BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
1
Problem Statement: Mountain Man Brewing Company (MMBC) is facing declining sales of 2%
per year. The company also relies on the revenues generated by a single product. 70% of
current revenues are generated off-site, allowing only 30% of revenues generated in
restaurants and bars. By not offering an alternative product, light beer, MMBC has no offering
available to 50.4% of beer drinking customers. MMBC is also facing the pressure of competing
with local, regional and national brewers and their brand awareness. MMBC is currently
operating in a market segment with declining revenues and sales, while other segments of the
market are growing and MMBC has no product offering in this growing segment.
Alternative One: Continue selling only Mountain Man Lager with no new product
introduction.
Pros: By not introducing a new brand there is no dilution of the core brand. By continuing with
only one product there is no diversion of advertising expenses to other products. MMBC’s core
demographic is the ages of 45-54, 55-64 and 65+. In these demographics MMBC commands a
greater percentage than the “Domestic Light Beer” and the “Domestic Premium Beer”
demographics. Continuing with one product eliminates any changes and optimizes all
resources to supporting one product.
Cons: Revenues for non-light beers is declining as light beer market share increases, which
would equate to declining revenues for MMBC (Ex. 5-C). MMBC doesn’t command as well of
market share with the ages below 45 as they do with 45 and above. These lower age brackets
represent the future customers and MMBC loyalty isn’t as strong with them as compared to the
Domestic Light and Premium Beer demographics. MMBC only offers a lager, which
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
2
immediately removes 50.4% of the beer drinking market from their customer base. (Ex.4)
MMBC lost 2% of revenues from 2004 to 2005. MMBC has no diversification while only selling
one product. One product issue can decimate MMBC’s entire revenue stream.
Alternative Two: Introduce a new product, Mountain Man Light, under the MMBC brand.
Pros: MMBC should capture some missing market share by introducing a light beer. A light
beer product has the potential to expand the market base of MMBC by offering a product to
the “Domestic Light Beer” profile shown in Exhibit 4. Currently MMBC doesn’t offer a product
for that profile of light beer drinkers. A light beer could increase on-site sales in restaurants
and bars, which wouldn’t require more “facings” in retail outlets. There has been a 4%
compound annual growth rate of light beer sales over the past 6 years. (pg. 1 of case) The light
beer market is the only non-super-premium domestic type of beer market that is increasing.
Cons: MMBC might dilute the brand equity of their Lager beer. MMBC might also “alienate
existing Mountain Man customers” by introducing a new product under the same brand. It
may be difficult to get more shelf space for the new product and the retailer might eliminate
current MMBC shelf space to make room for the new product, which might diminish existing
product revenues. There will most likely be some cannibalization with the new product
introduction. Company resources will be divided and there will be some detraction from the
company’s current and primary offering of the lager beer.
Recommendations:
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
3
The recommendation is alternative 2, introducing the light beer. 50.4% of the beer drinking
market drinks light beer (Ex. 4). MMBC has to increase the marketing and sales for on-site
consumption at restaurants and bars using personal sales. This accomplishes a couple of needs.
