Case Study Analysis Coors Brewing Company, Inc.
MBA 4231, Achieving Strategic Advantage II Daniels College of Business University of Denver May 27, 2004
Misti Ladd Curt Garner Scott Richrath Scott M. Vanier Steven M. Hickey
Executive Summary Throughout most of its history, the Coors Brewing Company (Coors) has been a regionalized brewer within
the United States, specializing in high-quality beer through by virtue of its source water selection, stringent production standards, and cold filtered brewing approach. As the company expanded its distribution to new markets within the U.S. in attempt to gain market share, it made a strategic decision to maintain a majority of its brewing operations at its primary production facility in Golden, Colorado. This decision was based upon the desire to preserve its core production strengths through close family control. However, as the company desires to expand its market presence beyond the U.S. boarders with a goal of becoming the 5th largest brewer by 2008, its historic approach to management and operations provides a detriment to achieving this objective. As seen by the on-going consolidation of top brewers within the beer industry, the competition is fierce as more brewers are competing within a global market with extended product lines and decreased profit margins. While organic augmentation is the traditional mode of company expansion within Coors, the harsh reality is that the company must seek external-based initiatives (e.g., joint ventures, acquisitions) to gain market share within the low market growth industry. However, several opportunities exist as three core markets are witnessing increased volume consumption: Russia, China, and Latin America/South America. Several of the top breweries have already implemented joint venture and/or acquisition strategies within these regions. Coors has not. As a result of Coors non-calculated acquisition of Carling Brewery in 2002, the company has become cash-limited as a result of incurring debt. Therefore, immediate acquisition within developing markets is not readily attainable. Because Coors cannot afford to defer market penetration, it must enter these markets immediately through a joint venture arrangement. In addition, the company must be willing to sacrifice its traditional, slow-moving family-based management style to effectively compete within the fast-moving beer market. Through the leveraging of its exceptional strategic sourcing program, savvy marketing approach, and distribution logistics systems, Coors should employ these key fundamentals as part of its international strategy to gain a competitive advantage. In parallel with its joint venture arrangements, Coors should continue to pay down debt and prepare for acquisition of an overseas brewer through the added cash infusion (i.e., issuing of stock). A strong, localized brewer should be purchased within a developing market. In addition, an established East Coast-based microbrewer may also be purchased, if feasible, for greater penetration within the U.S. and increased market share. Although these actions may expand the company, it does not provide a guarantee that its goals can be met. Coors does not possess the
financial strengths of the larger competitors, and it trying to join an international expansion race in which it has been a slow-mover. Due to the added requirements of dramatic cultural changes within an embedded organization, the challenge remains great. II. Core Problem/Issue Adolph Coors founded the Coors Brewing Company in Golden, Colorado because of the high quality of water that could be found at that location – something he considered the most essential component of brewing a quality beer. Since inception, Coors has continued to evolve and adapt to its environment. During prohibition, Coors malted non-alcoholic beverages to keep the facility running and the employees working. At the end of prohibition, Coors continued to expand through technology progression to allow cold product delivery, which is essential to the enduring quality of its product. As Coors expanded, the company adapted to the changing environment by establishing itself as a national competitor. During that time Coors also pioneered the aluminum can – a standard in the beverage industry today. Much of what has been accomplished by Coors over the past century has been at the management hands of the Coors family. In the 21st century, the beer industry landscape changed dramatically. It has evolved into a competitive industry that competes internationally at multiple levels. Coors is looking to continue to grow and become the 5th largest brewer by volume worldwide. Many questions arise, however, and many challenges must be met to accomplish this goal. Will Coors be able to maintain its family culture business structure on an international stage or will it have to give up family control to achieve its growth goal? Will Coors attempt, at least on some level, to grow its core product organically? And if so, how will the company address its distribution logistics issues of product delivery from Golden, Colorado? Can Coors maintain the quality level on an international stage that has become synonymous with its domestic reputation? In essence, does the “Rocky Mountain King” have the necessary competencies within the current management, and within its business strategy/approach to become an international company? III. Industry Analysis The beer industry is comprised of companies that manufacture beer and malt beverages. There are many different types of commercial beer that are produced regionally and globally, including pilsner, lager, ale, stout, light, malt liquor, dry, ice-brewed, bottled draft, and non-alcoholic. Within the United States, the industry has been
consistently dominated by three major breweries: Anheuser-Busch (A-B), Miller, and Coors. Accordingly, these three “heavyweights” retain 80 percent of the total U.S. market share. Craft beer, or microbreweries, account for approximately 10 percent of the total U.S. beer market. While market growth has been relatively stagnant and consumption is primarily comprised of mature product brands, the continued evolution of microbrews was able to facilitate additional U.S. industry growth as the number of breweries increased from 43 in 1983 to over 1,500 in 2003. However, microbreweries are currently experiencing declines due to rapid over-expansion. While the U.S., Japan, and Europe markets are generally over-saturated with low growth (approximately one percent per year), China, Russia, and Latin America continue to show the highest growth rates. Facing low prospects for volume growth in mature, developed markets and increased competition, brewers continue to seek growth through acquisitions of other brewers or by aggressive participation in developing markets. The effect of consolidation through mergers and acquisitions continues to reshape the global beer industry, as seen by the increasing market shares of the industry leaders. Accordingly, the top 10 brewers worldwide now account for more than half (50.4 percent) of the entire world’s beer production, marking an industry first. As a result of Interbrew’s recent acquisition of AmBev, Coors is now positioned as the eighth largest brewery with a global market share of approximately 2.6 percent (A-B is the largest at 9.0 percent). As a result of heavy investment in developing markets, China is now the largest beer producer and consumer in the world. China and the U.S. (the second largest producer) now constitute one-third of the world’s total beer production. Of the available growth in the United States, most is attributed to a rising taste for super-premium products and products that adhere to lifestyle considerations (e.g., low-carbohydrate beers). The mini-baby boomers, or the 21 to 25 year old age segment, are anticipated to increase by 11 percent over the next 10 years. Thus, in attempts to gain market share, manufacturers are focusing product preference and advertising within this age demographic. On a global basis, considerable market growth is being experienced within the developing markets as a result of increased buying power and consumer demand. The beer industry continuum has shifted from “perfect competition” to “oligopolistic supply.” Despite efforts of world microbreweries and smaller brewers to meet consumer demands for an increasing variety of product, the top beer producers have either purchased or swallowed market share from once-formidable competitors. Given this global trend toward consolidation and somewhat stagnant sales in many of the major markets, strategic group mapping becomes ever more meaningful for the industry leaders.
Attempting to boost incremental sales within developed markets, beer manufacturers continue to introduce new products – often creating entirely new segments (i.e., higher quality, specialty beers, etc.) – while increasing the perceived quality and customer value. Product freshness is now a large component to consumer preference and package designs are being developed to better appeal to target markets. New products and higher levels of product quality are also being driven by a surge in imports as world brewers pursue growth outside of domestic markets. The surge in imports to the U.S. has been attributed to the American consumer’s desire for high quality, full-bodied brews; lower total alcohol consumption; and familiarization to higher prices for both domestic craft brews and imported brands. The result of the increased level of both domestic and global competition within slow-growth markets is that profit margins continue to erode and price competition continues to increase; therefore, cost reduction plays an ever-increasing role in operations. Given the relatively low margins within the beer industry and past optimization of production costs and company overhead, the degree of profits is now being dictated by external cost control (i.e., supply, distribution) rather than internal cost control (i.e., production). Therefore, much emphasis in controlling costs is now being placed on strategic sourcing, supply chain optimization, and distribution channel logistics. Increasingly, beer producers are creating higher quality products through supplier selection and control methods. In addition to cost reduction methodologies, the industry is advertising-heavy and commits significant resources to appeal its product to the consumer. While the industry uses large media mechanisms (print media, billboards, television, radio, etc.), it also uses distributors and personal selling for retail marketing campaigns and in selling/promoting its products at points-of-consumption. Therefore, promotional sales programs are prevalent. In addition, to help promote volume growth through the promotion channels, manufacturers are instituting discounts, lucrative credit terms, and allowances with distributors. The beer industry also struggles against global trends (e.g., health, fitness). Coupled with heavy governmental intervention, which includes distribution laws, taxation, advertising restrictions, production and health standards, anti-trust laws, and indirect laws and ordinances, beer producers have found an increasing competitive environment due to regulatory forces.
Strengths. Coors has a highly-integrated divisional structure between finance, human resources,
procurement, and technology departments. These support activities are the backbone of the company and support all aspects of the business. Within the information technology arena, Coors is deploying SAP to integrate their company. Procurement has adapted the VIPER program. This program is designed to consolidate vendors that represent approximately $1 billion in annual expenditures. By consolidating these vendors Coors will have more leverage to control, and even reduce, cost. Coors retains a key strength within its primary supply and production activities. Competitive advantage primarily exists within its inbound logistics and operations. Within inbound logistics, Coors strengths include longterm supplier relationships, supplier training, strategic sourcing, and the VIPER program. Within operations, strengths lie within waste minimization, cold filtering process and quality controls, joint venture relationships and close logistics to packaging facilities, and high economies of scale through the largest single site brewery in the world. Coors has a long, well-established history of brewing beer. It is suffice to say that Coors knows beer and how to produce a high quality product. Its cold filtering process is a key strength and advantage when compared to the heat pasteurization process of primary competitors. Additionally, Coors excels in cold distribution of their product and supply chain management. Within the sales and marketing arena, Coors has succeeded in securing primetime advertising campaigns with the National Football League and has had successful and creative television spot promotions. Additionally, Coors ranks very highly with the appearance and appeal of their packaging profile. Coors also retains core strength within employee loyalty and commitment. Coors has a very close relationship between the guiding beliefs and the daily beliefs within the company. This value system includes producing a strong quality brand, controlling costs, having a passion for what they do, and rewarding good performance. Coors employees also enjoy a very favorable benefits program. In regards to its financial position when compared to four other larger brewers, Coors appears to be strong in two ratio categories: inventory turnover and fixed asset utilization. Given the cold filtering process and the importance of keeping beer fresh, it is important that Coors turn its inventory quickly. Because Coors guarantees
freshness within a specific time period after packaging, Coors must continue to lead the industry in this category. Coors operates one primary production facility with only a few remote, satellite brewing and bottling facilities in North America; the company is able to achieve high economies of scale for fixed asset utilization.
