The major domestic producer segment only contained three major companies also known as “The Big Three”: Anheuser-Busch, Miller Brewing Company, and Adolf Coors Company. They commonly competed on the foundation of economies of scale which wound up being the main driver of revenue. By selling significant quantities of product at a cheap price, “The Big Three” was able to obtain 77% of the market share in 1994. By holding such a large portion of the market, domestic producers received elevated amounts of revenue which became extremely helpful in the 1980’s when demand dwindled.
“The Big Three” was able to avoid financial hardship by having the financial and marketing resources to defend their brands. Due to mass production however, the tastes and standards of quality often varied widely. This created a niche for other brewing segments to tap into the market. Queue the necessity for craft beer. The craft brewing segment manufactured products for more sophisticated drinkers who desired more flavorful and bitter tasting beer.
In terms of driving their revenue, craft brewers concentrate on the price aspect of their product.
By primarily focusing on the quality of their beer, they could charge a price premium to drive revenue. In fact some brews are so well sought-after, they are sold for double the price major domestic beer. Craft Brewers also capture value through strong brand name recognition. They use extensive marketing campaigns to spark interest and build product awareness. In addition, Craft Brewers have the opportunity to contract out plants of domestic manufacturers who are beneath capacity.
Due to the excess amount of producers, custom brewers have considerable control in the relationship allowing them to set strict prices and quality control.
Additionally, contracting allows brewers to strategically choose plants locations allowing them to cut down on transportation costs and guarantee product freshness. Boston Beer captured value similarly to all other craft brewers. It focused on selling high priced, high quality beers to its customers by pursuing four main initiatives, three of which have already been touched on. Boston Beer assured extremely high quality standards by testing each batch with numerous tests, being the first company to stamp expiration dates on each bottle, and instructing customers to toss beer after expiration.
Boston Beer also received all the bargaining benefits for contract brewing listed before. Additionally it spent an absurd amount of money in sales and marketing, significantly more than most other specialty beer companies. Commercials were focused on the quality of the beer itself and educated consumers, drawing attention to superior ingredients. Boston Beer’s unique advantage was their product line innovation. Creating a broader line of seasonal and annual beers continued to build brand awareness by helping obtain greater shelf space and product focus among distributers and retailers.
Boston Beer vs. Craft Beer Competitors Redhook Ale Brewery owned and operated its own breweries unlike Boston and Pete’s. They only had two plants in the state of Washington so they were primarily focused in the western part of the country with ambitions to tap into the eastern market by purchasing a new plant in New Hampshire. Redhook also plan on regional expansion by aligning with Anheuser-Busch where their products were sold through 700 distributors nationwide. By primarily focusing on expanding its product coast-to-coast, Redhook plans to now drive revenue through increasing quantity.
Pete’s Brewing Company already has a fairly broad spectrum as they market beer in 44 states thanks to a great deal of advertising. Although once exclusively a contract brewer, Pete’s has now focused on obtaining their own production plants as well. Specifically in California where the opportunity for growth is higher than ever due to high demand for specialty beer there. Unlike Redhook, Pete’s has already expanded their product reach. Now it is focusing on obtaining greater market share. Boston Beer Company is fairly similar to its competing beer competitors.
All three had capitalized on tremendous growths and plan to continue progressing into the future. Boston also plans on an upcoming initial public offering to raise funds, which Redhook and Pete’s have also just recently completed. The principal difference is that Boston plans on remaining solely a contract brewer. When the market begins to mature, it will be interesting to see whether company-owned or third-party breweries will be more beneficial. As time goes on, craft breweries will start directing their efforts competing against each other instead of domestic producers.
Luckily Boston Beer will be ready for the transition since they have already established themselves in the specialty beer market. Comparing Craft Brewers Financials Expressing relationships between financial statement items can be used to determine Boston Beer Company’s performance relative to their competitors, Redhook and Pete’s. By comparing and contrasting historical data with firms in the same industry, Boston Beer can identify their primary strengths and weaknesses. By breaking down their financial ratios into four basic categories, Boston Beer can determine their success.