70% of MMBC sales are off-premise. By marketing a light beer in restaurants and bars MMBC
can balance this out to perhaps 50% of sales of off-premise, which would increase their marketshare. The second item that an increase in marketing to restaurants and bars does is
eliminating some of the problem with “facings” in retail establishments. By increasing MMBC’s
sales in restaurants and bars they reduce the need to cannibalize the lager brand by requiring
twice the shelf space at retail points. With declining margins, shelf space is going to be more
difficult to obtain so the alternative is on-site consumption. MMBC should increase marketing
spending and focus the marketing for the on-site consumption, to the 21-34 demographic and
to females. MMBC’s demographic share in this age bracket is lower than for the other brackets
and this can be a relatively easy place to gain market-share quickly. Females comprise 42% of
the light beer market while they are only 19% of MMBC’s lager market. Again, this should be a
relatively easy place to quickly gain market-share. Recommend extending the initial marketing
expense of $750,000 for the first six months into the second six months at the same rate. This
will be a slight increase above the current lager marketing expense of $1,350,000 but this is a
new product roll-out and a bit higher marketing expense should be expected (Ex. 2). MMBC
should also increase its regional advertising. While Mountain Man is seen as West Virginia’s
beer the state owns the lowest share (by half of the next lowest) of beer consumption in the
East Regional area (Ex. 3). As seen in Exhibit 2, the Light Beer product introduction, with a 20%
lager cannibalization rate (Ex. 1) for the first year and then a 2% decrease per year in lager
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
4
revenues following, the introduction creates a greater profit in percentage and overall number
within the required 2 years. The initial increase in costs in 2006 is very much outweighed in the
subsequent years due to the estimated increase in market share of the light beer market. (Ex. 6)
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
5
Exhibit 1
Break-even analysis:
MMBC sells barrels of Lager @ $97 (Revenues $50,440,000/520,000 barrels sold)
Contribution margin from lager beer is calculated at $97 - $66.93 = $30.07 (pg. 6 of case)
Contribution margin from the light beer is calculated at $97 - $66.93 - $4.69 = $25.38 (pg. 6 of case)
New fixed costs from Light introduction: (($750,000 first 6-month advertising) * 2 for annual projection)
+ $900,000 in annual, incremental SG & A costs) = $2,400,000 for the first year (pg. 6 of case)
BEQ(Units) = $2,400,000/$25.38 = 94,563 barrels of Light beer
BEQ(Revenues) = 94,563 * $97 = $9,172,576.83
Cannibalization analysis:
“Then there's the real risk that Mountain Man Light might just end up hurting the sales of Mountain
Man Lager; I reckon we could count on at least 5% but it might be 20% or higher.” (pg. 6 of case)
We will use a 20% cannibalization calculation, 520,000 barrels * .2 = 104,000 barrels
Cannibalized contribution margin of Lager = 104,000 * $30.07 = $3,127,280
BEQ(cannibalization) = $900,000 (SG & A) + $1,500,000 (Advertising) + $3,127,280 (Cannibalized
contribution margin) = $5,527,280/$25.38 (light beer contribution margin) = 217,781 barrels of light
beer to makeup added fixed costs and cannibalized revenue at a 20% cannibalization rate.
With a 5% cannibalization calculation, 520,000 * .05 = 26,000 barrels
Cannibalized contribution margin of Lager = 26,000 * $30.07 = $781,820
BEQ(cannibalization) = $900,000 (SG & A) + $1,500,000 (Advertising) + $781,820 (Cannibalized
contribution margin) = $3,181,820/$25.38 (light beer contribution margin) = 125,368 barrels of light
beer to makeup added fixed costs and cannibalized revenue at a 5% cannibalization rate.
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
6
Exhibit 2
Light Beer Introduction
2005
2006
2007
2010
$
Gross Margin
SG & A Lager
SG & A Light
Other Operating Expenses
Total Expenses
$
$
Operating Margin
Other Income
$
$
4,640,480 $ 2,645,464 $
151,320 $ 121,056 $
4,510,984 $
118,635 $
4,976,574 $ 5,450,933 $ 5,968,113
116,262 $ 113,937 $ 111,658
Net Income Before Taxes
Provisions for Income Taxes
$
$
4,791,800 $ 2,766,520 $
1,667,130 $ 1,333,704 $
4,629,619 $
1,307,030 $
5,092,836 $ 5,564,869 $ 6,079,771
1,280,889 $ 1,255,272 $ 1,230,166
Net Income After Taxes
Profit %
$
3,124,670 $ 1,432,816 $
6.19%
3.18%
3,322,589 $
6.73%
3,811,947 $ 4,309,598 $ 4,849,605
7.05%
7.27%
7.48%
Light Beer Market (East Cent)
Light Beer Market (MMBC)
$
$
50,440,000 $ 40,352,000
$ 4,727,295
$ 45,079,295
34,803,600 $ 27,842,880
$ 3,261,851
$ 31,104,731
$
$
$
$
$
$
38,754,061
15,339,186
54,093,247
26,740,302
10,584,043
37,324,345
$ 37,978,980
$ 21,270,338
$ 59,249,317
$ 26,205,496
$ 14,676,538
$ 40,882,034
$ 37,219,400
$ 27,651,439
$ 64,870,839
$ 25,681,386
$ 19,079,498
$ 44,760,884
15,636,400 $ 13,974,564
9,583,600 $ 7,666,880
$ 2,400,000
1,412,320 $ 1,262,220
10,995,920 $ 11,329,100
$ 15,307,104 $ 16,768,902
$ 7,513,542 $ 7,363,272
$ 1,900,000 $ 2,914,445
$ 1,382,578 $ 1,514,611
$ 10,796,120 $ 11,792,328
$ 18,367,284
$ 7,216,006
$ 4,041,364
$ 1,658,981
$ 12,916,351
$ 20,109,955
$ 7,071,686
$ 5,253,773
$ 1,816,383
$ 14,141,843
2005
18,744,303
2006
19,494,075
0.0025
48,735.19
2007
20,273,838
0.0050
101,369.19
$
$
$
$
$
$
2009
Net Revenues Lager
Net Revenues Light
Total Revenues
COGS Lager
COGS Light
Total COGS
$
39,544,960
9,832,811
49,377,771
27,286,022
6,784,645
34,070,667
2008
2008
21,084,792
0.0075
158,135.94
2009
21,928,183
0.0100
219,281.83
2010
22,805,311
0.0125
285,066.38
Income statement with the light beer assumptions:
Initial 0.25% base market share in 2006 (2005(18,744,303*1.04%CAGR) = 2006 market of 19,494,075 barrels of which MMBC
share would be 48,735 barrels of light beer with a 0.25% increase of the light beer market share per year.
