campaign will barely get Mountain Man Light up to a 60% Brand Awareness. Even with these hurdles and dynamic market, the growth of the light beer industry cannot be ignored, and if MMBC wants to continue being profitable, it needs to take he risk and dive in this market before it’s too late. Quantitative In order to convince the board members to launch a new product line, Chris Prangel must show that the product will be successful, produce a profit within two years, and be successful for the company in the long-term. Based on an income statement from 2005, and a 2% decline in sales for the premium beer, the contribution margin for introducing a new product line was analyzed for both short term and long term potential. While the light beer market is growing at 4%, there were several costs incurred to introduce this product line.
A smaller contribution margin, additional SG&A and advertising costs, as well as loss of sales in the premium market had to be overcome before the light beer could be profitable. Projections for the light beer market are based on a 0. 25% market share in 2006, with a 0. 25% growth each year until maturation. This growth is reasonable, as the premium beer brand makes up roughly 7% of the east region’s premium beer sales. At a growth rate of 0. 25%, it would take 20+ years to reach the same market share in the light beer industry, more than enough time to establish a new brand awareness with a younger consumer.
The loss of sales of premium beer to the new light beer market can vary between 5% and 20%. For the purposes of this analysis, the best and worst case (5% and 20%) is used. The key to the entire analysis revolves around the projected sales and eventual growth in the light beer market. The risk associated with introducing a new product is very high, and to meet the projected growth, additional advertising costs may be incurred. By producing a quality product associated with a strong brand name, these risks can be avoided.
Based on the aforementioned market variables and projections, the net present value and breakeven analysis for first and second year of production was calculated for two scenarios: 1) 5% loss of premium beer sales 2) 20% loss of premium beer sales With a 5% reduction in premium beer sales, MMBC must overcome the initial advertising campaign and additional incremental SG&A costs. The breakeven units for the first and second year are 95,200 and 160,246 respectively. Based on projected sales, both years will fall short in light beer sales to breakeven.
The net present value was calculated based on a cost of capital of 12%. The NPV for the first two years is -$318,000, and the NPV for the first five years is $7,075,000. With a 20% reduction in premium beer sales, MMBC must overcome the initial advertising campaign and additional incremental SG&A costs. The breakeven units for the first and second year are 185,766 and 339,566 respectively. Based on projected sales, both years will again fall short in light beer sales to breakeven. The net present value was calculated based on a cost of capital of 12%.
The NPV for the first two years is -$4,170,000, and the NPV for the first five years is -$922,500. In both scenario’s, the 2 year net present value analysis indicates that investment into a light beer product line would not be a good idea. However, looking more long-term, and assuming some growth in the light beer market, both products show vast improvement in net present value. Because MMBC plans on being around for the long-term, Chris Prangel must convince the board that they must look past the first two years.
The initial $700,000 advertising skews the payback analysis in the short-term, although it could be argued that this same investment will need to be made for the premium beer to overcome the reduction in sales. For this reason, the long-term potential must be looked at. Digging further into the numbers, it was determined that if the premium beer lost 18% of sales, nearly the worst case scenario, the new present value of the investment in the light beer product would result in a positive value after five years. [pic] [pic] [pic] [pic] [pic] [pic]
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