Those four are: profitability, efficiency, liquidity, and solvency. *All ratios were taken from 1995 financials since it was the most recent. The most up-to-date entry gives the best look at Boston Beer’s current state of affairs. Profitability ratios show a company’s overall performance by assessing their ability to generate earnings as compared to expenses. They indicate the firm’s proficiency to create a return. Due to Boston Beer’s premium quality, they are able to sell their product at a gross margin of 51. 7%, higher than both Redhook and Pete’s.
However, Boston’s operating profit of 6. 8% is far behind that of Redhook’s 16. 8% due to their immense advertising expenses. Boston Beer may have the best gross margin of craft brewers, however their profit margin is offset because they are spending a lot in order to do so. Efficiency ratios are used to analyze how well a company internally manages their assets and liabilities. By decreasing their working capital, firms are able to free up cash which can be used for other means such as short-term investing, repayment of debt, or issuance of dividends.
No matter what the money is used for, improvement in working capital almost always translates to profitability. Boston Beer has the highest inventory turnover of 12. 8 related to Pete’s and Redhook and their collection period and accounts payable period are also lackluster. As a takeaway, Boston Beer still has ground to make up in productivity against rivals. To determine a company’s ability to pay off its short-term debt obligations, liquidity ratios are used. In order to avoid bankruptcy, a business must be able to have enough cash to cover their obligations.
These ratios will determine if the company has a financial future by clarifying their margin of safety with debt. The most common factor used to determine liquidity is the current ratio. Boston Beers current assets over liabilities are 1. 43 which is more than enough cushion to cover any interim commitments. Unlike liquidity, solvency is used to determine the chances of the firm’s long-term survival by measuring the ability to meet long-term debts. Solvency ratios help hint on the likelihood of bankruptcy down the road. Boston’s debt-to-asset of . 05 and debt-to-equity of .
06 are far lower than that of their competitors so they seem to be leading in that category. Even after the expected IPO deal continues, Boston’s D/A and D/E ratios will improve even further. Boston Beer Intrinsic Value In order to determine the IPO price of Boston Beer Company, the intrinsic value of the company must be found first. By using various valuation methodologies, we can create estimates of the company’s underlying value and determine a final answer from there. One method that can be determined from the given data is the discounted cash flow valuation.
By using a cash flow analysis, a valuation can be determined by taking the current status of a company to predict future profitability and then discounting them to obtain an intrinsic value. Using the information provided in the case, general assumptions can be made to determine Boston Beer’s projected income statement, changes in working capital, increases in capital expenditures, and their weighted average cost of capital. Unfortunately there is a lot of missing data, leaving some values up to debate. Through calculating a WACC of 7.
76%, generating future cash flows for the next five years, and determining the low terminal growth rate, the enterprise value of Boston Beer is expected to be about $210 million. That leaves an equity value of $197 million after eliminating debt. Expected price per share can be determined by taking the equity value over number of outstanding shares which ends up being $10. 78 a share. Profitability and Growth Assumptions In the short term, there is still plenty of opportunity for craft beer companies to expand. But due to increased competition and market saturation, it will only be a matter of time before growth begins to slow down.
With all three leading specialty brewers undertaking plans of massive expansion, and domestic producers beginning to make a move into the specialty beer market the industry’s future looks bleak. Boston Beer may experience extraordinary growth for the few years, however eventually industry growth will stabilize. The long term growth rate for craft breweries will be much lower than their current astounding growth rates. The outlook of the beer industry as a whole is not expected to grow at all, resulting in breweries constantly battling market share away from competitors.
Once the specialty beer market has become saturated, Boston Beer will need to search for other growth opportunities, or risk stagnating company development. Furthermore, the future of bargaining power over contract breweries should be taken into account. One of Boston Beer’s competitive advantages is obtaining cost benefits from the overabundance of brewery plants. By removing the benefits of contract brewing, it would result in drastically reduced net income for craft brewers due to increased expenses. In a worst case scenario, Boston Beer may have to transition and purchase their own facilities leading to large capital expenditures.
As the market begins to mature and growth slows, craft brewers will have to find ways to reduce expenses in order to continue increasing profits. Assuming changes in expenses plays a big part in determining a company’s profitability. Price fluctuations in raw materials and production advances can influence the cost of goods sold. Craft Breweries need for such high marketing expenses may decline after the market becomes saturated and the need for awareness diminishes. These are just a few disruptions that can vastly alter companies future. Discounted Cash Flow Valuation.