Intitial 20% cannibalization as worse case and then a decline of 2% per year for 2007 - 2010
Initial expenses of SG & A of the $900,000 and $1,500,000 for advertising for the year with SG & A expenses of 19% which is
the equivalent of the lager SG & A
The second year (2007) SG & A expenses are calculated at the same rate as the lager SG & A expenses at 19% going forward.
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
7
Exhibit 3
Illinois
Indiana
Kentucky
Michigan
Ohio
West Virginia
Wisconsin
% of Total
2000-2005 Average
24.5%
9,112,694.50
10.7%
3,970,187.17
6.8%
2,534,542.33
18.2%
6,755,457.33
23.2%
8,637,336.00
3.6%
1,339,669.33
13.0%
4,846,406.00
100.0%
37,196,292.67
2000
9,038,323
3,954,209
2,517,894
6,761,561
8,493,144
1,274,626
4,741,019
2001
9,165,381
3,947,466
2,486,731
6,695,665
8,601,604
1,311,838
4,784,791
2002
9,268,188
4,021,685
2,564,013
6,854,064
8,682,331
1,360,589
4,890,122
2003
9,108,157
3,905,265
2,490,928
6,774,702
8,760,272
1,358,527
4,855,313
2000-2005 Average Beer Consumption by
State
Illinois
Indiana
Kentucky
Michigan
Ohio
West Virginia
Wisconsin
2004
9,032,851
3,993,643
2,591,949
6,746,578
8,702,382
1,373,205
4,877,662
2005
9,063,267
3,998,855
2,555,739
6,700,174
8,584,283
1,359,231
4,929,529
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
Exhibit 4
Light Beer
Premium Beer
Popular
Imported Premium
Superpremium
(craft and high-end
domestics)
Total Barrels
20,000,000
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
-
East Central
Region
18,744,303
7,326,642
4,351,356
4,462,929
% Total
50.4%
19.7%
11.7%
12.0%
2,305,847
37,191,077
6.2%
100.0%
6-year
CAGR
East Central Region
4%
-4%
-5%
6%
9%
8
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
9
Exhibit 5
A.
1% Increase
2005
2006
2007
2008
2009
2010
Net Revenues
COGS
$50,440,000 $ 50,944,400 $51,453,844 $ 51,968,382 $ 52,488,066 $ 53,012,947
$34,803,600 $ 35,151,636 $35,503,152 $ 35,858,184 $ 36,216,766 $ 36,578,933
Gross Margin
SG & A
Other Operating Expenses
$15,636,400 $ 15,792,764 $15,950,692 $ 16,110,199 $ 16,271,301 $ 16,434,014
$ 9,583,600 $ 9,679,436 $ 9,776,230 $ 9,873,993 $ 9,972,733 $ 10,072,460
$ 1,412,320 $ 1,426,443 $ 1,440,708 $ 1,455,115 $ 1,469,666 $ 1,484,363
Operating Margin
Other Income
$ 4,640,480 $ 4,686,885 $ 4,733,754 $ 4,781,091 $ 4,828,902 $ 4,877,191
$ 151,320 $ 152,833 $ 154,362 $
155,905 $
157,464 $
159,039
Net Income Before Taxes
$ 4,791,800 $ 4,839,718 $ 4,888,115 $ 4,936,996 $ 4,986,366 $ 5,036,230
Provisions for Income Taxes $ 1,667,130 $ 1,683,801 $ 1,700,639 $ 1,717,646 $ 1,734,822 $ 1,752,170
Net Income After Taxes
$ 3,114,670 $ 3,145,817 $ 3,177,275 $ 3,209,048 $ 3,241,138 $ 3,273,549
B.
