Brooklyn case - Lecture Notes PDF

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Brooklyn Brewery: Setting the Course for Growth

COMM 401

Problem Statement Brooklyn Brewery’s success in the craft beer segment of the beer industry was due in part to fortunate timing, given the growth that this segment experienced despite consumption decreases across the industry in general. This growth, however, introduced a bevy of new entrants, including some backed by multinational produces such as AB InBev, and is also set to decline. At the same time, the lease on the Williamsburg facility that Brooklyn Brewery currently uses as a secondary production facility and which also functions as a corporate artifact is expiring soon as well, while its primary facility is operated by a subcontractor that produces Brooklyn beer, resulting in decreased operating expenses but increased variable and opportunity costs. Brooklyn Brewery must therefore decide whether or not to adjust its corporate and business strategy given the above and the prospect of entry into the retail segment and even possibly into the production of Apple Cider given the potential congruency with the Brooklyn Brewery brand name.

External Analysis PEST Analysis The industry’s structure is such that producers must be independent entities from distributors or retailers, thereby preventing vertical integration and thus lessening the monopolistic potential of the giant industrial brewers like AB InBev and MillerCoors enjoy. Socially, craft beer as a whole is a growing trend both in terms of on-premise, where it is leading to the creation of bars specializing in craft beers, as well as off-premise. In both cases, Millennials have demonstrated a clear preference for craft beer, and economically it has been found that craft beers are especially popular with higher-income consumers.

Key Success Factors Ensuring adequate margins is essential to success, as for one it is an industry norm and is therefore required to adequately compete. To that end, distributors and retailers, for their part, also expect large margins, and as a result, this can be considered a prerequisite to even getting one’s products on the shelf space.

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A beneficial relationship with distributors is essential to success as it determines presence and visibility in a given location, while their purchasing price determines the retail price and thus significantly affects margins at both ends. In terms of branding, it is essential that craft beers appear hip and authentic, as well as local if possible, to appeal to younger consumers especially, who represent both the present and the future of the market. Quality control is also important in terms of preventing waste and in terms of ensuring the freshness that is essential to the flavor which justifies the premium price of craft beer Lastly, growth is dependent on a functioning market development strategy that adapts to the different drinking habits of different geographic markets, particularly in terms of on-premise vs. off, as well as to preferences concerning ale, lager, wheat, and seasonal/specialty beers.

Porter’s Five Forces Threat of New Entrants Capital requirements are low in the craft beer segment, and as a result, a high number compete locally. That said obtaining distribution, even regionally, is difficult as distributors prefer to work with brands that can produce higher volume, which does require a significant investment. However, these craft beer brands can then be purchased by an industrial brewer, as has been seen, which turns them into a highly credible threat as they marry their branding with the capital of the parent company. Threat of Substitution Other alcoholic beverages like wine and cider represent the clearest alternatives to beer, however, though wine bars are growing, craft brewpubs represent a distinct retail channel where substitution is unlikely to occur. Bargaining Power of Suppliers Because of the importance of margins, as well as forecasting and timing production to ensure freshness, supply chains indeed have high switching costs, which increase the bargaining power of raw material suppliers significantly. Production contractors enjoy this same benefit except brewers are even more reliant on them.

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Bargaining Power of Buyers Distributors, in contrast, do not face high switching costs, and from their perspective the product is undifferentiated (while their customers likely do not mind variety when faced with a new option).

Intensity of Rivalry Competition is high, with industrial brewers releasing their own craft-like beers to take advantage of market growth and selling at significantly lower prices, which is affordable given the economies of scale, and thus the margins, they enjoy. With limited shelf space and low differentiation, as well as the abovementioned factors, producers are turning to advertising, especially social media, and experimental flavors to compete.

Competitive Analysis The Boston Beer Company produces Sam Adams Boston Lager, the #1 craft beer on the market. While the brand shares the branding technique of creating an association with a popular city, Sam Adams also benefits from high geographic penetration and television advertising which makes the brand well-known on a national and international scale, both of which present options Brooklyn Beer should consider, as does pursuing cider, which has also been successful for the Boston Beer Company.