Weaknesses. Coors has utilized a follower strategy and is very cautious to come to market with new
product lines. This is primarily driven by a tenured internal style, skill set, and staff within Coors management. It would be fair to conclude that Coors knows beer better then they know the business. A once powerful regional player in the market, Coors has recently stepped up to the national stage and the current strategy is to compete in the international arena. However, the top-down style of management, which is driven by Coors family members that hold the voting stock in the company, has not allowed the company to innovate and move forward. Although the Coors family has brought in external management to run the company, they must still answer to the family before making any major changes to the identity of Coors. Because the company adheres to a strong value of rewarding employee tenure, Coors may not have the right people in key positions to take the company to the international stage. Succession management also appears to be an area where Coors needs to improve dramatically. The company is localized geographically, and most of the staff has never had to work anywhere but in the Golden facility. To make the change to an international company (where the majority of production and sales are not within the United States) may be a culture shock for the Coors management team. Coors has also recently tried to extend its SAP systems to the supply chain through the Cornerstone Deployment Program. This deployment did not proceed well and cost the company in excess of $8 million in losses during 2003. Having strong systems in place that can integrate a company across continents will be the key to its strategy to grow domestically and internationally. From a financial analysis perspective, Coors does not perform well against the four other companies analyzed. In fact, of the thirteen ratio analyses Coors is lagging in eleven of them. Although Coors appears to be among many comparable companies with an unfavorable current and quick ratio, it is a key weakness to growth – Coors cannot service its current liabilities with current assets. Coors is lagging major competitors significantly in collection period with an average time of converting sales to cash collection of 55 days, which is double that of the primary competition. This measure increases the risk that receivables may ultimately become uncollectible. With the exception of one small competitor, all companies analyzed maintained an asset utilization of less then 1.0 in 2003. Although Coors does not appear to be out-of-line with the industry, this is clearly a weakness that needs to be
addressed to generate better returns for investments in capital assets. As Coors relates to capital structure and debt management, the company appears to be in the middle of the pack for debt to equity and last in times interest earned. Prior to the Carling acquisition, Coors carried higher equity than debt. The fact that the company is highly leveraged is not necessarily a weakness, but in combination with a long cycle for cash collection the company cannot retire debt as quickly. This becomes a driver for the increased interest expense, which is driving down the times interest earned ratio. External/Prescriptive
Opportunities. The industry is consolidating. As part of the process, companies are transitioning from
regional brewers to national brewers to international conglomerates. In this expansion environment, Coors has an opportunity to organically grow its current product abroad while acquiring/merging other companies as part of the growth initiative. Developing countries are leading the way to new markets. Consumption growth is highest in Russia, China, and Latin America (growth rates range from 7 to 11 percent per year). As far as new entrants, almost all are microbreweries and tend to be mostly localized, regional at best. Although imports are increasing in the U.S., international brewers are not establishing U.S. operations as the cost of entering the market is high (barrier). With the proliferation of global microbrewers, consumers are becoming more apt to try different beers than the staunch brand buyers of the past. Because of this, an opportunity exists to expand lighter beers within traditional heavy beer markets (e.g., Europe) as well as introduce new products in the United States. The alteration in social behaviors allows expanded consumer acceptance of bringing new products to market, although rivalry remains very high. From a technology and production standpoint, opportunity nearly always exists to drive out inefficiencies and to service the customer more effectively. Suppliers have little power in this industry. As it relates to Coors, the company has established joint ventures with metal and glass container manufactures to control cost for the most expensive component of delivering product to the consumer. Additionally, the company owns long-term water rights and has contracts with 1,500 farmers to grow its primary raw materials. Coors also has opportunities to provide more environmental-friendly packaging, increase pollution prevention goals, and continue to drive production through by-product use objectives.
Threats. Although great opportunity exists for Coors to expand into other markets, competitors are
enjoying the same advantage within Coors home/core domestic market. Rivalry is very high within this industry.
Not only are Coors major competitors consolidating, but the number of microbrewers in the United States has grown to over 1,500 establishments. The top ten brewers in the world hold about 50 percent of the world market share. In the United States, Coors, SAB Miller, and Anheuser-Busch hold about 80 percent of the market share combined. It will be extremely difficult for Coors to maintain market share in the United States, let alone take market share away from its competitors. In addition to the threat of reduced market share, there is a potential erosion of profitability. Buyers maintain a lot of power within the market. Due to the incredible variety of beers from a massive number of producers, brewers do not have the power to dictate pricing. Thus, profit margins continue to decline. A number of substitute products exist in this industry. Spirits, wine, other alcoholic and non-alcoholic beverages (soda, water, near-beers, sport drinks etc) are only a few substitutes. Since beer consumption can also be linked to certain forms of entertainment, threats of substitutes could also exist from activities that do not involve alcohol consumption. From a social responsibility perspective the consumption of alcohol is continuing to be scrutinized. Both health consequences and socially unacceptable behaviors such as underage drinking and drunk driving are damaging the industry. Additionally, the industry is under constant pressure from political and legal fronts. These pressures include heightened government intervention, increased taxation burdens, regulations, and legal challenges. V. Market/Product Service Positioning Using its “Rocky Mountain water” to produce “cold-filtered, never-pasteurized” premium beers, Coors has set out to differentiate its product from those of its two larger American competitors, while simultaneously targeting drinkers of A-B’s and SAB Miller’s arguably lower quality brews. Having ventured east of the Mississippi River only in the past quarter century, Coors and Coors Light have impressively established themselves as nationally formidable opponents to Budweiser, Bud Light, Miller, and Miller Lite. With now well-established name recognition and, to a varied extent, quality preference, Coors has begun to achieve some price differentiation and plans to continue improving on comparatively thin profit margins. Once strictly a U.S. player, Coors realized that expansion was necessary just to keep from falling further behind Budweiser and Miller. Its 2002 acquisition of Carling Brewing enabled the manufacturer to gain a foothold in the European market with an eastward eye toward further growth. As Carlsberg and Heineken buy into Eastern European and Russian breweries and while A-B and SAB Miller form partnerships with large Chinese beer-makers,
Coors must continue to shift emphasis from a stagnant American market to its overseas opportunities. Typically content to follow, Coors will likely not venture into wine and spirits unless the American leaders do so first, but two factors may force the company to take the initiative: (1) as Coors grows internationally, it will soon find itself competing against companies with several types of alcoholic beverages in their portfolios (Diageo and Kirin, for example, sell wine and spirits); (2) Coors’ U.S. market has lately trended toward a variety of malt and non-malt alcoholic beverages. Such efforts to charter into unknown markets should likely be funded by ongoing strong sales of Coors’ core product – Coors Light. Though Coors Original has lost ground as Americans become more health-conscious, Coors Light – accounting for 51 percent of Coors U.S. volume sales – ranks behind only Bud, Bud Light, and Miller Lite and reigns as Coors’ American cash cow. Resources for introduction of products like Aspen Edge, reformatted Zima, and Mexicali will be available as long as Coors Light maintains its position. Keystone, Kilian’s, and Molson will continue to fill certain niches, but will likely never provide the profitability that Coors Light has generated. Coors goal is to become the fifth largest brewer in the world by volume. With the exception of the Molson/Coors joint venture, all of Coors business segments are currently positioned for growth on an international stage. Two key segments need to move into the high industry attractiveness/high business strengths quadrant. The first is the Coors Brewers Limited (Carling) business segment. It will be difficult to move Carling into this quadrant as the market is highly competitive. Just to maintain position, Coors must selectively invest heavily in current market segments and seek attractive, new segments to leverage strengths. To move into the desired quadrant Coors must be able to diversify the Carling line worldwide and accept medium near-term profits. This activity will require a premium investment for growth. Bringing the Carling premium brand to the United States, for example, would fill a void in the Coors premium beer product line. Given the high competitiveness, low growth rate, and saturation of the U.S. market, this is a very difficult strategy. The second is Coors Brewing Company business segment. The challenge to maintain position within the current quadrant is to minimize weaknesses/vulnerabilities and to build selectively on strengths. Coors will need to define the implications of leadership challenges to maintain position and to move forward into the “high industry attractiveness/high business strengths” quadrant. Although it will require a premium investment for growth, Coors must provide the maximum investment to diversify worldwide. Coors must be prepared to accept moderate, near-
term profits in hope of attaining overall, worldwide market share in the future. This will require Coors to aggressively engage in joint venture/acquisition/merger activity. Coors must engage in a number of market/product positioning strategies while aggressively pursuing the international market. It would have the opportunity to expand the Coors brand – and if done through joint venture/acquisition/merger, - could gain expanded distribution and product offerings quickly. Internally, Coors must have a queue of new products ready to enter the market. Although most of the product line is currently considered cash cows, Coors develop the “cash cows of the future” to fund downstream growth. By continuing with a “follower” strategy and not being the first mover in the market(s), Coors will fall further behind its competition. And last, Coors must continue to position its core products by expanding Carling into the U.S. and expanding Coors brand overseas – all while maintaining domestic market share. This strategy for the Coors Brewing Company business segment will be easier to achieve then the proposed strategy for Coors Brewers Limited business segment. It is easier to attain growth through joint venture/acquisition/merger when compared to steal market share within the premium beer segment from other competitors. These strategies must be achieved in concert with the marketing/positioning of its existing “Rocky Mountain water” and “cold-filtered, never-pasteurized” beers for continued differentiation within the U.S. market. VI. Alternative Strategies Coors must follow a variety of strategies for growth within domestic and global markets. The chosen strategy is dependent upon the product at hand – Coors’ existing product lines and/or potential new product lines (either through organic development, or joint venture/acquisition) – and the target market. If Coors desires the combination of existing and new product lines as part of the strategy to broaden its market and increase market share, the company must utilize a combination of strategies. In regards to its existing product lines, it will want to maintain the image and product quality that have differentiated Coors from its U.S. competitors. Accordingly, it would like to preserve or increase its domestic market share while expanding the overseas market, specifically within developing markets (e.g., China, Russia, and Latin America). Because Coors maintains a strong U.S. market presence and position within its core product offerings, which includes Coors Original and Coors Light, it should uphold a “status quo” strategy position; however it should implement a “growth” stage within new/overseas markets. Although Coors has seen moderate levels of success in Canada and Japan, revenues are still small compared to those of competitors and Coors’ product development in these markets is still in its infancy stage. Although the company
desires to broaden the market and aggressively grow its position within the industry, it should be cognizant of its core strengths within the U.S., but may have to either sacrifice its perceived “Rocky Mountain” quality and image status or add brands in an attempt to distribute product within the new markets as part of the “growth” strategy. Thus, a combination strategy should be used in regards to its core products. In regards to the development of new products, Coors may be in the beginning stages. If Coors introduces new products (either through organic development or acquisition/joint venture) in an attempt to broaden the market and further penetrate overseas segments, it should implement a “growth” strategy. The exception would be if Coors acquires a mature product brand from an existing overseas competitor (similar to its acquisition of Carling). In this case, Coors would want to maintain a “status quo” strategy in the product’s existing market, as it includes the product’s market share within Coors overall market portfolio. However, marketing of the mature brand to new markets would require a “growth” strategy. As part of the stratagem for organic product development, if desired, Coors should develop a “best strategy” for product development, deployment, and maximization of market share. While it may be able to gain market share through in-house developed products, growth is generally slow through this approach, and acquisitions of existing brands and/or joint ventures have been the preferred strategy for market share attainment. VII. Recommended Strategy The following provides a summary of the recommended strategies for three timeframes. Phase I (Through Year 1)
Organizational Changes. As part of the effort to grow the company in overseas markets and acquire new market
share, Coors must seek outside perspectives and leverage new management experts that are experienced in oversees expansion and operations. While this appears to be a daunting task given the existing organizational structure’s heavy reliance on Coors family control, the company must transcend from an environment that encourages a long and meticulous development and growth culture to an environment that is able to quickly adapt to new markets and inorganic means of growth. The existing organization must be able to relinquish control as it seeks joint ventures arrangements within developing markets (e.g., China, Russia, and Latin America). Communication and management channels should be restructured to promote these strategic objectives through an articulative manner that relays the vision of the company. Accordingly, the company should instill a defined succession management plan that is aligned with its growth objectives.
Operational Systems and Improving Financial Position. Coors should continue to follow through on SAP
integration throughout its value chain. Cost control management should be a continued objective via strategic sourcing, optimization of operations, inventory management, and distribution logistics. As part of the on-going effort to improving its cash flow position, Coors should continue to pay down debt from the Carling acquisition. Immediate focus should be given to Coors average collect period. Coors will enjoy a large infusion of cash if it can cut the collection period in half and fall in alignment with the rest of the industry. Another alternative for cash infusion is through the issuing of stock and/or the leveraging of new debt.
Product Market Analysis. Coors should determine product opportunities and fill gaps in product offerings. An
example of existing product extension would be the marketing of Carling and other U.K. beers in the U.S., if the market analysis determines this approach to be viable. In addition, Coors should evaluate potential new product offerings. However, Coors should not sacrifice its existing U.S. reputation and image if it decides to develop new lines. It should also integrate a branding strategy through the leveraging of Coors’s strong U.S. brand name and image.
