Mr. Prangel as we all know Mountain Man Beer Company has been in the market over eight decades; manufacturing a beer known for its authenticity, quality and toughness. In all these years we have seen many regional breweries vanished by fatal decisions. Mountain Man Beer Company is still standing strong in the market, yet it has come the time to make a crucial decision regarding the future of our company.
Before I present my recommendation I would like you to know that I am well aware of your father’s words when he talks about the company, when he says that “Mountain Man is still standing because we manufacture and exceptional beer with a great brand name, we have never lost sight of our core customer, and we have never been seduced by the other guy’s market”.
Unfortunately due to changes in beer drinkers’ preferences and declines in sales for the first year, we need to consider different options to compensate for potential declines in sales in the coming years.
Despite all our efforts to build brand equity in 2005 Mountain Man Lager Beer’s sales have declined for the first time in the history of the company by 2%, which could continue on the following years if no action is taken. On the other hand the Light Beer category, in which we have to presence at all, has been steadily gaining market share at a compound annual rate of 4% per year in the past 5 years. Light beer’s market share accounted for 50. 4% of volume sales in 2005. At this point we have two different options from which we can pick from with their pros and cons.
The first strategy would be to keep doing what we are doing focusing on our core consumers, maintaining our company as a single product company. The second strategy, and the one I am recommending after looking at the industry’s numbers and different facts in the Beer industry, is to move to diversification of our product portfolio towards light beer to satisfy a new customer base, to catch up with the changing times and the lost in sales of our main product Mountain Man Lager Beer. Keep doing what we are doing
The strategy consist in focusing in our core consumers and keeping our brand image of “Working man’s beer” as Oscar Prangel said “focusing on what we do best, not by attaching our brand to every conceivable version of a product. ” Mountain Man Beer Company has been successful marketing to the blue collar, middle-to-lower income men over age 45, distinguishing from competitors with an old family brew resulting in a flavorful, bitter-tasting, high alcohol level beer, obtaining a brand loyalty rate of 53%.
At the same time we have to take in consideration that the beer consumption in the US has declined 2. 3% plus the lost in market share of premium beers, going with this strategy could hurt the company in many ways. This strategy does not include introducing a light beer into the market, even though the market for light beer has been growing consistently 4% per year for the past 5 years. Pros:Keep brand image strong. No investment needed Focus on our core consumers. Cons:Beer consumption in US declined 2. 3% Sales decreased by 2% in 2005 (Appendix 1)
45 + years old beer drinkers are being overshadow by the key consumer segment for beer (21-27 years old) Light beer’s market is growing 4% per year while Premium beer has been losing 4% market share per year. Our Revenue will be considerably hurt in the next years (Appendix 2 & 3) Launch Mountain Man Light Mountain Man Beer Company will have to introduce a “light” beer to their product portfolio, to satisfy the growing demand of the younger beer drinkers and compensate the lost in sales of our main product Mountain Man Lager.
Light beer is the fastest growing segment in the $75 billion beer industry in the US, accounting for 50. 4% and increasing at compound annual growth rate of 4%. There are many factors we need to take into consideration when launching Mountain Man Light, such as cannibalization, cost, and advertising. -We are shooting for a 0. 25% market share of the light beer consumption in 2006, while growing our share by a quarter of a percent per year the following years. We are projecting 48,735 barrels on 2006 (Appendix 4) -There is a risk of possible cannibalization from MM Light to MM Lager of 5% – 20% according to Oscar.
I will set cannibalization at 5% due to the fact that MM Lager drinkers consume our product for its roughness, and they are not likely to switch to a lighter version of MML. 25,480 barrels of beer will be cannibalize from MM Lager on 2006. (Appendix 5) -An advertising agency estimated that creating a 60% level of awareness for Mountain Man Light will cost $750,000 for an intensive six months. -Another cost to take in consideration is the increment selling general and administration which is $900,000 per year.
-The cost of producing Mountain Man Light will be $71. 62 which is $4. 69 more than a Mountain Man Lager barrel, reducing our contribution margin from 31% to %26. 16. (Appendix 6) -We will see increase in Income and Revenue starting 2007 (Appendix 7) Appendix Appendix 1 Appendix 2 Mountain Man Sales Assuming 2% per year reduction Mountain Man Sales Assuming 2% per year reduction Appendix 3 Projected Income Statement | | | | Mountain Man Income Stament | 2005| 2006| 2007| | 520,000 Barrels| 509,600 Barrels| 499,408 Barrels | | | | | | | |.
Net Revenue| | | 50,440,000 | 49,431,200 | 48,442,576 | | COGS| | | 34,803,600 | 34,107,528 | 33,425,377 | Gross Margin | | | 15,636,400 | 15,323,672 | 15,017,199 | | SG&A| | | 9,583,600 | 9,391,928 | 9,204,089 | | Others| | | 1,412,320 | 1,384,074 | 1,412,320 | Operating Margin| | 4,640,480 | 4,547,670 | 4,400,789 | | Other Income| | 151,320 | 148,294 | 145,328 | Net Income Before Taxes| | 4,791,800 | 4,695,964 | 4,546,117 | | Provision for Income Tax| 1,677,130 | 1,631,230 | 1,598,605 | Net Income After Taxes| | 3,114,670 | 3,064,734 | 3,003,440 | Appendix 4Projected Market share| | | | | | |
Year| Light Beer | MM Light| Market | | Consumption| 0. 25%| Share| | CAGR + %4| . +. 25% per year| | 2005| 18,744,303 | – | 0. 00%| 2006| 19,494,075 | 48,735 | 0. 25%| 2007| 20,273,838 | 101,369 | 0. 50%| 2008| 21,084,792 | 158,136 | 0. 75%| | | | | Appendix 5 Cannibalize Barrels Cannibalize Barrels Contribution Margin Contribution Margin Appendix 6 Appendix 7 Projected Income Statement | | | | | Mountain Man Income Stament | 2005| 2006| 2007| | | 520,000| 484,120| 474,438 | BB Lager| | | | | | 74,215 | 126,339 | BB Light| | | | | | | | | | | | | | | | | Net Revenue| | | $ 50,440,000 | $ 54,158,495 | $ 58,275,369 | | | COGS BB Lager| |.
34,803,600 | 32,402,151 | 31,754,135 | | | COGS BB Light| | | 5,315,278 | 9,048,399 | | Gross Margin | | | 15,636,400 | 16,441,066 | 17,472,834 | | | SG&A (+900,000 yearly)| | | 9,583,600 | 11,190,114 | 11,072,320 | | | Others (+750,000)| | | 1,412,320 | 2,266,438 | 1,631,710 | | Operating Margin| | 4,640,480 | 2,984,514 | 4,768,804 | | | Other Income| | 151,320 | 162,475 | 174,826 | | Net Income Before Taxes| | 4,791,800 | 3,146,990 | 4,943,630 | | | Provision for Income Tax| 1,677,130 | 1,787,230 | 1,923,087 | | Net Income After Taxes| | 3,114,670 | 1,359,759 | 3,613,073 | |.