Internal Analysis Value Chain Analysis Brooklyn Brewery benefits from a distinct brewing process for its specialty beers, which have earned them international acclaim through prizes and partnerships. This expertise is largely the result of the intellectual capital of Oliver, who leads research and development efforts for the company successfully. This activity should be continued as it is an important means through which Brooklyn Brewery differentiates its products and also competes in the less-crowded specialty/seasonal flavor market. That said, inefficiencies can be observed with regard to the outsourcing of the bulk of production, as both this splitting of production and the outsourcing itself results in additional expenses, prevents economies of scale and additional efficiencies from occurring in terms of both logistics and supply chain (when

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compared to having just one location), and decreases the ability to properly conduct quality control. As such, operations, inbound logistics, and outbound logistics must be improved in this regard. Lastly, marketing is a driver of growth given that the association with Brooklyn is a positive one, as it imparts the cool, creative image that is important to the success of a craft beer with the millennium segment. Additionally, the Brooklyn Brewery brand itself also has significant brand equity as a result of the awards it has won, its critical acclaim in general, its partnerships with brands like Carlsberg, etc. However, the Williamsburg location does appear essential to minting both the authenticity required to appear cool, the association with Brooklyn, and even possibly the quality that allows them to gain this positive reputation, given that it is largely the result of the specialty beers make by Oliver at that plant.

Financial Analysis Brooklyn Brewery has experienced significant growth in terms of both revenues and profits, demonstrating improved revenues as well. However, to that end, a comparison with AB InBev reveals that the industrial brewer earns nearly double the margins, as a figure that is not likely to change anytime soon as a result of economies of scale, supply chain, and logistical efficiencies, decreased wastage, etc

Recommendations Corporate Level Strategy At the corporate level, Brooklyn Brewery should adopt a differentiation strategy, when compared to their current focused differentiation strategy, to enter different segments and markets related to the beer industry as a whole. For example, the Brooklyn brand does lend itself well to retail, particularly in Europe (mostly in markets like Portugal where on-premise consumption is high) where the craft brewpub would be a novel and likely popular concept given that per capita beer consumption is increasing. In addition, the option of pursuing cider can also be explored given that it is congruent with the “Big Apple” in terms of marketing and has been so successful for Boston Beer Company and can be introduced regionally in the North East as a test market to begin. This would help lower the overall reliance on craft beer alone, which is important given that the industry is becoming less attractive as growth declines, and also allows for the eventual acquisition of Brooklyn Brewery’s craft beer assets, should the introduction of industrial producers prove impossible to compete against in terms of margins.

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Business Level Strategy At the business level, the Boston Beer Company should continue its product differentiation strategy by ensuring that beers are as high a quality as possible, as this will continue to impart more accolades, thus further differentiating the brand and allowing for its introduction in more and more markets and a higher offer as well in terms of a possible acquisition. This requires renewing the lease on the Williamsburg location so that Oliver can continue to release specialty flavors, and also so that the authenticity of the association with Brooklyn is maintained. However, the main production facility should be built in the Midwest to achieve distribution to both the East Coast (who, again, will be partially served by Williamsburg as well) as well as the West Coast, which represents a viable target for geographic expansion. Television advertising, meanwhile, should be saved as a contingency and only utilized in the event of declining growth in a given market.

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Appendix A: SWOT Analysis

Strengths 

High brand equity



Effective research and development



High-quality end result through

Weaknesses 

production locations in same state 

careful brewing 

Supply chain inefficiencies due to two

Difficulty to closely monitor freshness for quality assurances

HR management – motivated team,



Loss of economies of scale

effective leadership



Production volume not high enough to



Brand authenticity



International distribution



Partnership with Carlsberg in Europe



Association with hip and

compete with Big 4 

Margins not high compared to industrial brewers



entrepreneurial Brooklyn

Lack of overall diversification, reliant on craft beer



Subcontracting costs



Lack of internal production skill as a result of subcontracting

Opportunities 

At the retail level can introduce restaurant



Industrial breweries backing acquired

(US) or gastro pub (Europe)

craft breweries or releasing craft-like



Cider market continuing to grow

beers like Blue Moon



Craft beer market contain to grow despite



Declining growth in craft beer market

declines in this growth



High number of new entrants in craft beer



Industrial brewers acquiring craft breweries thus potentially raising offer on Brooklyn Breweries

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Threats

segment

Appendix B: Value Chain Analysis

Activity Inbound logistics Operations Outbound Logistics Marketing Service Firm Infrastructure Human Resources Research and Development Procurement

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Effect on margins Negative Negative/No effect Negative Positive No effect No effect Positive Positive No effect...