International Strategy. Based upon a need to broaden its market through product diversification and expanded
marketing and distribution of existing products, Coors should review its strengths and weaknesses and begin to develop a strategy to expand into international markets. It needs to keep in mind that to meet its growth objective, the company will have to leverage its existing overseas operation, Carling/Coors Brewers Limited, in an attempt to gain market share within European markets. Thus, the international strategy should be communicated to both Carling and U.S. operations, and each group should mutually retain ownership in the strategic plan. Human resource relationships between the U.S. and U.K. should be formalized to establish a base for international expansion. Training will be required in preparation for strategy implementation. The international strategy should evaluate potential joint ventures and acquisitions within the large growth markets: China, Russia, and Latin America. Acquisition within China will be prohibited due to current governmental restrictions. The resulting strategic plan should provide a road map for the forthcoming five years of international expansion and growth.
Aggressive Marketing Campaign. In regards to its existing product lines, Coors should seek to maintain its
position within its existing customer base while attempting to expand the market in younger aged and overseas populations through an aggressive marketing campaign. The marketing campaign should focus on the education of
non-Coors drinkers, selling the Coors brands as a beer of younger generations, and extensive promotional programs for domestic and global distributors. Phase II (Year 1 through 3)
Cash Appropriation. In preparation of implementing its international expansions strategy, Coors should begin to
infuse cash through the issuing of additional stock or the use of long-term loans. Currently, there are approximately 36 million shares of stock outstanding; the issuing of additional shares should be evaluated in relation to investor desirability. Coors should also review its existing debt structure and determine the appropriate cash appropriation method based upon its capital needs for global expansion.
Joint Venture – Branch Plant Strategy. Because of the cash demands associated with an acquisition, it is probable
that Coors will not be able to immediately acquire an overseas brewer. Because Coors cannot afford to sit idle as the developing markets continue to assign market share to its competitor base, Coors must begin to implement the joint venture arrangements, as outlined within the international strategy. Joint ventures should become active intercompany arrangements within China and Russia, and possibly Latin America. Coors should also leverage its strategic sourcing methods as part of the joint venture. There should be a transfer of technology, information, resources, and sourcing methodologies between Coors and its partners.
Overseas Distribution Networks and Continued Marketing. Following the marketing campaign of the existing
product lines, Coors should begin to expand its distribution networks. Its production facilities and distributors should be interfaced as part of the distribution logistics systems, and inventory management systems should be incorporated globally. To further promote its new and existing product lines, Coors should continue to increase its marketing efforts across geographical areas in conjunction with the joint venture in a continued attempt to broaden Coors market.
Additional Efforts. Coors should continue with the execution of the new/modified vision for the company. It
must dedicated required resources for continued R&D – these efforts should be focused on new products while driving productivity and continued reengineering of cost reduction methods. Phase III (Beyond Year 3)
International Acquisition. As part of the international strategy and cash appropriation campaign, Coors should
implement its targeted acquisitions. The acquisitions should focus on a strong, regionalized brewer within Latin America, South America, or Russia – all high growth beer markets. Key acquisition attributes may include: low debt,
established brand name but stabilized growth, effective regional distribution network, aligned values/goals with Coors, suitable transfer of technology/systems/processes. As part of the acquisition, Coors should leverage strategic sourcing methods within the new acquisition in attempt to lower supplier costs. Coors should also begin to use and coordinate existing product line distribution within the new market, as well as implement a regionalized marketing campaign. If a Latin American or South American brewer is acquired, Coors will have to implement a wellconceived marketing campaign as the Hispanic market has historically provided marketing challenges. Localized marketing experts may be required.
Domestic Acquisition or Merger. In an attempt to gain market share within the U.S., Coors should target a
desirable East Coast-based brewery for acquisition or merger. As with the international acquisition, the acquisition/merger should focus on a strong regional beer. Viable candidates include Boston Beer Company and Yuengling. However, if a merger is determined most suitable due to capital limitations (following the international acquisition), Coors will likely want to maintain a dominant level of control within the agreement (due to family intervention, maintaining brand and quality image).
Expansion of Production Facilities. Coors should expand its production facilities overseas and possibly within
the U.S., as required, to satisfy its growth objectives. The expansion must be controlled to eliminate high overhead and production costs that could result from under-utilization of facilities. Supplier advisory councils should continue to be an essential part of its strategic sourcing program.
Future Market Analysis and Positioning. Coors must continue to assess future market demands and evaluate
both existing and new lines. The company must continue to enforce its core values and attributes, including customer-focus, quality, and its brand image within the U.S. It must do all of this while assessing competitive threats and innovative possibilities. Coors should also continue to carefully weigh production and distribution expansions. Succession management should be reevaluated as part of its long-term strategic plan.
Appendix A: McKinsey 7-S Framework 1. • • • Structure Inter-department communication never a Coors strong-suit, but has been improving. IT, Finance, HR, Strategy, and Technology departments support all aspects of the business. Family has retained controlling interest by utilizing 1.2M Class A voting shares and 35M Class B non-voting shares. 2. Strategy • • • Maintain higher standards for quality, taste profile, and packaging appeal than the competition. Work to become a top 5 international brewer; currently 8th (3rd in U.S.). The family-owned environment and direction are still dominant. Grass roots, market-by-market approach to sales. • • • Must work to be focused but flexible; 1 year delay on Aspen Edge costly. Marketing strategies for 2004: Drive growth on Coors Light and Coors Original via a full line of support, including over 20 television spots, promotions, radio, out of home and print. Sponsorship of NFL, Miramax, and Maxim magazine focuses primarily on Coors Light. • Support Keystone Light, Killian’s, Blue Moon, Mexicali, and reformulated, repackaged ZimaXXX, via tactical, local programming. • Respond aggressively to low carbohydrate opportunities.
3. Systems • • • • Focus currently is on the supply chain management. Trying to consolidate vendors – especially in the technology areas. From thousands of vendors to a few. Control costs (more critical to bottom line than increased prices) through improved systems efficiency. Strategic Sourcing is designed to promote innovation in purchasing and to building relationships with suppliers while improving performance. • Require flexibility in carriers to meet distributor orders more timely. Continually looking to improve logistics.
2003 Implementation of Cornerstone supply chain initiative was faulty, and cost the company $8 million in lost sales.
Adding brewing capacity in Memphis to help decrease distribution costs. Asset CARE – predictive/schedule maintenance program – provides improved reliability, speed, and scheduling.
4. Shared Values • Five core values: Excellence – Coors considers itself the Best in Beer. Quality – only the most consistent and highest quality materials permitted by packaging and brewing departments. Service – require carrier flexibility to timely and perfectly meet distributors’ orders Creativity – new systems ideas have often come from line employees. Innovation – Regarding product to market, Coors must improve in this area. • • Family atmosphere has been a Coors legacy. Supplier Partnerships promote these values through entire production and sale process – heavy campaign undertaken from 2003-2007 to improve supply chain management from Suppliers to Coors to Distributors. Launched supplier newsletter in 2003. “Relationships + Performance = Winning in Beer.” • • Guiding Beliefs – Building the Brand, Develop strong partnerships, Attack costs, and Build a strong team. Daily Beliefs – Fostering a winning culture through enduring values of integrity, excelling, quality, creativity and passion. This is implemented through strong employee benefits and an increasing move toward a bottom-up decision making process. 5. Style • Follower, not a leader. Typically follows the larger competitors; Bud launched Michelob Ultra nearly a full year prior to Coors’ Aspen Edge. Bigger competition first to market in low carbohydrate, non-alcohol, draft, light, etc. • Was once very top down, are now moving toward bottom up. VIPER program was a bottom up development.
Have initiated supplier diversity through a diversity department, promoting women and minority development. Trying to overcome stereotypes of Old Boy network.
Coors has a top-down communication approach, and generally adheres to a “waterfall” communication style.
6. Skills • Historically, Coors has known the beer business better than business itself. A-B arguably knows business better than the beer. Coors becoming more business-savvy through national and global expansion: acquisitions, joint venture with Molson, etc. • • Coors becoming a recognized leader in distribution and supply chain management. Though Coors considers itself a marketing leader, recent failures to gain market share in areas of heavy marketing concentration indicate otherwise. 7. Staff • • Plans call for doubling of sales force over the next two years. Very localized company that may have difficulty dispersing their sales force nationally and globally while maintaining family-oriented corporate values. • Unions are less prevalent and have been reduced to thirty-one percent of the labor force within Coors Limited Brewers. Within the United States, Coors works cooperatively with its workforce. Within the United Kingdom, more stringent labor laws are considered a possible threat as labor disruptions would have material impact on the company. • Succession Management – Coors needs to prepare for a shift in responsibilities in the event that Pete Coors (who has maintained an active roll in marketing and business decisions) wins a bid for the United States Senate. Formal plans for succession become more critical with expansion, as the family becomes a less integral part of corporate operations. Developmental opportunities now abound with product and geographic diversification. Key issue for the long-term: Will controlling interest remain in the family?
Appendix B: Financial Ratios Please refer to the adjacent worksheet for the year-to-year financial ratios for Coors. In addition, supplemental worksheets are provided for the financial ratios of four (4) industry competitors. The following provides a summary of the implications of the resulting ratio values: Liquidity Ratios • Current Ratio – Coors has been on a downward trend for this financial measure. Coors has dropped below 1.0 since the acquisition, which means it does not have the ability to service its short-term debt with existing current assets. Anheuser-Busch (A-B) is also below 1.0, which has been the case throughout the five-year analysis period. The primary reason for this occurrence is that A-B has been in a growth and acquisition mode for many years. South African Brewers, which acquired Miller, is also below 1.0 (the company is now referred to as SAB Miller). Heineken is above 1.0 and Boston Beer Company (Boston Beer) has consistently been above 3.0. Boston Beer’s high current ratio bodes well to an acquisition candidate. • Quick Ratio – All trends remain essentially the same as the quick ratio. However, the significance for Coors is that it cannot service its debt with all current assets including inventory. Once inventory is factored out of the equation the ratio drops by nearly 19%. For a company like Coors, this is very significant since beer is a perishable item. Even without the acquisition of Carling in 2002 the quick ratio has not been above 1.0 since 1999. A-B has the same trend as Coors. The A-B quick ratio drops over 36% when inventory is factored out. In fact, for the five-year period analyzed, A-B can only service a little over half of their current debt without inventory. SAB Miller can only service about a third in 2003. Heineken and Boston Beer Company are well positioned to service all of their current liabilities with, or without, inventory. • Inventory Turnover – The inventory turnover has primarily trended upward for Coors rising from 10.7 in 1999, peaking at 16.1 in 2002, and lowered to 13.1 in 2003. The industry leader is A-B in 2003 with approximately 14.7 turns per year, the highest throughout the five-year analysis period, and is on an upward trend increasing every year. SAB Miller Brewers and Boston Beer both hold approximately 10 to 11 turns per year. Heineken is the worst in the industry by this measure with a decline of five turns in 2003 down from nine in 2000.
Average Collection Period – Coors (55 days) is lagging far behind A-B (17 days), SAB Miller (26 days), and Boston Beer Company (15 days). Only Heineken is worse at 57 days; however, long payment terms in Europe are not uncommon. This demonstrates the competition’s strength in the market among distributors. Coors trend has been worsening significantly and must be reversed. The 2002 annual report notes a loosening of accounts receivable, presumably for economic conditions. Accounts with nearly all of company’s independent distributors are negotiated regularly. Fortunately, all accounts are on an electronic fund transfer basis and hold little late-payment or non-payment risk. Coors, therefore, can anticipate cash flow and presumably improve collections as economy recovers.
