mountain manbrew beer

Harvard Business School’s Case Study Mountain Man Brewing Co.

DIVYATA JAISWAL

IIT Guwahati| IIML Internship| GUIDE : Prof S. Mathur

Case Study : overview Mountain Man Beer Company founded in 1925 by Guntar Prangel Chris Prangel , an MBA graduate wanted toinherit his father`s business. Mountain Man brewed one beer called Mountain Man Lager Also known as West Virginia`s beer Chris wanted to launch Mountain Man Lightamong the youngsters

For the past 6 years beer sales in US had beengrowing at a compound annual rate of 4% Also had decrease of traditional premium beer sales with same percentage The reputation quality beer was wellentrenched throughout the East Central regionof United

States By 2005, Mountain Man generated revenueover $50million and selling over 520,000barrels² of

Mountain Man Lager. Held in top market position in West Virginiaamong Lagers

Company Background

Family owned business, of brewery Founded in 1925 by Guntar Prangel Launched MOUNTAIN MAN LAGER Used old family recipe

Company Background Present Scenerio

Current owner, Oscar Prangel Strong reputation in centrel East region $50 million revenue by 2005 Best beer in West Virginia

Primary Customer

Blue collar people Low income men over the age of 45-54 53% customer loyalty rate

Product : Success & Specification (Mountain man Lager )

West Virginia’s top market position amoung best lagers for 50 years Voted “Beat Beer of Indiana” in 2005. Voted Best beer in West Virginia “ for eight continuous years. “American’s Championship Lager “ in 2005.

SUCCESS

Dark hued colour Packed in brown bottles, with original label Unique flavour Quality product Prices are similar to premium domestic brands

Product Specification

SWOT Analysis of Case Study

STRENGTHWEAKNESS

OPPORTUINTY THREATS

Strong brand equity Market leadership

Lack of financial resources to compete in the light beer advertising market

Improper utilization of funds in advertising

Market extenstion to younger demographic

Increase lifetime customer value

Dilutes Brand equity

Risk of canalization of core brand

Alienation of core customer through newbrand

Loyal Customers

New class of customer : Women lncrease Product Line Increase in manufacturing cost

Competitors

Main competitor

Major domestic producers

Other competitors

Second tier domestic producers

Anheuser Busch

Miller Brewing Company

Adolf Coors Company

Import beer companiesTogether , they accounted for 74% of 2005 beer

shipments in Mountain Man’s region

Pabst Brewing Company Genessee

Craft beer companies

Sam Adams Sierra Nevada Harpoon

Heineken Molson Corona

Emergent Situation

Light drinkers emerge Greater health awareness Drinkers preferences have changed Competition and Channel Development Key consumer segments changed to age 21-27 years

MARKET CHANGE

MARKET DECLINING FACTOR

Mainly drinkers are aged 45 years Neglecting the growing target audience of women Lack of variety Rise of light beer

Can introducing man brew light beer solve the problem of

decline ?

Introduction of “Light Beer”

Market will increase (Younger customers and females) Increase product line Increased revenue

WHY ? WHY NOT ?

Money will be spent in its advertisement. Dilute the brand name May lead to loss of brand integrity. May lead to loss of current loyal customers Increased competition with powerful brands.

Income statement : Mountain Man 2005

Revenue of next year = (1-2%) revenue of previous year Gross Margin = Net revenue - COGS Net Income = Net Revenue - (COGS + SG&A + Other Operational Expenses - Other Income + income Tax)

Future Analysis trends in market revenue : Mountain Man Beer

2006 2007 2008 2009 2010

Net Revenue $49431200.00 $48442576.00 $47473724.48 $46524249.99 $45593764.99

COGS $34107528.00 $33425377.44 $32756869.89 $32101732.49 $31459697.84

Gross Margin $15323672.00 $15017198.56 $14716854.59 $14422517.50 $14134067.15

SG&A $9391928.00 $9204089.44 $9020007.65 $8839607.50 $8662815.35

Other Operational Expenses

$1384073.00 $1356392.13 $1329264.29 $1302679.00 $1276625.42

Operating Margin $4547670.40 $4456716.99 $4367582.65 $4280231.00 $4194626.38

Other Income $14829.36 $14532.77 $14242.12 $13957.27 $13678.13

Net income before taxes

$4695964.00 $4602044.72 $4510003.83 $4419803.75 $4331407.67

Income tax $1631229.60 $1598605.01 $1566632.91 $1535300.25 $1504594.24

Net Income $3064734.40 $3003439.71 $2943370.92 $2884503.50 $2826813.43

** above data is calculated by formula shown in prev slide

Net income decreases every year

So what can be infer from tabulated data ?

“ LET'S CHECK FOR ALTERNATIVE SOLUTION i.e.. Mountain Man Light Beer ”

Introduction of new product : Light Beer

2005 data

Net Revenue $50440000

Barrels Sold 520000

Price per Barrel $97.00

Variable cost (per barrel Lager) $66.93

Variable cost (per barrel light ) $71.62

Margin (lager) $30.07

Margin (light ) $25.38

Price per barrel = Net Revenue/ Barrels Sold

Margin = Price per barrel - Variable Cost

Initial fixed costs of Mountain Man Light

Fixed cost calculation

Advertisement cost $750000

Annual incremental SG&A cost(2006)

$900000

Annual incremental SG&A cost(2007)

$900000

Total fixed cost $2550000

Best case scenario 2006-2007 Worst case scenario ( 2006-2007)

Fixed cost calculation (with 20% cannibalization* plus 2% last revenue base annually )

Advertisement cost $750000

Annual SG&A cost (2006) $900000

Annual SG&A cost (2007) $900000

Cost from cannibalisation $437226

Cost from cannibalisation $341036

Total fixed cost $3328262

*cannibalization refers to a reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer

Breakdown analysis : 2006-2007

Breakdown analysis of Mountain Man Light Beer

Without cannibalization With cannibalization

Best case scenario Worst case scenario

Total breakeven volume (barrels) Fixed costs/ Net profit margin Fixed costs/ Net profit margin

$2550000/$25.38 $3328262/$25.38

100473 barrels 131137 barrels

Total breakeven revenue Total breakeven vol * price per barrel Total breakeven vol *price per barrel

$100473*$97 $131137*$97

$9745881 $12720308

Revenue with cannibalization

2006 2007 2008 2009 2010Lager Revenue $49431200 $48442576 $47473724 $46524249 $45593765

20% Cannibalization $39544960 $38754060 $37978979 $37219399 $36475012

Light beer Revenue $4727313 $9832811 $15339185 $21270337 $27651439

Net Revenue $39544960 $48586872 $53318165 $58489737 $64126451

2006 2007 2008 2009 2010

Net Revenue $49431200 $48442576 $47473724 $46524249.99 $45593764.99

Revenue with Mountain man Lager

Revenue with cannibalization

RESULT

Total breakeven revenue (TBR) Analysis (in both case , with & without cannibalization)

TBR is sufficient enough to meets its budget constraint within span of 2-3 years

Net Revenue Analysis

Light beer : net revenue increases every year Mountain beer : net revenue decreses every year

* assuming 0.5 % market share

Decision

The Mountain Man Light beer should be launched !

Increase the product line

Revenues also favour its

launch

Company will make greater

profits

Introduction of other new

products

With expected market share, budget can be managed