2% Increase
2005
2006
2007
2008
2009
2010
Net Revenues
COGS
$50,440,000 $ 51,448,800 $52,477,776 $ 53,527,332 $ 54,597,878 $ 55,689,836
$34,803,600 $ 35,499,672 $36,209,665 $ 36,933,859 $ 37,672,536 $ 38,425,987
Gross Margin
SG & A
Other Operating Expenses
$15,636,400 $ 15,949,128 $16,268,111 $ 16,593,473 $ 16,925,342 $ 17,263,849
$ 9,583,600 $ 9,775,272 $ 9,970,777 $ 10,170,193 $ 10,373,597 $ 10,581,069
$ 1,412,320 $ 1,440,566 $ 1,469,378 $ 1,498,765 $ 1,528,741 $ 1,559,315
Operating Margin
Other Income
$ 4,640,480 $ 4,733,290 $ 4,827,955 $ 4,924,514 $ 5,023,005 $ 5,123,465
$ 151,320 $ 154,346 $ 157,433 $
160,582 $
163,794 $
167,070
Net Income Before Taxes
$ 4,791,800 $ 4,887,636 $ 4,985,389 $ 5,085,096 $ 5,186,798 $ 5,290,534
Provisions for Income Taxes $ 1,667,130 $ 1,700,473 $ 1,734,482 $ 1,769,172 $ 1,804,555 $ 1,840,646
Net Income After Taxes
$ 3,114,670 $ 3,176,963 $ 3,240,503 $ 3,305,313 $ 3,371,419 $ 3,438,847
BUS 656 Don Avery
Mountain Man Brewing Company Case Analysis and Write-Up
10
C.
2% Decrease
2005
2006
2007
2008
2009
2010
Net Revenues
COGS
$50,440,000 $ 49,431,200 $48,442,576 $ 47,473,724 $ 46,524,250 $ 45,593,765
$34,803,600 $ 34,107,528 $33,425,377 $ 32,756,870 $ 32,101,732 $ 31,459,698
Gross Margin
SG & A
Other Operating Expenses
$15,636,400 $ 15,323,672 $15,017,199 $ 14,716,855 $ 14,422,517 $ 14,134,067
$ 9,583,600 $ 9,391,928 $ 9,204,089 $ 9,020,008 $ 8,839,607 $ 8,662,815
$ 1,412,320 $ 1,384,074 $ 1,356,392 $ 1,329,264 $ 1,302,679 $ 1,276,625
Operating Margin
Other Income
$ 4,640,480 $ 4,547,670 $ 4,456,717 $ 4,367,583 $ 4,280,231 $ 4,194,626
$ 151,320 $ 148,294 $ 145,328 $
142,421 $
139,573 $
136,781
Net Income Before Taxes
$ 4,791,800 $ 4,695,964 $ 4,602,045 $ 4,510,004 $ 4,419,804 $ 4,331,408
Provisions for Income Taxes $ 1,667,130 $ 1,633,787 $ 1,601,112 $ 1,569,089 $ 1,537,708 $ 1,506,953
Net Income After Taxes
$ 3,114,670 $ 3,052,377 $ 2,991,329 $ 2,931,502 $ 2,872,872 $ 2,815,415
Exhibit 6
2006
2007
2008
2009
2010
$ 3,052,377 $ 2,991,329 $ 2,931,502 $ 2,872,872 $ 2,815,415
$ 1,432,816 $ 3,322,589 $ 3,811,947 $ 4,309,598 $ 4,849,605
Lager
Light
Net Income After Taxes
$6,000,000
$5,000,000
$4,000,000
Lager
$3,000,000
Light
$2,000,000
$1,000,000
$2006
2007
2008
2009
2010