Sam Adams Porter Analysis
Strong Brand Equity
Boston Beer gained brand equity as a result of its efforts to create robust brands over the years - Sam Adams Porter Analysis introduction. The company offers beverages under various brand names such as Samuel Adams, Sam Adams Light, Twisted Tea, Angry Orchard, and HardCore. The company markets more than 50 beer products under Samuel Adams and Sam Adams brands, 10 flavored malt beverage products under the Twisted Tea brand, a hard cider product under HardCore brand, five hard cider beverages under the Angry Orchard brand, and five beers under two brands of its Alchemy & Science subsidiary. The company’s Samuel Adams brand is the third largest brand in the Better Beer category of the US brewing industry, after Corona and Heineken brands. According to Men’s Journal, Samuel Adams NoblePils is one of the 25 best beers in the world. According to Fox News of USA, Samuel Adams ranked number one place among 10 best perceived beers in America, heading Budweiser, Dos Equis, Bud Light, Corona, and Heineken among others in 2013. The company’s brand equity enables it to respond profitably or adopt skillful measures while marketing these brands. Sales and Marketing Capabilities
The company has a strong sales and distribution channel network, which helps Boston Beer to reach various customer groups and serve its comprehensive product portfolio. The company sells its low-alcohol beverages to a network of more than 340 wholesale distributors across the world. The company products reach retailers including, pubs, restaurants, grocery, convenience stores, package stores, stadiums and other retail outlets through wholesale distributors. It distributed its products principally across the United States, Canada, Europe, Israel, the Caribbean, the Pacific Rim and Mexico. Also, the company’s manages Freshest Beer Program with domestic wholesalers to provide better on-time service, forecasting, production planning and cooperation with the wholesalers. As of December 2012, the company reported 89 wholesalers participating in the program at various stages of inventory reduction, which constitutes over 59% of its volume. Boston Beer expects between 65% and 75% of its production volume will be in the Freshest Beer Program by the end of 2013. Moreover, the company undertakes media campaigns through television, radio, billboards and print. Also, though participation in sponsorships of cultural and community events, local beer festivals, industry-related trade shows and promotional events at local establishments, to the extent permitted under local laws and regulations.
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The company brewed and packaged approximately 90% of its core brand volume at company-owned breweries in 2012. The company-owned breweries are located in Breinigsville, Pennsylvania; Cincinnati, Ohio; Boston, Massachusetts; and Los Angeles, California. Currently, the company has a brewing and packaging services agreement Page 1
with City Brewing Company, LLC, to produce its products at facilities in Latrobe, Pennsylvania and La Crosse, Wisconsin and an agreement with Pleasant Valley Wine Company to brew and package at facilities in Hammondsport, New York. Also, Boston Beer’s capital investments in 2012 reported $67m for efficiency of projects, support the Freshest Beer Program, and to expand the quality, capacity and capabilities of its breweries. Moreover, the company expects to invest $70m to $85m in 2013. Such brewing investment and agreements provides significant scope to produce high output and derive profits.
Significant Influence of Class B Shareholder
Boston Beer’s Class A common stock is entitled to voting rights only as a class to approve certain mergers and charter and by-law amendments and also to elect a minority of the company’s directors. As a result, the election of a majority of the company’s directors and all other matters for stockholder approval are decided by C. James Koch, chairman of the board of directors of Boston Beer. Mr. Koch is the current holder of 100% of the outstanding shares of the company’s Class B Common Stock. Consequently, he is able to exert a major influence over all matters requiring stockholder approval, which will restrict most of the company’s accomplishments without Mr. Koch’s support. Decreasing Operational Efficiency
The company has displayed a poor financial performance reducing its investor’s confidence. Though the company’s revenue increased by 13.1% from $513m in 2011 to $580.22m in 2012, its operating income decreased by 7.8% from $103.66m in 2011 to $95.58m in 2012. The company’s operating margin decreased to 16.47% in 2012 as compared to 20.20% in 2011. The company’s operating margin has declined 374 basis points (bps) over 2011 which may indicate that the company’s cost management and pricing strategy is weakening. The decreasing operating profit margin indicates the company has been less efficient in its day-to-day operations. The company’s EBITDA growth decreased to (7.7%) in 2012 as compared to 27.6% in 2011. On the other hand, the company reported an increased operating cost as percentage of sales to 83.52% in 2012 from 79.79% in 2011. The declining operational efficiency of the company affects its financial and operational condition.
Strategic Growth Initiatives
The company expands its boundaries of operations and increases its customer base with strategic growth initiatives. In 2012, the company completed its national distribution for both Twisted Tea and Angry Orchard brand families. It introduced 25 new beers and won 367 awards in 2012. In January 2012, A&S Brewing Collaborative LLC, d/b/a Alchemy & Science (A&S), a wholly-owned subsidiary of the Boston Beer, acquired all of the assets of Southern California Brewing Company, Inc., d/b/a Angel City Brewing Company.