Asset Utilization (Management) • Asset Utilization – Coors maintained a ratio of over 1.4 prior to 2002. Since that time it has dropped to slightly below 0.9. During the acquisition of Carling, Coors took on many more assets than they were immediately able to convert to sales. The Coors 2003 annual report indicates that plans are to exceed the industry in asset utilization. A-B, SAB Miller, and Heineken were all below 1.0 in this measure. Only the Boston Beer was greater then 1.0. In fact, Boston Beer has maintained a ratio of sales revenue to total assets of over 2 to 1. • Fixed Asset Utilization – Among the major brewers analyzed, Coors is the industry leader in fixed asset utilization. Coors maintains the single largest single brewery site in the world and pilots only a few satellite brewing and bottling facilities around North America. This allows Coors to gain high economies of scale for the utilization of fixed assets. A-B, SAB Miller, and Heineken maintain ratios of approximately 1.5 to 1.8 – compared to Coors at 2.7. Boston Beer, the largest of microbrew companies, has the largest ratio of sales to fixed assets at 13.0. Capital Structure & Debt Management • Debt to Equity – Before the acquisition of Carling, Coors was a low debt company carrying greater equity in the company then debt through 2001. Since the acquisition of Carling the debt has dropped from 3.4 times the value of equity to 2.54. This is a drop of total debt, as compared to equity, of almost 25%. In the analysis of five companies in the industry, it appears that this financial measure is widely diverse. A-B, which has been in a growth and acquisition mode during the entire analysis period, has been accumulating debt and worsening the debt to equity ratio (increasing from 2.22 in 1999 to 4.42 in 2003). Heineken has jumped
from averaging about 1.6 debt to equity in 2000/2001 to 5.88 in 2003. SAB Miller had a ratio of equity grater then debt at 0.95 in 2003. Boston Beer led the industry by far in with its highest debt to equity ratio in 2003 of only 0.4. • Times Interest Earned – Similar to the debt to equity ratio, this measure typically follows the debt position of the company. Coors had little to no interest expense prior to the acquisition in 2002. Coors is lagging the industry in 2003 with only a 4.1 times interest earned ratio. A-B, SAB Miller, and Heineken were 8.0, 6.8 and 5.7, respectively. Boston Beer has no interest expense. Prior to the acquisition of Carling, Coors led all major brewers (among the companies analyzed in this report), with as much as a 38.8 times interest earned ratio in 1999. The best performance among the remaining companies (excluding Boston Beer) in any year was 10.0 by Heineken in 1999. Profitability • Contribution Margin – Coors lags the industry with a contribution margin that has been on a downward trend and settled at 35.3% in 2003. Heineken leads the industry with a 77.8% margin in 2003. A-B is on an upward trend, increasing in every year analyzed to 40.3%. Boston Beer and SAB Miller have maintained contribution margins between 50% to 60% in each year analyzed. It does not appear that Coors has improved their ability to control direct costs. A primary issue for the company is freight expense since they brew the majority of their beer at one location – Golden, Colorado – for the entire United States. Companies such as A-B are not geographically bound by natural resources like Coors whom touts the use of fresh Rocky Mountain water. Therefore, A-B can erect multiple, regional brewing facilities and reduce distribution cost. Additionally, Coors takes on the added cost of keeping their beer cold from the time it is brewed until it is purchased by the end consumer. No other brewer has the burdens of these costs. • Profit on Sales – In 2003, Coors, Boston Beer, and SAB Miller were in the 4% to 5% profit on sales range. SAB Miller, however, fell from 10.7% to 5% from 2002 to 2003. Heineken maintains a profit on sales of 10.1% and 9.3% in 2002 and 2003 respectively. A-B is by far the superior performer with 14.3% and 14.7% in 2002 and 2003, respectively. The difference in contribution margin and profit on sale is the ability of a company to leverage there sales, general, and administrative expenses, as well as servicing their interest expense. Although A-B was the second lowest in contribution margin among the five companies analyzed,
the massive size of the company (the number one brewer in the world by volume) gives them the ability to leverage their overhead expense and have the highest profit on sales. • Return on Investment (ROI) – Coors lags the industry in this category. Since the Carling acquisition, ROI has dropped forty-five percent from 7.1% in 2001 to 3.9% in 2003. Only SAB Miller was worse with a ROI of 3.3%. Of the companies analyzed, A-B leads the industry (14.1%) followed by Boston Beer (12.2%) and Heineken (7.9%) in 2003. • Return on Shareholders Equity (ROE) – Coors has generally experienced an upward trend of ROE, peaking at 16.5% in 2002 and settling at 13.8% in 2003. Coors lags the industry in this ratio, with only SAB Miller doing worse with 6.8% in 2003. Of the companies analyzed, A-B leads the industry (76.5%) followed by Heineken (54.5%) and Boston Beer (16.8%) in 2003. • Price to Earnings (P/E) – Coors is on a downward trend with this ratio declining every year since 2000. From 2000, this ratio was 29.9 and has dropped to 11.7 in 2003. A-B has followed the exact same trend with a P/E ratio of 26.6 in 2000 to 21.0 in 2003 Boston Beer has experienced more fluctuation with a P/E increasing from 14.3 in 2000 to 36.1 in 2001; however, in subsequent years the ratio has decreased over time to the current 2003 value of 24.6. Since this time period coincided with the recession in the economy the amount of beer consumed stayed steady as it is cyclical and considered recession proof. However, in a recession the consumer tends to shift from premium beers to less expensive beers that carry a lower margin which decrease earnings.
Appendix C: Macro Forces Economic • Overall beer sales tend to be recession-proof. During economic downturns, beer sales remain flat without decline. • • As the economy slows, beer consumption shifts from premium brands to “popular priced” brands. According to the Beer Institute, the American beer industry has been growing steadily since 1996, resulting in a record 197.6 million barrels in 2000. However, as a result of the generally slowing economy, and the effects of the terrorist attacks of September 11, figures at the end of 2001 were close to those of 2000. • The industry has grown from a regionalized business to global operations. To illustrate, beer firms in the United States continue to embrace the hot import sector, and are entering into agreements to become American distributors of international brands. Of the top thirteen American malt beverage producers, six are either import firms or are U.S. affiliates of beer suppliers based outside the United States. Direct exports and foreign investment all play a role in the continuing trend of beer producers growing foreign markets. Political/Legal • Beer industries in all countries deal with similar issues, including high taxation, growing regulation, and legal challenges. • Taxation is a critical issue, since governments around the world are fond of heavily taxing all forms of alcohol, both to raise revenue and discourage consumption. Taxes on alcoholic beverages, in general, are particularly effective, since high-volume consumers tend to buy the same amount of alcoholic beverages no matter how high the taxes. • A cause for a stagnant beer market has been partially attributed to the federal excise tax hike in 1991 within the United States. • The United States has historically had lower alcohol taxes than many other Western countries. However, U.S. taxes on alcoholic beverages were raised sharply in 1991. At that time, the federal excise tax on beer was doubled to $18 per barrel, the equivalent of 16 cents to 32 cents per six-pack of 12-ounce bottles or cans.
Beer producers have come under legal fire and lawsuits in many countries over alcohol abuse, underage drinking, and drunk driving.
Throughout the world, beer producers must adhere to manufacturing regulations, which includes minimum and maximum alcohol contents, as well as public health safety standards.
As discussed in the Economic section, operations have become global. As such, licensing agreements play a role in the continuing trend of U.S. beer producers growing foreign markets.
Demographic/Sociocultural • The United States is the world’s largest producer of beer, brewing more than 20 percent of the world’s volume. • There are 56 major beer markets in the world, and the average global per capita consumption of beer is 5.6 gallons. The country with the highest per capita consumption is the Czech Republic with 45.3 gallons. Germany has a rate of slightly more than 34 gallons, while the United States, Australia, and New Zealand come in at 20 to 22 gallons. China and India round out the lower consumption rates at just under three gallons and 0.1 gallon respectively. • Latin America, Asia, the Middle East, and Eastern Europe are the areas demonstrating the highest rates of consumption growth. Forecasts show that Asian beer production will grow over 75 percent from 1997 to 2003. The outlook is positive as well for Latin America's beer market due to factors including fast population growth; increase in the beer-drinking age group; and weather conditions in the region conducive to drinking beer. • Most U.S. beer is lager – a pale, medium-hop-flavored beer. While Europe also produces many lagers, a higher percentage of European production is in heavier, dark beers. Also popular in Europe – particularly in the United Kingdom and Ireland – is stout, a very dark, almost syrup-like beer. • U.S. consumers looking for balance between taste, mouth-feel, alcohol content and a healthy alternative have turned to light beer. This segment now accounts for 39% of the beer market, up 32% from 1991. Light beer brands accounting for three of the top four brands in the U.S. today.
The surging popularity of "craft brewing" (i.e., microbreweries) was in part due to consumer reaction against established industrial brewers' lack of attention to new consumer preferences for more variety of flavor characteristics, color, freshness, foam, and other aspects of the beer drinking experience.
Stagnant market conditions are attributed to unfavorable demographics (not enough 21 year olds) and continuing health concerns regarding alcohol consumption. However, the mini baby-boom generation is coming to age – the flat market of 21 year olds is expected to grow.
The population of individuals old enough to drink continues to grow; thus, the beer industry has been able to achieve growth through the turn of the century.
Beer is a more socially acceptable beverage. Consumption is almost equally divided between retail (52%) and food service (48%). Additionally away from home consumption is expected to grow over the next decade. In part, due to the consumer’s desire for fun and entertainment. Consumers today tend to drink as a leisure activity about 70% of the time. According to overall volume sales, consumers are three times more likely to drink (Wine or Sprits) at home then away from home. • Alcohol abuse has had devastating health and social consequences in almost every country. For example, between 40 and 50 percent of all traffic accidents in the United States are said to be alcohol related. Alcohol abuse also reduces productivity in the workplace and causes family stress. • Varying degrees of growth within the industry is attributed to the taste for super-premium products.
Technological • Beer producers are implementing various packaging and manufacturing technologies to increase shelf life and to optimize storage/shelf space. • • • Packaging materials have changed to decrease product costs. Optimization of transportation and distribution methods has increased. Automated production facilities have decreased the required industry workforce. The number of employees directly involved in the industry has dropped over the past several decades from more than 71,000 workers in 1960s to less than 40,000 in the late 1990’s, although consumption has grown considerably.
Although the basic ingredients have been around for many centuries, technological improvements have allowed beer to be produced in mass production scales. Examples include pasteurization (e.g., Budweiser) and cold sterile filtration (e.g., Coors).
Ecological/Physical • The industry may be partially influenced by consumers who desire products that are environmentally friendly, such as requiring less packaging materials. • • Pollution prevention goals may also influence manufacturing and packaging processes. Manufacturing facilities are providing supplemental treatment services to local municipalities, such as Coors’ providing all water treatment operations to the City of Golden. • Bi-products from production processes are being used for reuse purposes, such as the generation of livestock feed from hops and oats processing. • The physical location of production sites are being driven by economic considerations, such as geographic location to raw resources and distribution points.
