Mountain Man Case Write Up PDF

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Nikita Ivanchenko Marketing Management Professor Grace Zimmerman November 17, 2017 Mountain Man Brewing Company: Leaving the Brand in the Dark In the beginning of 2006, Mountain Man Brewing Company (MMBC) ran into serious trouble – sales of the Mountain Man Lager, Mountain Man’s lone product, were declining for the first time in the company’s history. Chris Prangel, the newly-hired head of marketing operations, believes that product line extension is the best solution. However, will launching of the Mountain Man Light improve the long-term prospects of the company? As suggested by the title, in this paper I will argue for staying on ‘the dark side of the force’, despite its diminishing power. Additionally, in place of entering the light beer category, I will propose an alternative growth strategy. The case lays out all the information pertinent to the Five Cs paradigm. After describing the context, I analyze every other element of the paradigm in greater detail from two perspectives: “what is the status quo?” and “what is the potential impact of MM Light?”. Context In general, U.S. per capita beer consumption has been declining by 2.3% per year since 2001 (mainly due to external pressures such as other alcohols and taxes). Nevertheless, the total sales of beer in the U.S. have been growing, albeit very slowly. Although the size of the market remains relatively stable, consumer preferences regarding the type of beer are changing rapidly. Primarily driven by younger consumers, the market share of the “light” beer category has increased from 29.8% to 50.4% over the last five years. In contrast, sales of traditional premium beer have been declining at a comparable rate. To summarize, the context of the beer market does not bode well for the MMBC’s future:  The size of the pie has not been growing recently and, as a result, the beer companies have to compete fiercely for each other’s shares of market in order to survive;  The primary means of competition are product line extensions and expensive marketing campaigns (dozens of companies went out of business doing that); and  Industry experts regard “first-time drinker demographic” as the key consumer segment for beer companies. Company MMBC’s core competency is brewing and selling the Mountain Man Lager – the company has been doing that successfully since 1925. The company earned multiple accolades in 2005, including “Best Beer in West Virginia”, “Best Beer in Indiana”, and “America’s Championship Lager”. The combination of perception of quality, brand awareness and brand loyalty have made MMBC successful. MM Lager’s distinctively bitter flavor and higher-than-average alcohol content contributed to the consumers’ perception of quality of the beer. Furthermore, the company relied on grass roots marketing in order to spread the message about the quality by word of mouth, thus creating tremendous levels of brand awareness and loyalty. All these factors enhanced the MMBC’s value proposition – a legacy brew made by an independent, family-

owned brewery – and created an extremely strong brand. Nonetheless, the company’s sales declined slightly in the beginning of 2006 because of the market changes described above. It is worth noting that unfavorable market conditions have not prevented MMBC from growing sales during the five years prior to the most recent setback. In other words, while competitors were struggling to preserve their SOMs, Mountain Man’s strong brand enabled the company to grow both sales and SOM consistently. Chris Prangel’s idea to launch Mountain Man Light does not rely on the MMBC’s core competency. We cannot be certain that the new beer will achieve the same quality as the old one. Poor or average quality might not only negatively affect sales of the MM Light, but also damage the sales of the core product. Therefore, erosion of the MMBC’s brand equity is one of the major risks of Chris’s decision. Customers MMBC’s core consumers are blue-collar, middle-to-lower income men over age 45. These working-class males in the East Central region stay loyal to the company. MMBC earned their loyalty. They are respectful and appreciative of the company’s history and its authenticity. By launching MM Light, Chris plans to target consumers with the opposite characteristics – young “first-time drinkers”. I assume that these individuals are more likely to be either in college or recent college graduates. They perceive Mountain Man as a “strong” and “working man’s” beer. Similar to the MMBC’s current target audience, younger beer drinkers are well aware of the brand and show appreciation for its status as an independent brewery. However, based on the reactions of younger participants of the focus group, several key issues can be identified: I. Most young consumers show preference for the Big Three beer companies; II. They are less likely to show the same level of loyalty as middle-aged blue collars; and III. Younger beer drinkers are easily influenced by their [often erroneous] perceptions. I conclude that, excluding its size, “first-time drinker demographic” is not an attractive demographic. Chris’s growth strategy does not guarantee success. Given the level of competition (discussed below) in the light beer category, the potential benefit of extending the product line does not outweigh the risk of alienating MMBC’s existing consumers. Collaborators MMBC sells its Mountain Man Lager to distributors in Illinois, Indiana, Michigan, Ohio, and West Virginia. These distributors tend to focus on their main customers, rather than small players like MMBC. Because of that, the company had to establish its own small sales force in order to build Mountain Man’s brand at off-premise locations. The case suggests that product line extensions leveraging the core brand name often helped brewers obtain greater shelf space and improve their relationships with distributors and retailers. However, I share Oscar Prangel’s concern about retailers’ willingness to grant additional shelf space to Mountain Man. I can imagine competing brewers of all sizes banging on the doors of distributors pushing their new products and trying to achieve the same goal as MMBC. Overall, distribution is not the major concern of the MMBC’s management team because, if necessary, they can figure out collaborators’ attitudes towards MM Light by making several inquiries.

