Problem Statement:
Mountain Man Brewing Company sells one beer, the Mountain Man Lager; however, the
sales for the Mountain Man Lager have been steadily declining at a 2% rate per year despite the
better than average brand loyalty of 53% from the target market of blue-collar, working men in
the West Virginia area. Meanwhile, for the last six years, the sales of light beer in the United
States have been growing at a 4% rate annually while traditional premium beer sales have been
declining annually by 4% in response. In other words, even though Mountain Man Lager has a
strong brand image, showing an unaided response rate of 67% from West Virginia’s adult
population giving it as recognizable of a brand among working class males in the region as
Chevrolet and John Deere, but consumer tastes are changing in regards to beer in the United
States, which is the largest drinking market in the world. Concluding, Mountain Man Lager is
steadily declining in sales annually because of a changing of consumer tastes, meanwhile the
light beer segment of the market is growing in sales annually, both illuminating to Mountain
Man Brewing Company the problem of losing business from the change in consumer tastes, as
well as potential opportunity to introduce an extension to their brand by creating a light beer in
order to offset the loss in sales with new sales in the growing light beer segment, assuming that
light beer would be successful enough and would recover investment costs in two years or less.
Alternative 1:
Mountain Man Brewing Company could introduce a light beer through a brand extension
in attempts to capture some of the fast growing light beer market segment, representing 50.4% of
total beer volume sales in 2005, up from 29.8% in 2001. As Mountain Man Brewing Company
is now alone among the major and regional beer companies in not expanding the brand beyond
its original Lager product, and product line extensions are often helpful in leveraging new
products on core products in order to obtain important shelf space. Since light beers are more
popular among the younger drinkers and female drinkers who are frequent visitors of restaurants
and bars, the introduction of a light beer into the Mountain Man Brewing Company’s product
offering would help the company gain share in these vital on-premise locations. Further, the
recognition of the Mountain Man Lager could mean a significant percentage of the local light
beer market would be interested in trying the Mountain Man Light, and reciprocally, any initial
or continued popularity of Mountain Man Light could boost sales for the Mountain Man Lager.
Alternatively, the light beer market is extremely competitive and advertising will be a huge
expenditure associated with the possible product launch. Continued, the larger beer companies
with economies of scale are major threats as they already have a significant market share in the
light beer market and this competition could prove to be a great barrier of entry to the market.
Also there is no guarantee that additional shelf space would be provided in off-premise locations
for Mountain Man Light, which could mean supplementing Mountain Man Lager shelf space
with Mountain Man Light. Also, Mountain Man Light could potentially risk the brand image of
Mountain Man Lager thereby causing perhaps even more than a 20% cannibalization. On top of
that, Mountain Man Light has a higher variable cost equating to a lower contribution margin so
the profit potential for the Mountain Man Light would rely more upon selling a high quantity and
gaining popularity quickly to capture a sizeable market share. Though light beers are often
bought in greater quantity and consumed in greater quantity, especially by the younger drinkers,
the projections of possible market share captured in the light beer market by the Mountain Man
Light may or may not be overestimated, underestimated, or accurate.
Alternative 2:
Mountain Man Lager has very high brand recognition and also very high brand loyalty
among the target market. The Lager, created in 1925, using an old family recipe as well as
careful selection of rare and particular tasting ingredients have established a beer with great
reputation despite being the only beer sold by the Mountain Man Brewing Company. Though
Mountain Man is alone among major and regional beer companies in only providing the original
Lager product, this makes the Mountain Man Lager very unique. In 2005, Mountain Man Lager
won best beer in West Virginia for the eighth straight year, among many other awards. Also,
even though the Mountain Man Lager is experiencing declining sales, the company is still
profitable and the beer is still beloved by the older, working, blue-collar males. The Mountain
Man Lager is known for its strong taste, bitterness, and higher than average alcohol content,
which are qualities that the target market pass onto the brand and these correlations in product
value and brand values may not continue to exist if a light beer is introduced, and a steady
alignment of product value and brand value is important for brand parity. On the other hand, it is
worrisome that the sales for the Mountain Man Lager have been steadily declining on an annual
basis, and there is no way to be certain that the trend will not continue. Also, other companies in
the past have been put out of business by the major domestic companies who have the advantage
of economies of scale. The growing trend towards light beer and other alcohol alternatives such
as wine and spirits imposes risk as well, especially for continued brand loyalty and brand
recognition.
Recommendation:
Mountain Man Brewing Company should choose to not create a light beer as a brand
extension to their Mountain Man Lager beer because even though the extension would cover
costs for the company overall in the first year, and for the light beer product specifically in the
second year, given a 20% cannibalization of the Mountain Man Lager, or even a smaller
cannibalization, the company will be less profitable even after the second year. Since Mountain
Man Brewing Company’s net income in 2005 was $4,791,800, and the projected net income for
the second year after implementation of the Mountain Man Light would be significantly less at
$2,991,864, the Mountain Man Brewing Company would still have to aggressively compete in
order to gain a larger market share than the expected quarter of a percent with a quarter of a
percent increase per year in the light beer market. Advertising expenditures are also likely to be
more expensive than projected as a 6-month campaign may or may not be successful enough to
establish the projected market share. It would be better for Mountain Man Brewing Company to
expand their distribution network to include more off-premise locations, and to even start
lifestyle marketing geared at the younger drinkers who are becoming easily attracted to the light
beers. Consumer tastes may be changing, but the Mountain Man Lager has been awarded the
best beer in the West Virginia area for the past eight straight years. Instead of allowing the light
beer market to continue growing at such a fast rate by accepting the social trend that women and
younger drinkers are more interested in light beers, lifestyle marketing aimed at making women
and younger drinkers see the value of Mountain Man Lager would be advantageous and probably
a better use of the money that would be spent on creating and distributing the Mountain Man
Light. It is possible over time Mountain Man Light could create a more significant market share
to boost the net income back to 2005 levels, before the Mountain Man Light, but it is probably
more possible for Mountain Man Brewing Company to exercise alternative marketing tactics to
attract the younger drinkers and women drinkers who go to on-premise locations often.
Tables:
Year 1
Lager (20% cannibalization)
Light (0.25% market share)
Total
Projected
520,000*.80=416,000
18,744,303*0.25%=46,860
$97*416,000= 40,352,000
$97*46,860=4,545,420
$44,897,420
$66.93*416,000=27,842,880
$71.62*46,860=3,356,113
$31,198,993
Contribution $30.07*416,000=12,509,120
$25.38*46,860=1,189,306
$13,698,427
Figures
Net
Revenues
COGS
Margin
SG&A
9,583,600
900,000
$10,483,600
Other
1,412,320
750,000 (6-month
$2,162,320
Expenses
Net Income
advertising)
1,513,200
-(460,694)
Year 2
Lager (20%
Light(0.5% market
Projected
cannibalization)
share)
$1,052,507
Total
Figures
520,000*.80=416,000
18,744,303*0.5%=93,722
Net Revenues
$97*416,000= 40,352,000
$97*93,722=9,091,034
COGS
$66.93*416,000=27,842,880 $71.62*93,722=6,712,370 $34,555,250
Contribution
$30.07*416,000=12,509,120 $25.38*93,722=2,378,664 $14,887,784
$49,443,034
Margin
SG&A
9,583,600
Other Expenses
1,412,320
Net Income
1,513,200
900,000
$10,483,600
$1,412,320
1,478,664
$2,991,864