Appendix D: Porter’s 5 Forces 1. Rivalry Among Present Competitors • • • The rivalry level among the beer manufacturers is high. There are more than 1,800 brewers and beer importers that operate in the United States. Among large competitors substantial market increases result more from attracting consumers from competitors, than from attracting new industry consumers. • Three major companies hold nearly 80 percent of the market share in the United States (Anheuser-Busch, Miller, and Coors). • Beginning in 1995, the industry experienced significant consolidation to reduce operating expenses. Large companies such as Anheuser-Busch (A-B), Miller, Coors, Heineken, etc. have all used consolidation to maintain or grow market share. • The beer industry is constantly introducing new products in an attempt to boost incremental sales and expand the beer market – often creating new segments such as light beer, nonalcoholic beer, ice beer, bottled draft beer, and clear malt liquor drinks. Examples include A-B unveiling Tequiza, which is beer with a touch of tequila, or Devon’s Original Shandy, a combination of beer and lemonade. Another example is the introduction of Zima by Coors. • The import sector of the beer industry has experienced its tenth straight year of growth in 2002, having more than doubled in size during the 1990s. Thus, competition is increasing from international producers. • • The consumption rate of microbrews or specialty beers continues to grow in popularity. Although small in market share, home brewing laws allows adults to produce 100 gallons of beer per year for personal or family use (but not for sale) without payment of federal tax. 2. Threat of New Entrants • • The threat of new entrants is high. A majority of new entrants can be attributed through the introduction of new microbreweries. However, this threat tends to be localized rather on a nationalized, or internationalized, basis. • Since the industry-leader Boston Beer Company was founded in 1984, the microbrew business has grown into a $1 billion industry by 2000. And while the market was flat from 1997 to 1998, the segment did grow
1.2 percent in 2001 to secure a 3.1 percent share of the total domestic US beer market, with Boston Beer controlling 0.6 percent. When the Boston Beer Company was founded in 1984, fewer than 40 microbreweries existed. Since then, an estimated 500 small breweries and brew pubs have opened with an additional 50 added each year from 1985 to the present. • Because of globalization of the market and the increased accessibility, the U.S. imported beer market continues to increase. 3. Bargaining Power of Suppliers • • The threat of bargaining power of suppliers is low. Because of the magnitude of raw material suppliers, beer manufacturers have tremendous leverage in establishing supplier contracts to create favorable negotiating conditions. This is the same case with manufacturers and packaging material suppliers. 4. Bargaining Power of Buyers • • As a result of the high number of product choices, the retail buyer has a high level of bargaining power. There are many different types of commercial beer, including pilsner, lager, ale, stout, light, malt liquor, dry, ice-brewed, bottled draft, and nonalcoholic. The market is further segmented by price and quality, with beers being categorized as super-premium, premium, and popular-priced. • The manufacturers do not have the ability to dictate price due to the large magnitude of competition. Margins are lower for large-scale producers compared to premium beers (microbreweries). Therefore, A-B, Coors, and Miller (large-scale producers) are more susceptible to price inflexibility. 5. Threat of Substitute Products • • The threat of substitute products is high. There are three major segments that constitute the global alcoholic beverage trade: beer manufacturers; wineries, which produce wines and brandies; and distilleries, which output various liquors and blended alcoholic drinks. Wines and liquors are alcoholic substitute products. • Nonalcoholic beverages provide consumers substitute options, such as soft drinks and bottled water. Bottled water consumption accounts for 6.7% of total U.S. beverage consumption, up from 2% just a decade ago.
Appendix E: Porter’s Generic Strategies
Advantage Low Cost Cost Leadership Strategy Broad (Industry Wide) Proposed Coors Strategy Product Uniqueness
Coors Narrow (Market Segment)
Focus Strategy (Low Cost)
Focus Strategy (Differentiation)
Coors is currently located in the lower right side of the broad / low cost strategy quadrant. Coors is too close too the center of the grid and needs a strategy to move away. The problem with being too close to the center is that it appears that the company does not know what its vision is or where they want to position themselves. Since the core issue of Coors is how to be in the top five brewers in the world by barrels sold by 2008 they need to broaden their market, stay low cost, but stay as close to the product uniqueness quadrant as possible without crossing over. It would be too difficult and too time consuming to try to grow their market organically. That is, trying to take market share from other producers with current product offering or trying to introduce new products with the sole purpose of trying to grow share. We propose the following strategies to become one of the top five brewers by volume in the world: • Defensive Strategy – Brewing Process and Existing Product Lines. The Coors brewing process is very unique. Coors is the only mass production brewer that processes their beer through cold filtering. In addition, they only use Rocky Mountain water. These two unique items is what pulls the company closer to being a differentiator and prohibits them from being a lower cost producer. Coors needs to do a better job of educating the public about the process of making beer. Because competitors are not constrained by these
items it enables them to logistically place manufacturing facilities wherever they need to. Additionally, with heat pasteurization the competitors can produce beer in a cycle time of at least twice as fast. The public, in general, is starting to educate themselves across a wider demographic on items such as beer and wine. The public is taking an interest in what makes a beer different from another. Further advertising should continue to enforce this key differentiating factor to educate the market. This defensive strategy will maintain the current customer base and allow Coors to grow with the market. However, it will be difficult to take overall market share from the larger competitors. • Absorption Strategy – Merger and/or Acquisitions. If Coors wants to be one of the top five brewers in the world by the year 2008 they will have to do it through merger and/or acquisition. As of 2002, Coors ranked 8th in the world with 22 million barrels sold. We see today that consolidation within the top brewers in the world is currently underway. Coors recently acquired the Carling from Interbrew as a first step toward their long-term goal. However, at current rankings, at a minimum Coors must double their current barrels sold to achieve their goal. It would appear that a merger would be unlikely due to the culture and values system at Coors. A merger would mean the possibility of the Coors family losing at least some of the control of the company, something they have always had. Since the employees value their relationship with the Coors family a merger with a new culture could be damaging in the short and long term. It would have to be a very carefully planed merger with the Coors vales, history, and traditions left in tact. An acquisition would seem to be the best alternative to keep the values, history, and traditions in tact. Coors would probably have better success consolidating brewers that are by world volume barrels sold ranked ninth through fifteenth. To acquire a brewer larger then themselves, although not impossible, may be financially straining to Coors. To join a brewer larger then themselves a merger approach would be more likely then acquisition. However, as mentioned above, due to internal reasons a merger is not likely. Therefore, to acquire and consolidate brewers their own size or slightly smaller would be the best strategy to maintain internal values and achieve their goal. Additionally, Coors should target companies such as the Boston Beer Company who are very large micro brewers and have large regional and national followings. This would allow them to follow the recommended strategy of walking along the differentiator line while maintaining positioning in the low cost strategy.
Branch Plant Strategy – Joint Venture. Coors could engage in a joint venture strategy in addition to, or in lieu of, an acquisition/merger strategy. The key to engaging in a joint venture is two-fold. First, critical element is the viability of high level of trust among partners. This is absolutely necessary as sensitive information and process trade secrets may need to be shared to make the venture work. Second, both parties need to bring value to the deal. Value can come in many forms. These forms of value include channels of distribution, expertise in processes, easier access into markets, financial strength, sharing technology, management systems, leveraging of common suppliers for better cost, and lower cost of capital to name a few. This strategy would be necessary in countries such as China were sole ownership of a company is not possible. This strategy also supports where Coors needs to move within the industry as a low cost, broad market company.
Defensive Strategy – Brand Extension. Coors is a classic follower strategy company. A recent example was the introduction of Aspen Edge, which was a follower product to Michelob Ultra which is marketed as a low-carbohydrate beer. Coors needs to introduce more beer products into the market, such as a premium beer to compete with SAB Miller’s MGD Draft or A-B’s Michelob. Coors already has brand recognition, good market intelligence, and do not have to establish the market. Although Coors already owns and markets Killian’s Irish Red it is not primarily marketed under the Coors name. Coors needs to enter the market and compete with its own brand in the premium arena. Coors needs to continue to develop and expand the brand if it wants to maintain its current market share. Additionally, the only way for Coors to really gain more market share is to take it from segments in the market that they currently do not compete, such as the example of Aspen Edge and the low-carbohydrate market.
Appendix F: Value Chain Analysis
Coors – Descriptive
Firm Infrastructure – Human Resources Technology Development Financing (All); Legal Support (All); Accounting (All) Benefits (All); Strong Reputation – Easy to Recruit (Operations, Marketing & Sales); Tailored Incentive System (All) VIPER Program (Inbound Logistics); Route Opt. Software (Outbound Logistics); Instrumentation & Controls (Operations); Temperature Controls (Operations); Movement to Paperless (All) Supplier Quality – Genetically Altered Barley (Inbound Logistics); Vendor Consolidation Saved $1B Annually (Inbound Logistics)
Waste Minimization Long Term Relationships Supplier Training Cold-filtering Process Quality controls for Production Shipping bulk liquid not Full bottles Consolidated Warehouses Beer delivered cold Pricing – products At multiple price points Automated retail pricing information Sports Sponsorships Advertising – Wing Man Adapting Products – Aspen Edge Strong European Position w/ Carling Freshness Dates Customer Satisfaction Helpline Partner with Distributors for Training
Strategic Sourcing Program Bottling and Canning Operations VIPER Program Econ. Of Scale – Largest Single Site Brewery in the world
Marketing & Sales
Adapted from Ghemawat & Rikin, 1998
Coors – Prescriptive
Firm Infrastructure – Human Resources Technology Development Procurement
Discrimination Prevention (Operations); European Operations – Strengthen Labor Relations (Operations) Automation Opportunities (All)
By-Product Reuse Outsourcing Waste Water Treatment
Billing & Collections – 60 days too high SAP
Buy Competitors to Get Plants Where Demand is Electronic Inventory Niche Beer Emphasis Control – New To Gain Market Supply Chain System Share
Marketing & Sales
Adapted from Ghemawat & Rikin, 1998
Appendix G: Product-Market Matrix
Related Product Unrelated Product
Current / Phase I – III expansion Beyond Phase III
With the 2002 acquisition of Carling Brewing, Coors entered a related market for its current product with seemingly outstanding rewards. Carling and Grolsch helped counteract lackluster 2003 U.S. performance with increased market share and profitability in the U.K. While continuing to streamline its European operations to achieve tighter overhead costs consistent with those in America, the Carling division will help anchor European expansion as Coors continue to explore new geographic expansion.
International players Diageo, Kirin, Allied Domecq, and Companhia de Bebidas have all achieved market capitalizations over $5 billion (to Coors’ $2.5B) by diversifying product lines. Though not a current strategy for Coors, wine and spirits sales would represent an addition of a related product. Coors points out that younger generations are turning to a greater variety of alcoholic beverages, and Coors may eventually deem it necessary to target a wider range of tastes. According to Coors, “The U.S. beer industry faced many challenges in 2003, including the rise in popularity of distilled spirits and other alternative beverages, particularly among 21- to 29- year olds” (2003 Annual Report, p. 18).
Venturing into an unrelated product (such as, hypothetically, on-premise billiard tables and dart boards) would require Coors to take advantage of knowledge in its current markets. Its distribution channels to
American bars are well-established and could serve as a spring board for non-core product sales to similar customers. Its current sponsorship of the National Football League might provide other electronic gaming opportunities in football-viewing businesses that already promote their Coors products. Such ventures, however, would not fit within Coors’ current expansion strategies. • Though Anheuser-Busch integrated into a completely unrelated product and distantly-related market with its venture into Busch Gardens and Sea World theme parks, it did so only after establishing itself as the world’s premier beer-maker. Coors’ goal of surpassing at least three international brewers in becoming one of the world’s top five will require it to focus efforts and resources in core or related products. • State and federal regulations governing the sale of alcohol largely dictate distribution channels for maltbeverage makers. Internet-based “Beer of the Month” clubs and other direct-sales approaches have fallen out of favor with U.S. commerce regulations and likely do not provide a near-term option for Coors.
Appendix H: Boston Consulting Group Growth-Share Matrix
Non Alc o
Kil Molson Extra Gold
The Boston Matrix shows the unbalanced condition of the Coors product line. The matrix shows that the majority of the products are in the low market growth, high market share category. In this market growth of a beer line is achieved through marketing, sales and price at the expense of a competitor. The top three brewers in the United States, of which Coors in number three, account for 80% of U.S. sales (Coors 2003 Annual Report, pg. 6). The annual growth rate of the existing beer market for the last 10 years is under 1%. With the exception of Aspen Edge, Zima and Mexicali the existing Coors brands, Coors Light, Coors Original, Extra Gold, Killian’s and the Keystone Brands are all brands in a mature product stage of the business life cycle. Over the next ten years, blurring between the alcoholic and non-alcoholic drinks market will become even more pronounced. The beer industry and the top three companies will face a big challenge in this market. Customers will look beyond; the product will have to perform on every front (alcohol level, taste, mouth feel, as well as price). Opportunities will emerge for products that are light and refreshing (Promar International).