Competition The level of competition in the beer industry is very high. As mentioned earlier, the size of the market is hardly growing and all the beer companies compete fiercely for SOMs in every segment of this industry. It is worth noting that some segments are more consolidated than others. For example, in Table 1 total sales of beer in East Central region are divided into two categories: ‘light beer’ and ‘all other types of beer’. The Big Three beer companies control 84% of the light beer sales and “only” 64% of the rest of the industry. These numbers indicate that gaining market share in the light beer category will be significantly harder than in the traditional premium beer category. Because of its relatively rapid growth rate, the light beer category has attracted many newcomers in recent times. The brewers of all sizes have become interested in seizing the opportunity, thus creating a glut of product. I assume that the combined market share of the Big Three is impenetrable for the small and medium-sized competitors. Currently, MMBC competes directly with several regional brewers and a number of international players for the remaining third of the traditional premium beer market. Chris Prangel ponders about entering the light beer category where an even larger number of companies compete for one sixth of the market. In the traditional premium beer category, MM Lager’s high quality and great taste coupled with the brand legacy differentiate MMBC from competitors. However, achieving the same degree of differentiation will be nearly impossible with the MM Light. Table 1 also demonstrates that the import beer companies are struggling to gain a foothold in the light beer market, presumably because of an inferior cost structures and weaker distribution networks. A small regional brewer like Mountain Man is probably on par with large import companies in terms of costs and distribution capabilities. In a nutshell, I do not believe that Mountain Man Light can be so differentiated from the rest of the market as to elicit the same level of brand loyalty as Mountain Man Lager does. Mountain Man’s value proposition in the light beer category does not sound very compelling neither for younger beer drinkers, nor for other consumer segments. Quantitative analysis Without doubt, the possibility of extending the product line into the light beer category has to be evaluated thoroughly. Qualitative analysis of the Five Cs has demonstrated that launching the Mountain Man Light is an extremely risky endeavor which can cause such issues as sales cannibalization, brand alienation and/or brand equity erosion. But what is the potential reward? Why does Chris Prangel consider this a golden opportunity for the company? Table 2 and Table 3 present his estimations of the MMBC’s financial performance with and without the Mountain Man Light in the product line, respectively. I ignore the time value of money in this analysis for the sake of simplicity. Historically, beer was not subject to sharp fluctuations in demand during economic downturns. Consequently, these forecasts are reliable as long as Chris’s assumptions are correct. The problem is that his assumptions seem to be overly optimistic. First, the actual marketing budget is likely to exceed the proposed budget of $750,000 – an intensive six-month marketing campaign must cost substantially more than what the company spends regularly on advertising ($675,000 every six months). Second, I am skeptical about the validity of the projection of

$900,000 in annual, incremental SG&A costs. The company will not only have to hire additional sales personnel, but also continue incurring substantial marketing expenses in order to build and sustain the brand awareness of the MM Light. Finally, Chris’s SOM projections are a bit out of reach for the company. Basically, he plans to match the market share of Corona Light – an established international brand – in less than five years. Having said all that, the Mountain Man Light is economically feasible for MMBC. Table 4 summarizes the breakeven analysis for the new product. The company will have to sell slightly over 100,000 barrels of light beer and grab a meager 0.25% SOM in order to break even in two years. Although this is a realistic scenario, the main objective of launching the Mountain Man Light is not reaching the breakeven point on time, but rather ‘doing no harm’ to the MMBC’s core product. The qualitative analysis suggests that Mountain Man’s light beer fails to accomplish this goal. Recommendation #1 MMBC should not launch the Mountain Man Light. I believe that the intangible costs mentioned above are greater than the potential short-term financial benefits. In other words, MMBC may end up replacing one very strong product with two mediocre products in the long run. In addition, there are reasons to believe that the current drop in sales is temporary. The sales in MMBC’s market segment must not necessarily continue falling indefinitely. The traditional premium beer is not a dying category; while consumers’ tastes and preferences may swing the other way around in a few years, rebuilding MMBC’s brand equity may not be feasible. Chris Prangel draws his conclusions from only a limited amount of data available. The two months of slightly less than satisfactory sales do not convince me that the company needs such a radical change to survive. The company has been able to withstand adverse market conditions in the past and is capable of doing that in the future. Recommendation #2 Chris Prangel has a single goal in mind – to sustain a healthy growth rate of his familyowned business. In my opinion, launching the Mountain Man Light is not the only option on the table. Having said that, I recommend focusing on geographic expansion rather than product line extension. This growth strategy is significantly more conservative. While the economic potential is less attractive, the risks of sales cannibalization and brand alienation are absent. Therefore, the MMBC’s management team is more likely to accept such proposal. The fact that the Mountain Man Lager won the “America’s Championship Lager” award indicates that consumers in other regions of the country are well aware of the product. The company does not have the resources to expand nationally, but can go state by state beginning with the states adjacent to the East Central Region such as Virginia and Pennsylvania. Shipping costs should not be higher because these two states are significantly closer to West Virginia than Illinois or Michigan. And incremental advertising and SG&A expenses should be negligible because of the Mountain Man’s exceptional brand awareness. To summarize, in contrast to entering the light beer category, this growth strategy sticks to the company’s core competency, leverages the strength of the core brand, and accomplishes Chris’s goal in a more conservative way.