Also, A&S signed an agreement for lease of the Angel City brewery premises located in Los Angeles, California, through which it intends to brew, distribute and market for on and off premise consumption beers under the Angel City brand name. Furthermore, the company through A&S intends to roll out additional brands and complete its national distribution for both Angry Orchard and Twisted Tea brand families. The growth initiatives provide enough reach and opportunity for the company to increase its business-to-business marketing through alliance network and channels. Growth Prospects: Spirits Market
Growing alcohol consumption across the world offers a strong growth potential for the company. According to the industry experts, the total spirits consumption is expected to rise from approximately 2.81 billion cases in 2010 to more than 3 billion cases till 2016, and more than 85% of the growth in global spirits consumption is expected to come from the emerging geographies of China and the India. Industry is expected to witness substantial growth in Asia, Central and Eastern Europe, and South America. The increased consumption is primarily driven by growth in global population, rising income levels and cultural changes in certain markets. The wine industry is expected to witness growth in China, Page 2
GlobalData – SWOT Analysis, 10/13/2013, The Boston Beer Company, Inc. the US, and Russia, and stagnation in the western region markets. The whiskey market is expected to grow at highest annual growth levels at 9.5% for standard and premium products in the period to 2016. It is also forecasted that the US market would increase its share of the global whiskey market from 29% to over 48% by 2016. The vodka market is expected to grow at a CAGR of 5.6% to 130m of 9-liter cases by 2016, rum at a CAGR of 3.5% to 65m 9-liter cases, tequila at a CAGR of 4% to 24m 9-liter cases and gin at a CAGR of 1% to 19m 9-liter cases. Opportunities in Emerging Markets
The fast paced growth in the emerging economies offer a huge growth potential for the company by leveraging its strong brand and product portfolio. The emerging economies like China, India, Brazil, Russia and Taiwan are estimated to witness a 10% growth for the next seven years. The growing economy has generated new employment opportunities for the residents and has provided a boost to their earnings. Growing population, increased disposable income and shift from consumption of traditional hard liquors towards beer is expected to drive the growth of beer industry in these areas. The worldwide beer consumption growing at 2-3% annually and the developed markets (Western Europe, the United States, Australia and Japan) are showing stagnant growth, but in the developing regions of Central Eastern Europe, Latin America, Africa and Asia, the beer consumption is growing at the solid rate of 3-4%. This provides an excellent opportunity for the company to cash in its brand value and superior product quality in the emerging markets. Threats:
Stringent Government Regulations
Boston Beer’s operations are subject to extensive government regulations at both federal and state levels as well as local level. These regulations pertain to brewing, marketing and advertising, transportation, distributor relationships, sales, labeling, credit, container characteristics, alcoholic content, tax rates and litter assessments, among others. Mostly, all the federal regulations involving brewing are issued by the Bureau of Alcohol, Tobacco, and Firearms (BATF), which was established through the FAA Act. In the US, television and radio advertisements of alcoholic products have been prohibited since 1971, and television and radio advertisements of the usage of alcoholic products have been prohibited since 1986. Such limitations make it difficult for the company to generate and maintain its brand equity. Each state has a complex set of laws and regulations governing its industry and these regulations are issued by state alcohol control agencies. The company should comply with all such stringent governmental regulations. Failure to comply could impose new liabilities on the company or hamper its existing operations, which could in the short term result in a material decline in its profitability.
Consumer Preference Shifting Towards Wine
The increasing demand for wine in the US could have a major impact on Boston Beer’s business. Wine consumption in the US is growing rapidly as against Europe. The US is the world’s largest wine-consuming country surpassing France. Wine imports in the US, especially from California and foreign producers grew to nearly 330 million cases, registering a growth of 2% over that in the previous year. Though wine consumption in the country is less 2.6 gallons per capita, the adult population is growing every year, which would adopt wine just as their baby boomer parents did. It has been observed that the Americans are increasingly interested in a lifestyle with wine and food, proven by the growth in the US wine consumption for 17 consecutive years and presence of wineries in all the 50 states of the nation. According to the US Department of Commerce data, the US wine exports have almost doubled in the last decade. The demand for wine in the US is expected to continue further. As the company is a major supplier of beer across the US and to select international markets, such changing consumer choices could affect the sales volume of the company.
Increase in the Input Costs
Growing raw material costs could have a major impact on the operational efficiency of the company. The company uses various raw materials such as grapes, neutral spirits, molasses, rum, cereals and sugar during the production Page 3
GlobalData – SWOT Analysis, 10/13/2013, The Boston Beer Company, Inc. processes of beer, wine and spirits. In addition, the cost of wheat, followed by barley and hops are all setting the stage that the cost of beer to rise. The price of barley has been increasing over the years primarily due to the flourishing ethanol market. Furthermore, the supply of some brewing raw materials and packaging materials has been constrained during the past two years, leading to supply shortages and cost increases. Although the company uses forward contracts, price fluctuations and non-availability of these raw materials could have a material effect on product costs and the operations of the company.
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GlobalData – SWOT Analysis, 10/13/2013, The Boston Beer Company, Inc.