In fiscal year 2003 Coors Light accounted for 51% of Coors total worldwide sales and 70% of the total Coors U.S. sales. The U.S. sales of Coors light are 9% of the total beers sales in the U.S (Coors 2003 Annual Report, pg. 5). Coors best selling product, Coors must establish a successor for this product while the product is still a good seller.
Aspen Edge Released in March 2004 in a bid to capture some market share in the expanding lowcarbohydrate beer segment. First wave of market tests in Texas and the Northeast were 30% above original forecasts (progressivegrocer.com). Coors will capture a percentage of this market, with a good advertising campaign.
Joint venture with Molson to distribute the product in the U.S. market has resulted in losses of $2.6 Million in 2003, $4.8 million in 2002, and $2.2 million in 2001(Coors 2003 Annual Report, pg 54). Coors could better use the money spent on this venture, research and development of a new beer for example, Coors should discontinue the distribution of this brand or increase advertising. However, advertising would be better spent on a Coors product.
Killian’s beer was introduced in the United States in 1981, although, sales have declined with increased interest in flavored alcoholic beverages Killian’s Red is still the country's leading specialty red beer in sales (alabev.com ). A good niche brand that performs well on taste and in the Micro Brew market. Needs more advertising attention.
Regular Coors, company’s oldest beer ranks 17th in the U.S. out of top 20 beers just ahead of Old Milwaukee at 19th and Smirnoff Ice at 20th ( Food Retailing's Top 20 Beer Brands) Sales for this line of beer continue to remain flat. This is Coors signature product, is in danger with slow sales and declining patronage. To save this product Coors needs to re-evaluate and perhaps adjust the formula, bitterness is the main compliant with this beer (beeradvocate.com). Coors needs a successor to this brand.
Keystone is the Coors low price competitive beer brands. The sluggish economy has helped establish a following for this brand. Currently, Keystone Light holds the 15th spot of the top U.S. beers 2 ahead of the Regular Coors brand (Food Retailing's Top 20 Beer Brands). 2003 sales for keystone light are $127 Million, this brand appeals to the younger demographic with limited budget.
First introduction in 1992, one of few offensive strategies for Coors. Leading clear malt beverage, 2001, 610,000 barrels produced. Targeted market for this beverage is a young male between the ages of 21
through 29. Also popular among women Zima is considered by the market as a bridge or gateway drink. It serves to entice younger drinkers who may not have acquired the taste for hard liquor or beer. The Zima brand launched a flavored line of Zima products called Zima XXX, in selected U.S. markets. Zima sales have remained flat primarily because of the influx of new flavored alcohol beverages in the United States (Coors 2003 Annual Report, pg. 19). Zima remains one of the most popular brands in the Japanese market. With the proper promotion will this product will capture that percentage of the market that may be looking for balance rather then extremes in the beverage they choose. • Coors Extra Gold, Full flavored golden color, Coors’ premium beer brand limited advertisement. Reviews generally are good for this brand (beeradvocate.com ). However limited advertisement and poor sales have failed to establish Coors Extra Gold as a strong competitor in the premium beer market. Coors is in need of a strong premium beverage a new brand with a name not representative of Coors may be the answer. This brand may be one worth eliminating. • Coors Non-Alcoholic, changes in the political environment have helped to fuel the non-alcoholic beer market. The market demographic is young adults ages 28 to 35. Anticipated sales growth, non-alcoholic brands will exceed 10 of the total market within the next five years (club management.com). Good political statement for the company, advertise to the designated driver, this beer has room to grow with proper attention. • Mexicali beer, yet to be launched in the United States. Beer to be brewed in Mexico and distributed through the Coors distribution networks. Market to the younger and expanding Hispanic population. Court battle over trade mark has delayed market release of this product. Niche beer not a large bottom line contributor, good for goodwill and image. Limit the advertising and marketing to areas of social acceptance. • Carling acquired by Coors in 2002 for 1.7 billion from Interbrew. Coors' purchase includes four breweries in England, the U.K.'s top selling beer Carling, together with Caffrey's, Stones and Worthington brands. The deal gives Coors a 19% share of the U.K. market, second to Scottish and Newcastle. The company borrowed all but $200 million of its purchase price. Coors has no plans to market Carling brews more aggressively in the U.S. the acquisition by Coors was simply a way to get a bigger piece of the British market, Carling's export business is "relatively minor (realbeer.com)." Big challenge for the company, this beer also needs a successor. However, the market in the U.K. is different and unfamiliar to Coors; the
company will need testing and trials to insure consumer support in this market. Europe has a bigger opportunity of expansion than the U.S. markets.
Appendix I – GE 9 Cell
Overall, Coors main revenue generating activities are not in the strongest position of High Business Strength and High Industry Attractiveness.
Coors Brewing Company is Coors’ primary SBU and produces most of its revenue. The beer industry is very attractive; however, Coors itself is not the strongest competitor in the market, being ranked 3rd in the US and 8th internationally. The company’s first objective should be to improve the Business Strength of Coors Brewing Company and bring it to a High/High position.
Coors Brewers Limited is the recently acquired SBU in the UK. This SBU is actually stronger than Coors Brewing Company in many aspects, including profitability and market position in the UK. However, its primary market is currently the UK and needs additional funding to compete internationally. (Coors 2003 Annual Report, pg. 71). Again, Coors should focus on moving this to a High/High position.
Coors Energy Company is a wholly owned subsidiary which currently supplies 100 percent of Coors energy to the Golden, CO facility (Coors 2003 Annual Report, pg. 69). As energy prices continue rising and CEC can continue to remain the primary supplier of energy to Coors Brewing Company, CEC will maintain its High/High position.
Rocky Mountain Metal Containers (RMMC) and Rocky Mountain Bottle Corporation (RMBC), are the main suppliers of packaging for Coors and both ventures are profitable, however, profits from these ventures are immaterial to the overall Coors financials and were included in “Other Income” (Coors 2003 Annual Report, pg. 51, 33)
The Molson/Coors JV continues to loose money in 2001 – 2003, Coors is going to re-evaluate the business during 2004. (Coors 2003 Annual Report, pg. 51). Likely Coors will move its focus away from the Joint Venture in order to strengthen other parts of the business and allow this to move to a Low Business Strength position and possibly exit the venture.
Appendix J: Industry Analysis 1. Industry Definition
SIC Code: 2082-Malt Beverages; NAICS Code: 312120-Breweries
The industry includes companies that manufacture beer and malt beverages. There are many different types of commercial beer, including pilsner, lager, ale, stout, light, malt liquor, dry, ice-brewed, bottled draft, and nonalcoholic. In the United States, the market is further segmented by price and quality, with beers being categorized as super-premium, premium, and popular-priced. NAICS Industry Definition (Encyclopedia of Global Industries, 2003) Beer is made from a "mash" of fermented barley, malt, and rice or corn. It is naturally cloudy from sediment in the brews, but most commercial beers are clarified through filtration systems. U.S. brewers, who manufacture, package, and distribute beer, frequently use additives to stabilize foam and to maintain freshness, while European brewers use these additives less often. Almost all bottled and canned beer is pasteurized in the container to make sure that any remaining yeast does not continue to ferment. Draft beer, served from large kegs in taverns, bars, and other outlets, is not pasteurized and must be refrigerated to prevent spoilage. Most U.S. beer is lager – a pale, medium-hop-flavored beer. It averages 3.3 to 3.4 percent alcohol by weight and is highly carbonated. While Europe also produces many lagers, a higher percentage of European production is in heavier, dark beers. Also popular in Europe – particularly in the United Kingdom and Ireland – is stout, a very dark, almost syrup-like beer. Porter is a sweet, malty brew, with a high alcohol content of 6 to 7 percent. Malt liquor is beer made mostly from malt with a high level of fermentable sugars. Light beers are reduced calorie products made either by reducing the amount of grain used to make the brew or by adding an enzyme to reduce the starch content of the beer. According to the 2002 Market Share Reporter, in the United States in 1999, light beer held a 40.1 percent share of the beer market, with premium accounting for 25.9 percent of that share, and popular-priced accounting for the remainder. Microbreweries and brewpubs in the United States have demonstrated annual double-digit increases throughout most of the 1990s. According to a study by The American Journal of Sociology, the surging popularity of "craft brewing" was in part due to consumer reaction against established industrial brewers' lack of attention to new consumer preferences for more variety of flavor characteristics, color, freshness, foam, and other aspects of the
beer drinking experience. In particular, 1997 was a banner year for the U.S. microbrewery industry. That was the year that the number of American breweries surpassed those in Germany for the first time in at least two hundred years. Germany operated 1,234 breweries in 1997 compared to 1,273 in the U.S., and by the middle of 1999 American breweries numbered 1,414, compared to just 43 in 1983. However, the end of the 1990s have shown that a number of microbreweries are experiencing declines due to rapid over-expansion, although firms that have tended to focus on regional sales are seeing better results. Acquisitions, mergers, and shutdowns are more common, but new microbrewery firms keep on opening throughout the U.S. and continue to show significant growth. SIC Industry Definition (Encyclopedia of American Industries, 2004) This industry includes only those companies that manufacture beer. The industry has consistently been dominated by three major U.S. breweries, yet, regardless of size, all breweries have to sell their products through wholesalers and retailers. This distribution channel is the result of accommodating the variety of federal, state, and local regulations regarding the sale of alcoholic beverages. Competitors include domestic producers, as well as international producers. International producers, whom are largely comprised of manufacturers within Europe and Asia, generally produce fuller, dark-body beers compared to lighter beers within the United States. Industry Demographics • The effect of consolidation through mergers and acquisitions continues to reshape the global beer industry, as seen by the increasing market shares of the industry leaders. Accordingly, the top 10 brewers worldwide now account for more than half (50.4 percent) of the entire world’s beer output, which is an industry first. • In order, the world’s top 10 breweries are as follows, according to 2002 market share: Anheuser-Busch (AB) (9.0%), SAB Miller (8.1%), Interbrew (7.1%), Heineken (5.9%), Carlsberg (5.5%), AmBev (4.6%), Modelo (2.8%), Scottish & Newcastle (2.7%), Coors (2.6%), and Tsingtao (2.1%). • SAB Miller, Heineken, and Interbrew were each active with acquisitions in 2003. Most recently, Interbrew acquired 57% of AmBev in March 2004. • In the United States, three major companies hold nearly 80 percent of the market share. These breweries are A-B, located in St. Louis, Missouri; Miller Brewing Company in Milwaukee, Wisconsin (which was acquired by South African Breweries in 2002); and Coors Brewing Company in Golden, Colorado. The two top49
selling brands, Budweiser and Bud Light, both belong to A-B. Ranking second is Miller with the third-best selling product, Miller Light. Ranked third is Coors Brewing Company with the fourth most-popular beer, Coors Light. • Craft beer or microbreweries, led by Boston Beer Company, account for approximately 10 percent of the total beer market in the United States. • • • Production of beer throughout the world increased by 7 percent in 2002. In 2002, China and the United States constituted one-third of the world’s total beer production. China is now considered the undisputed leader in the global beer industry. It surpassed the United States as the world’s largest beer producer in 2002. In addition, China has also passed the United States as the world’s largest beer consumer in 2003. • Characterized by maturity and low-growth, the beer industry struggles against global trends (health, fitness) and heavy price competition. • Indirect competitors for the beer industry are comprised of producers of “other spirits.” These producers constitute the liquor/sprits segment (e.g., Diageo, the world’s largest producer of alcoholic drinks) and the wine segment (e.g., E&J Gallo Winery, the world’s largest producer of wines). 2. Industry History (Encyclopedia of American Industries, 2004) • The foundation of the U.S. beer industry can be traced to the ancient times of kings and pharaohs. Babylonian clay tablets more than 8,000 years old depicted beer being brewed and gave detailed recipes. Other writings indicated that beer was brewed by the Egyptians as early as 3000 B.C. and by the Chinese in the 23rd century B.C. One of the world's oldest breweries still in existence is Brauerei Beck in Germany, where Beck's beer was first brewed in 1533. • Beer was first brewed in America in 1587 at Sir Walter Raleigh's colony in Roanoke, Virginia, and Puritan settlers brewed beer in Boston as early as 1620. In 1791, Congress levied the first tax on alcohol. By 1870, Adolphus Busch had pioneered the use of refrigerated railroad cars to ship beer over long distances. Following the steady development of temperance groups, the Pure Food and Drug Act, more commonly known as the Volstead Act, went into effect on January 16, 1920. This act ushered in the era of Prohibition,
which banned the sale of alcoholic beverages. During this 13 year period, production and distribution of millions of gallons of alcohol fell into the hands of "bootleggers." • After Prohibition was repealed in 1933, federal and state governments tightened regulations under the Federal Alcohol Act (FAA) and various state regulations. Brewers also adopted policies of self-regulation, such as the Distilled Spirits Council of the United States's (DISCUS) voluntary "code of good practice." Following Prohibition, it was distributed to wholesalers and retailers in limited geographic regions that seem extremely small when compared to current distribution areas. By the 1930s, the primary way to sell beer was in draft form and in refillable bottles. • In order for breweries to continue expanding, however, less costly containers were needed. The beer can, introduced in 1935, filled those needs perfectly. By the end of World War II, the beer can had become such a popular container that glass companies soon created the one-way bottle to keep up with the competition. Both of these less-expensive containers allowed brewers to ship more beer and expand markets. By 1946, breweries served markets that were at one time only accessible to local and regional companies, and this expansion soon created the nationwide market of the major breweries. • Total sales volume for the domestic beer market rose 1 percent in 1996, a small but symbolic gesture breaking a decade-long stagnation in consumption rates. Although incremental, this industry growth can be attributed to the rise in microbrews, which has posted double-digit growth since 1995, and to imported beers. Both segments are significant but small; microbrews made up only two percent of the market and imports just five percent in 1998. • Companies began to consolidate with others to save operating expenses. In 1995 fourth-ranked Stroh Brewery Company acquired G. Heileman, makers of Colt 45, Old Style, and Henry Weinhard, among other labels. • Causes for the stagnant market were attributed to the effects of the federal excise tax hike in 1991, unfavorable demographics (not enough 21-year-olds), and continuing health concerns regarding alcohol consumption. A bit of good news for the beer industry was that the mini baby-boom generation was about to come of age, so the flat market of 21-year-olds would soon grow.