Appendix Table 1

East Central Region Sales Anheuser-Busch Miller Coors

15,620,252

42.0%

8,553,948

23.0%

3,347,197

9.0%

Big Three Combined: Other + Craft/Specialty Imports Total Barrels

Light Beer 9,184,70 8 4,498,63 3 2,061,87 3

74.0%

5,206,751 4,462,929 37,191,077

2,624,20 2 374,886 18,744,3 03 100.0% 14.0% 12.0%

%

All Other Types of Beer

%

49.0%

6,435,544

34.9%

24.0%

4,055,315

22.0%

11.0%

1,285,324

7.0%

84.0%

63.8%

14.0% 2.0%

2,582,549 4,088,043

14.0% 22.2%

100.0%

18,446,774

100.0%

Table 2

Net Revenues COGS Gross Margin

2005 2006E 2007E 2008E 2009E 2010E $50,440,0 $54,158,5 $58,275,3 $62,812,9 $67,794,5 $73,245,2 00 13 87 10 88 04 34,803,60 37,597,94 40,685,43 44,082,56 47,806,69 51,876,15 0 2 9 6 7 2 15,636,40 16,560,57 17,589,94 18,730,34 19,987,89 21,369,05 0 1 9 5 0 2

SG&A Other Operating Expenses Operating Margin Other Income Net Income Before taxes Provision for Income Taxes

9,583,600

11,233,60 10,483,60 10,483,60 10,483,60 10,483,60 0 0 0 0 0

1,412,320 1,412,320 1,412,320 1,412,320 1,412,320 1,412,320 4,640,480 3,914,651 5,694,029 6,834,425 8,091,970 9,473,132 151,320 151,320 151,320 151,320 151,320 151,320 4,791,800 4,065,971 5,845,349 6,985,745 8,243,290 9,624,452

1,677,130 1,423,090 2,045,872 2,445,011 2,885,152 3,368,558 $3,114,6 $2,642,88 $3,799,47 $4,540,73 $5,358,13 $6,255,8 Net Income After Taxes 70 1 7 4 9 94 Table 3

Net Revenues COGS Gross Margin SG&A Other Operating Expenses Operating Margin Other Income Net Income Before taxes Provision for Income

2005 $50,440,0 00 34,803,60 0 15,636,40 0 9,583,600

2006E $49,431,2 00 34,107,52 8 15,323,67 2 9,583,600

2007E $48,442,5 76 33,425,37 7 15,017,19 9 9,583,600

2008E $47,473,7 24 32,756,87 0 14,716,85 5 9,583,600

2009E $46,524,2 50 32,101,73 2 14,422,51 7 9,583,600

2010E $45,593,7 65 31,459,69 8 14,134,06 7 9,583,600

1,412,320 1,412,320 1,412,320 1,412,320 1,412,320 1,412,320 4,640,480 4,327,752 4,021,279 3,720,935 3,426,597 3,138,147 151,320 151,320 151,320 151,320 151,320 151,320 4,791,800 4,479,072 4,172,599 3,872,255 3,577,917 3,289,467 1,677,130 1,567,675 1,460,409 1,355,289 1,252,271 1,151,314

Taxes Net Income After Taxes

$3,114,6 $2,911,39 $2,712,18 $2,516,96 $2,325,64 $2,138,1 70 7 9 5 6 54

Table 4

BREAKEVEN ANALYSIS Mountain Man Light AMOUNTS SHOWN IN U.S. DOLLARS

REQUIRED SALES TO BREAK EVEN SALES PRICE PER BARREL SALES VOLUME PER PERIOD TOTAL SALES

$97.00 100,473 $9,745,862.88

VARIABLE COSTS REGULAR COGS ADDITIONAL COGS VARIABLE COSTS PER BARREL TOTAL VARIABLE COSTS

CONTRIBUTION MARGIN PER BARREL SOLD GROSS MARGIN

$66.93 $4.69 $71.62 $7,195,862.88

$25.38 $2,550,000.00

FIXED COSTS PER THE FIRST TWO YEARS ADDITIONAL SG&A MARKETING CAMPAIGN TOTAL FIXED COSTS PER PERIOD

NET PROFIT (LOSS)

$1,800,000.00 $750,000.00 $2,550,000.00

($0.00)

RESULTS BREAKEVEN POINT (BARRELS): REQUIRED MARKET SHARE (2007):

100472.81 0.25%...