The Canadian brewing industry accounted for seven billion dollars’ worth of sales in 1999 and the two dominant breweries, Molson and Labatt having 46.6% and 46% of the marketing respectively, attained most sales. While these two major players had a monopoly over the industry (92.6% collective market share) it was expected that microbreweries and imported beers market share would increase to between eight and ten per cent by 2003 from the current 7.4% they had. In terms of microbreweries Sleeman Breweries Limited was the largest in Canada in terms production capabilities. It produced 420,000 hectoliters in 1998 which was more than the 2nd to 5th highest producing microbreweries collectively. Sleeman was the best managed company in Canada at the time and had slowly built a reputation as a quality brand.
It had grown in size due to the success of several sequential mergers of smaller microbreweries. At the time they had recently rented the rights to produce and distribute Canada wide a new portfolio of mid to low quality beers from the US company Stroh in a 15 year contract. Stroh subsequently went of business, selling these portfolios to other companies, though Sleeman maintained the right produce and distribute the portfolio. As a result of this new contract, Sleeman took on a lot of debt. Nonetheless the company’s profit margin was still above industry standards and its sales growth had increased 16%, indicating an upward trajectory. Problem (Issue) Statement
Chantal Dumont, an investor, was looking to grow her investment portfolio and while researching for investment opportunities she came across Sleeman Breweries Limited (SBL). Dumont had recently received SBL’s fiscal 1999 financial results and is evaluating whether the risk of investment would be outweighed by the future potential of SLB. Being a major investor, she has the ability to change the operating strategy of the company, which affects its viability.
One of the more questionable things to note is the 15-year agreement with Pabst Brewing Company giving the rights to SBL to produce, sell and distribute the Stroh portfolio of brands in Canada. The main issues here are that: 1. The portfolio represented a mix of low-to-medium quality beers. This isn’t really compatible with the current marketing push that SLB is trying to do via TV, radio and sponsorship ads. They’re currently trying to build brand awareness and establish a strong brand image which would in turn differentiate them from their competition and hopefully attract a loyal client base. It would be quite difficult to integrate a low-to-medium quality beer into this model. 2. It’s not congruent with the first operating strategy objective “grow the domestic market share with SLB’s existing brands in Ontario, Quebec and British Columbia.”
This is a 15-year contract with a brewing company that lost 1.2% of its market share in just one year and then effectively dissolved itself and sold all its assets. I believe that there is a good reason as to why their market share dropped and why they decided to act so rashly. 3. Stroh Brewing Company is not a microbrewery. I understand that SBL wants to expand its strategic alliances and hopefully create a “family” of premium craft brewers across Canada, however, this is too far of a deviation and will not synergise well with what its current loyal client base is used to; a premium crafted beer from a microbrewery. This could possibly dilute its current brand. 4. The contract itself is quite pricy. If we take a quick look at the Industry Ratios, it can be seen that its acid test ratio is 0.8, which can lead to a liquidity issue. This additional contract added on more liabilities which resulted in SLB to not have enough short-term assists to cover its immediate liabilities.
Assuming Dumont has the ability to alter the operating strategy, the following options are available to her: Alternative 1: Focus on having a family of premium craft beer to exploit the already strong regional brand awareness. SBL already has a loyal client base and an established brand image specific to these areas as a premium product for a premium price. Alternative 2: Take full advantage of the recent 15-year agreement with Pabst Brewing Company. The portfolio represents a mix of low-to-medium quality beers and because both Molson and Labatt have begun aggressively marketing their own specialty beers to compete with the growing premium-craft beer segment there may be an opening which would allow SBL to obtain market share from the low-to-medium market segment.
Alternative 3: Divert all of the focus on expanding distribution so that all of brands in SBLs portfolio would be circulated throughout all of Canada. There is already strong regional brand awareness of the Sleeman brand and by gaining control over provincial distribution SBL may be able to compete on a more national level. Alternative 4: Not invest. Failing the acid test should never be taken lightly and its current ratio is also not above 2. Historically one in 2.5 microbreweries eventually failed and declared bankruptcy and seeing as how SBL already closed in 1933 it may again follow suit.
Key Decision Criteria
1: low importance
2: medium importance
3: high importance
4. very high importance
1: very low
The null option of not investing (alternative 4) cannot be fairly evaluated by the same criteria as the other 3 alternatives. The only way to compare it would be to first decide which of alternatives 1-3 would be best and then compare the winning alternative to 4th alternative. Based on the results of the decision matrix the winning alternative is number 3, to expand distribution of existing brands throughout Canada. From the score, it seems that alternative 3 has a realistic potential to maintain and improve SBLs financial performance with relatively low risk. Meanwhile alternative 1 does not net any gain and while alternative 2 has the potential to bring in new market share and profits, the risk of going in direct competition with the big two players-Molson and Labatt- is too high. That being said, the company’s current financial situation is somewhat questionable.
The company’s acid test ratio is below 1, and therefore does not have enough cash on hand to pay their debts. Their current accounts receivable is quite high which indicates that most of their buyers don’t pay in cash. This can hypothetically lead to a bad situation where the company does not have enough capital to pay its debts as its current ratio is not optimal. They have slightly less short term debts however they have significantly higher long-term debts due to the Stroh agreement. The good news is that SBL’s ROE is about 12.3% which is 10.2% higher than the industry average. Overall I would recommend that Dumont invest in the company. Despite the large debt, the company has a large potential to expand, is well managed and has maintained a good brand image.
Action and Implementation Plan
Expanding SBL’s distribution so that all of brands in its portfolio would be circulated throughout all of Canada would take advantage of the already strong regional brand awareness and allow SBL to compete on a more national level. One of the first things that SBL should look into is talk to the provincial liquor boards to persuade them to allow and carry the SBL’s current portfolio of brands. They would also need to hire local distributors to move their product into these new regions. SLB would also have to increase production in their current plants, though this should be relatively easy to implement, seeing as how they currently have underutilized production capacity.
This would all have to be done in conjunction with an aggressive marketing campaign. They are operating on a larger scale than true microbreweries and so are not in direct competition with them, On the other hand they have the first mover advantage over the big two companies (Molson and Labatt) in the premium craft beer market. This can afford them premium pricing opportunities, as well as high margins, if they move quickly and aggressively on this advantage. This puts them in a prime position to place themselves in between the two extremes of the marketplace.
Return on Equity = Net Income/Shareholder’s Equity
ROE = 7,396,965/59,978,295 = 12.3%