Attempting to boost incremental sales and expand the beer market, companies continued to introduce new products – often creating entirely new segments such as light beer, nonalcoholic beer, ice beer, bottled draft beer, and clear malt liquor drinks such as Zima.
In 1996 light beer became the largest segment of the beer market with 37.25 percent--more than 70 million barrels. Nonalcoholic beer also has helped the beer business. Although small compared to total beer consumption, volume of nonalcoholic beer has more than doubled since its 1989 level and remained steady since 1991.
In an industry of mature brands, companies were looking at the future of microbrews. Sales in this segment grew an average of 40 percent from 1987 to 1997. Specialty brewing in the United States grew from a $600 million industry in 1992 to a $1 billion industry in 1994. Even the big names were offering craft brews. In 1994, A-B, bought a stake in Seattle's Redhook Ale Brewery, while Coors Brewing Company landed Killian's Irish Red.
The undisputed leader of the microbrew segment has been the Boston Beer Company (BBC) and its product Samuel Adams. The tenth largest beer producer in the country, BBC manufactured 700 barrels in 1994, only about three one-thousandths of the beer sold in the U.S. that year. However small, this volume was still greater than the total of the next six microbrewers combined. When the BBC was founded in 1984, fewer than 40 micro-breweries existed. Since then, an estimated 500 small breweries and brew pubs have opened, with an additional 50 added each year from 1985 on.
According to the U.S. Department of Commerce, Japan was the largest market for U.S. beer in the mid1990s, although sales were actually down 16.6 percent in the country in 1995. Sales came in 62 percent higher in 1995 than in 1994 in Hong Kong, 214.5 percent higher in Brazil, 108.6 percent higher in Taiwan, 33.6 percent higher in Canada, and 78.9 percent higher in Russia. The total U.S. imported beer market hit an all-time high in 1995, with volume topping out at an estimated 343.5 million gallons. This growth represented a 5.5 percent jump in volume from 1994 and was almost a 40 percent improvement over a ten year period.
The surge in imports to the United States was attributed to the American consumer's desire for high quality, full-bodied brews; lower total alcohol consumption; and becoming accustomed to higher prices for both
domestic craft brews and imported brands. Among the world's best-selling beers, only Heineken, the Danish Carlsberg, and Guinness may be regarded as truly international. • North America and the Caribbean countries (Mexico, Canada, Jamaica) led exports in 1995, with 165.8 million gallons of beer shipped to the United States, up from 160 million gallons in 1994. The Europeans exported a record 161.8 million gallons of beer to the United States, up almost 8 percent from 1994. The Asian/Pacific region exported 7.4 million gallons to the United States--virtually the same figure as in 1994. 3. Industry Forces • Distribution approaches and technologies are leading competitive drivers within the industry. As long as breweries have done business in the United States and around the world, they have made continual refinements to their methods of distribution. For example, Adolphus Busch pioneered the use of refrigerated railroad cars to ship beers long distances in the late 1870s. Adolph Coors became the first brewer to develop and introduce an all-aluminum recyclable can in 1959. Beer is a relatively expensive product to transport considering its value, so traditionally any brewer wishing to expand its area of sales had to consider the freight differences involved in shipping to another market. Thus, breweries often create regional facilities to produce and distribute beer to local geographical areas. Any brewer desiring to sell in a specific area needs to consider the regional price structure, both in making their decisions about whether to enter the markets and in pricing their products. While there are fewer brewers today, this basic pricing situation still exists. Beer and ale wholesaling has always been relatively dispersed, characterized by a large number of independent distributors. The major beer companies have periodically made attempts to purchase some of their independent distributors in an effort to vertically integrate and obtain more control over the channel of distribution. Company-owned distributors can provide an advantage in controlling the pricing and presentation of the product to the final consumer and in maintaining retailer relations to ensure availability of the product. The average geographic coverage of a distributor ten years ago was 1,250 square miles. As of 2003, the coverage area has doubled. As with production, distribution is in a mode of consolidation.
“Top to top” relationships are key components within the distribution network between brewers and distributors. Executives must work together to ensure that mid-course adjustments can be made as the market dictates. In order to maintain a modicum of control over distributors, larger breweries have often tried to replace restrictions on the ability of distributors to carry products of other brewers. However, because of Anheuser-Busch's dominating market share, competing brewers, such as Miller Brewing and Coors have been forced to relax such restrictions, allowing wholesalers to acquire each other's brands, in order to guard their market shares. Distribution is a relatively unconcentrated industry with several hundred regional independent distributors. Distributors generally remain regional since they are regulated by the state in which they do business. In most states, each distributor is awarded an exclusive sales area by the brewer and is primarily responsible for building relations with the retail and other consumer outlets to build the sales of the product. A strong dealer network is essential for brewers in order to obtain shelf space and keep the product available to the consumer. Imported beers, an increasingly crucial sector for distributors, have met with some difficulties regarding their products' freshness. The resulting backlash focused scrutiny on distributors, who were under pressure to reduce "inventory days," the number of days beer and ale remain on their shelves. Domestic breweries, eyeing the possible vulnerability of the burgeoning import sector, have launched a campaign advertising their own freshness as a way of marketing on the strength of this problem. Distribution is clearly an important factor in the domestic market, and its importance internationally has taken a significantly increased priority. Obtaining access to distribution systems is a driving force behind the recent wave of international joint ventures and alliances. The accelerating globalization of the brewing industry has generally tended to diminish the power and influence that distributors wield. As distributors have become larger and more efficient, technology, which includes wireless ordering, automated truck loading, and on-line inventory tracking, has allowed them to increase margins steadily over the past 10 years.
The European market differs from that of the United States and Japan in that it is more regional, with local brands dominating their regions. Very few European brands have established widespread distribution, and most have had difficulty in gaining acceptance outside their regions. • In addition to distribution networks, another leading industry force is changing consumer preference and socio-economic considerations. Growth in the industry is attributed to a rising taste for super-premium products and products that adhere to lifestyle considerations. As a result, the industry is constantly introducing new products. Examples include A-B’s Tequiza, Coors’ Zima, and most recently, a variety of low-carbohydrate beers (e.g., Michelob Ultra, Coors Aspen Edge, Rolling Rock Green Light, etc.). There continues to be a strong consumer preference for microbrew-based beers. As a result, large manufacturers have attempted to include super-premium products within existing product lines (e.g., Coors Blue Moon) or have acquired smaller niche breweries (e.g., Coors acquisition of Kilian). The 21 to 25 year old age segment is anticipated to increase by 11 percent over the next 10 years. Thus, in attempts to gain market share, manufacturers are focusing product preference and advertising within this age demographic. This presents an opportunity to capture consumer who have not yet established loyalty to one brand. Coors recent marketing campaign reflects a focused strategy to acquire this untapped segment. On a global basis, considerable market growth is being experienced within China, Russia, and South America as a result of increased buying power and consumer demand. On the other hand, Japan, Europe, and North America are relatively flat in terms of market growth. On-premise sales have been hit hard as a result of 9-11 slowdown and a sluggish economy. Consumers have instead opted to purchase at retailers (off-premise). Consumers have become increasingly aware of product freshness. As a result, many brewers have now included “born on” dating. • Although there is beer growth within various consumer market segments, the overall growth is relatively flat when compared to other consumption products. As a result of this trend, the general approach to gain
market share is to either retain share from competitors, or through acquisitions and mergers. Thus, consolidation has become a driving force within the industry over the past 10 years. • Given the relatively low margins within the beer industry and past optimization of production costs and company overhead, the degree of company profits are now being dictated by external cost control (i.e., supply costs) rather than by internal cost control (i.e., production). Thus, much emphasis in controlling costs is being placed on strategic sourcing and supply chain optimization. Main areas of strategic sourcing include: agriculture, bottling, and packaging. Increased relationships and technological assistance between brewers and suppliers have become instrumental in the strategic sourcing relationship. Technological developments in energy management and software/hardware logistic systems have helped larger brewers save millions of dollars annually as part of strategic sourcing methodologies. • Governmental impacts, legislation, and actions have helped shape the industry’s approaches and practices. Thus, government interaction affects the industry’s strategic methodology, determining by what means and methods a brewer conducts business. Within the United States state laws often dictate distribution methods. Many states require that brewers sell through in-state distributors. Increasingly, states are beginning to permit alcohol beverage producers to sell directly to retailers. Taxation continues to be an increasing percentage of the consumer’s purchase price. In the United States, the federal excise tax was significantly increased (approximately doubled) in 1991. Another example is in the proactive taxation approach within Norway. Norway has raised its excise taxes (double those of Sweden; five times than those in Denmark) in attempt to minimize drinking. In addition to implementation of taxation laws, government regulatory authorities impact the bottom line through increased production standards and liabilities. This is highly regulated by national and local government entities affecting many parts of operations, including brewing, marketing, transportation, distributor relationships, sales, and environmental issues. Compliance has become increasingly difficult as brewers expand internationally – each country has different sets of rules and regulations. Local laws, such as bans on smoking in bars, can severely curtail on-premise beer consumption.
Brewers have been prevented by anti-trust considerations from purchasing their distributors, and efforts to build their own distributorships risk alienating their existing distributors and losing the market penetration they have. The major breweries still maintain only a small handful of companyowned distributors in the 2000s. 4. Industry Structure • As depicted in Figure 1 below, the beer Industry Continuum has shifted from Perfect Competition to Oligopolistic Supply over the past several decades. Despite the efforts of craft brewers to meet U.S. consumer demand for an increasing variety of product, the nation’s top three producers have either purchased or swallowed market share from once-formidable competitors such as Stroh’s, Pabst, and G. Heileman. Similarly, international consolidation such as Belgium Interbrew’s recent investment in Brazil’s AmBev has resulted in fewer players exerting greater control.
Figure 1 Industry Continuum
Oligopolistic Supply Perfect Competition Oligopolistic Demand
Even among “microbrews” in the U.S., convergence has become unavoidable. A-B has taken a large stake in Redhook Ale Brewery, popular in the Pacific Northwest. And though the number of craft brewers has grown from 40 to 1,500 since 1985, microbrew leader Boston Beer Company produces more than the next six microbrewers combined. Internationally, consolidation has not only clustered market shares but broadened the industry to include other alcoholic beverages. While A-B, Miller, and Coors compete squarely in the malt beverage arena in the U.S., overseas giants such as Diegeo (U.K.) and Kirin (Japan) rank among the world’s leaders in spirits and wines.
Just as Boston Beer’s Sam Adams commands a certain portion of the U.S. market, many parts of western Europe and South America still favor regional beers. Yet as supply and distribution management become more critical to the bottom line, the future undeniably favors the larger international producers. • Given this global trend toward consolidation and somewhat stagnant sales in many of the major markets, Strategic Group Mapping becomes ever more meaningful for the industry leaders. In Figure 2, the world’s largest brewers are mapped for price and perceived quality. As all have made recent gains across national boundaries, the global market has begun to absorb the U.S. market. This map, therefore, considers each manufacturer’s entire portfolio on a multi-national platform. World leader A-B has established Budweiser as the “King of Beers,” pacing the globe since 1957. And with Bud Light (launched in 1982) ranking as the second most popular brand in the U.S., A-B has clearly positioned itself as a widely-distributed value beer. Busch and Busch Light target the price-sensitive consumer, while the Michelob line competes in the premium segment. A-B hopes to gain market share through segment beers like Bud Ice and specialty beers Tequiza, Bacardi Silver, and World Select, reflecting its current growth strategy of adding product lines. On May 3, 2004, the company wrestled from SAB Miller a partnership with Chinese-based Harbin Brewery to help capture much of the exploding China market share. With an already expansive portfolio of brands, SAB Miller presently seeks growth through global expansion. Targeting mostly the same customers as A-B, Miller, Miller Lite, and Miller Genuine Draft and GD Light brands place SAB Miller on the same strategic map position as A-B. But offerings such as Pilsner Urquell and Tyskie allow the brewer to outperform A-B internationally at the premium level. Milwaukee’s Best and Hamm’s fill the lower segments. Belgium-based Interbrew stakes its claim as the “World’s Local Brewer” by providing a domestic lager in every market it enters. Its current expansion strategy is through acquisition. Global premium brands such as Beck’s and Stella Artois – with European-favored higher levels of alcohol content – allow it to enjoy a higher perceived level of quality than its American counterparts.
Figure 2 – Strategic Mapping
Hiigh H gh
S&N Heineken & Carlsberg
Perceived Q u al i t y
Hiigh H gh
Both Carlsberg (The Netherlands) and Heineken (Denmark) also command premium appeal by producing first-class brew as their flagship lines. With a presence in over 100 countries, Heineken (offering Heineken and Amstel) claims to be the “World’s Beer Maker.” Not surprisingly, Carlsberg has also grown through expansion, with majority holdings in breweries in Sweden, Norway, Switzerland, Finland and Poland. Mexico’s Modelo (featuring Corona), the U.K.’s Scottish & Newcastle (Baltika, Kronenbourg, and Foster’s), and the U.K.’s Diageo (Guinness) primarily aim for the premium buyers while offering acceptable prices in their domestic markets. Once a regional brewer, Coors Brewing Company became an international player with the acquisition of England’s Carling Brewing Company. Offering Rocky Mountain water brewed Coors and Coors Light in the U.S. and high-quality drafts such as Carling and Grolsch in Europe, Coors seek to distance itself from American stalwarts A-B and Miller in both quality and price.
Like its two bigger competitors, Coors also offers price-sensitive (Keystone) and premium (Killian’s) alternatives. Manufacturers of inexpensive beers once commanded their own share of the market. But as A-B rolled out Busch Beer and Coors introduced Keystone, the low-priced beer companies have nearly disappeared from the landscape. 5. Industry Marketing Practices Product • The product is generally homogenous. While there are different features and types, consumers generally view “beer as beer” and much of the beers are comprised of similar ingredients. • Increasingly, the manufacturers are creating higher quality products through supplier selection and production methods. • As consumer preferences become differentiated due to a variety of lifestyle choices and individualized tastes, manufacturers are developing supplementary product lines to existing core product lines. Examples include low-carbohydrate beers, malt liquors, flavored beers, alternative filtration, etc. • While product packaging generally consists of individual consumption containers (bottles, cans) and kegs, other distribution sizes and packages are being used. Examples include pony kegs, mini barrels, party balls, large-sized bottles and/or cans (32 and 64 ounce), etc. • Consumers have become increasingly aware of product freshness. As a result, many brewers have now included “born on” dating. In addition, guarantees and warranties are increasingly accompanying products. • Price • Beer manufacturers are continually seeing decreased margins as the number of competitors increases, and as manufacturers attempt to reduce list prices to increase market share. • The industry attempts to compete in price within generalized lines. However, specialty beers and microbrews attempt to differentiate themselves from high volume beers; thus, the pricing structure is more stabilized. Package designs are being developed to appeal to target markets.
In conjunction with distributors, manufacturers are instituting discounts and allowances to retail stores as part of promotional programs.
Producers are providing lucrative credit terms and extending payment period to distributors. To minimize transportation costs and reduce list prices, manufacturers are increasingly locating production facilities within geographic points-of-sale. This includes construction of facilities within overseas markets.
Promotion • Because of the number of competitors and the desire for growth, the industry is advertising-heavy and commits significant resources to appeal its product to the consumer. • • Advertising primarily consists of print media, billboards, television, and radio. In an attempt to gain market share by appealing to younger beer drinkers (i.e., new beer drinkers), producers have curtailed marketing and advertising campaigns to align with the interests and desires of the population. In addition, sports markets are heavily targeted to appeal to sports enthusiasts, as well as younger aged drinkers. • The industry utilizes distributors and personal selling (sales representatives) for retail marketing campaigns and in selling/promoting products to sports arenas, bars, taverns, etc. • • Promotional sales programs are prevalent. Promotional materials are both distributed through the manufacturer and individual distributors, depending upon the marketing structure and the point-of-purchase. • In an attempt to gain public acceptance and increasing positive publicity, manufacturers contribute monetary resources to non-profit organizations, public facilities and/or events, environmental advertising campaigns, etc. Place • Common “middlemen” between producers and the consumer consist of privately-owned distributors. Distributors sell products to bars, taverns, stadiums and arenas, grocery stores, liquor stores, public events, convenience stores, etc. • The consumer point-of-sales is diverse and readily accessible due to high number of locations. Therefore, availability is wide.
Because of the expansive market, the diverse/large number of distribution points, and the high levels of consumption, inventory levels within both distributors and retail stores are sufficient to meet customer demands. Inventory management is increasing due to the desire to minimize obsolescence. Production facilities have further reduced internal inventories as distributor-manufacturer communication continues to increase. Production schedules and delivery times are highly optimized to meet distribution demands and minimize in-transit periods.
Generally, it is an uncommon occurrence that the customer is not able to attain a certain product due to a retailer “exhausting its inventory.”
6. Industry Opportunities & Threats • The legal liability issues relating to the beer industry include: patents and copyrights, distribution and consumption laws, industry taxation, FDA and state health and production standards, and advertising compliance and regulations. • As stated previously, governmental impacts, legislation, and actions have helped shape the industry’s approaches and practices. Thus, government interaction affects the industry’s strategic methodology, determining by what means and methods a brewer conducts business. Generally, government interaction has posed a threat to the potential beer consumption market, production and distribution methods, and advertising approaches. Threats to the maximization of industry revenues and growth include: Distribution laws. Many states require that brewers sell through in-state distributors. Increasingly, states are beginning to permit alcohol beverage producers to sell directly to retailers. Federal and state taxation. Taxation continues to be an increasing percentage of the consumer’s purchase price. Advertising regulations and media-imposed restrictions. Government regulatory authorities for public media outlets, such as print newspapers and magazines, television, radio, etc., have strict standards and enforcement of acceptable promotional material. Regulations and laws limit the distribution points, method, and content of beer advertising. In addition, many media outlets have internal standards for determining advertising characteristics, such as ad location, content, size, etc. Production and health standards. Government regulatory authorities impact the bottom line through increased production standards and liabilities. This is highly regulated by national and local 62
government entities affecting many parts of operations, including brewing, marketing, transportation, distributor relationships, sales, and environmental issues. Compliance has become increasingly difficult as brewers expand internationally – each country has different sets of rules and regulations. Indirect laws and ordinances. Local laws, such as bans on smoking in bars, can severely curtail on-premise beer consumption. Anti-trust laws. Brewers have been prevented by anti-trust considerations from purchasing their distributors, and efforts to build their own distributorships risk alienating their existing distributors and losing the market penetration they have. Because of the various restraints, as listed above, the industry may be subject to fines and lawsuits resulting from direct violations. In terms of production standards, manufacturing facilities can be shut-down immediately by Federal and state health departments if standards are not met. As a result of the liability issues, existing manufacturers enjoy a limited “barrier to entry” as increased regulations equate to higher costs. Thus, increasing regulatory-induced costs lead to a lower risk of new manufacturers entering the market. 7. Industry Capital Requirements • The polarization that widens between mega breweries and microbreweries is evident not only in market share, shelf space, and advertising, but in capital requirements as well. Five hundred American microbrews have launched in the past two decades with often as little as some extra space in the back of a tavern. Meanwhile, A-B has paid an estimated $100 million to acquire 30% of a 100-year old Chinese brewer. In 2003, Coors sold tens of millions of dollars worth of warehouse and distribution space in an effort to reduce debt from its Carling acquisition and streamline its Golden, Colorado plant – the world’s largest single brewing facility. Acquisition capital, in fact, has been put to such use among the top three American producers that #4 Pabst has thus failed in its active efforts to find a buyer. • Microbrew’s seeking to gain national distribution channels have often found themselves undercapitalized, debt-ridden, and quickly non-profitable. After Boston Beer ($256 million market cap), the next fourteen largest publicly-traded beer makers yielded only four profitable bottom lines in 2003. According to Christopher Beros of beverage consultant Clarus Capital Advisors LLC, “Now, many craft breweries, failing
to sell, are simply going out of business” (Mergers and Acquisitions Report, December 8, 2003). Many bankers feel that in the states, only Boston Beer and Pennsylvania-based Yuengling are financially healthy enough to be considered attractive takeover candidates. • Current trends among the mega breweries have dictated capital spending not only on strategic acquisitions but on brand innovation and process upgrades. Increased productivity and quality management require large investments for companies producing millions of barrels annually on profit margins as slim as five percent. After acquiring Carling, for example, Coors invested $59 million in the U.K. to streamline operations, increase flexibility, and drive lower costs per barrel. • As the global trend-setters shift financing toward growth and product-manufacturing, many are left to relinquish some control of the supply and distribution chains. A late-90’s movement to build manufacturerowned distribution warehouses has reversed, as distributors have also consolidated and become more efficient. At the same time, packaging and bottling companies have undertaken major R&D investments to refine their processes, enabling beer manufacturers to joint venture on the most costly portion of their supply chain.