Core Mountain Man Brewing Company Bringing the Brand

Core Marketing Mountain Man Brewing Company Bringing the Brand to Light 1. Overview Mountain Man Brewing Company (MMBC, or the Client) is a family-run business in West Virginia that has experienced much growth since launching its flagship premium beer Mountain Man Lager (MMB) in 1925. Over the decades, brand loyalty, quality and brand awareness have been the cornerstones of the Client’s success – the importance of the MMBC brand among consumers has allowed the company to build its small but consistent market share in the East Central region (ECR), particularly in its home state, the only region it distributes in (7. % of the market with more than 50 million USD in revenue). 2. Challenges & Opportunities * Challenges MMBC currently faces a potentially identity-changing challenge: The traditional premium beer market has been declining at a compound annual rate of 4%, and MMB experienced a 2% decrease in revenue last year, the first drop in its entire history; accordingly, MMBC’s target aim is to recover from the 2% decrease in revenue that occurred in the prior year. * OpportunitiesThe light beer market – popular with younger drinkers – has also been growing at a CAGR of 4%. Although MMBC has been historically weak in the 35-years-and-under segment, there is opportunity to generate more sales by releasing a new Mountain Man Light Beer (MML) line to target this younger market. However, there is the risk of negatively impacting their current distribution of MMB through shelf-space cannibalization and higher costs; as well as the risk of alienating their core segment of older, blue-collar drinkers. . Analysis MMBC faces potentially losing more revenue at the current forecasted compound annual decrease rate of 2% – the projected decrease for MMB standalone in year-to-year net revenue from actual 520,000 barrels sold in 2005 (USD 50. 4 m) to 470,039 barrels (approximately USD 45. 6 m) by 2010 totals nearly 10% (see Exhibit 1). According to the key age demographics among beer drinkers, MMB’s customer segmentation is currently as follows: 64% for 45 years and up, and only 17% for 35 years and under.Yet the ECR breakdown for consumption by beer type is the opposite: 50. 4% for light and only 19. 7% for premium. Due to the overwhelming potential in the light beer market, we have prepared projections on growth in revenues and expenses for MMBC should they decide to move forward with brewing Mountain Man Light (see Exhibit 2A, 2B). * Making Mountain Man Lighter (and More Profitable) Considerations have been made regarding MMB remaining as a stand-alone product (again, see Exhibit 1).However, per the Client’s instructions, this report will focus on projected performance examining MMBC’s entry into the light beer market at their expected MMB reduction rate of 20%. According to our analysis, MML would still result in a significant increase in revenue within two years: With the new product mix , net income margin increases from an insignificant 0. 88% in MML’s first year to a robust 3. 7% by its second year (2007), even with considerations on the additional expenses that would go into launching a new product – manufacturing, advertising, general operating (see Exhibit 2A). Additionally, the projected MMB+MML sales volume after only two years would nearly match MMBC’s current volume level – 500,895 barrels to 520,000 – and would eventually overtake the 2005 figure in 2008; while standalone figures show a continuous decrease from the 2005 benchmark and eventually fall behind MML sales by 2011 (Exhibit 3). * Issues to Consider The forecast for MMB +MML sales are promising.However, JAFREM must note significant issues to consider with the presented data: 1) Due to limited sales volume for the first six years, impact on COGS has not been taken into consideration; should the current production capacity levels be exceeded, additional inputs rega rding CAPEX (for example, for new plants) will be necessary. 2) With the forecasted MML growth rate, the Client’s market share in the ERC amounts to 1. 5% after five years; MMB has not achieved this level after more than 50 years in the business and so considerations on the MMB reduction rate have also been provided (Exhibit 2B). 4. RecommendationsLight beer is an attractive proposition for MMBC, especially with the decrease in the premium beer segment. Accordingly, ignoring the dynamic growth in the light segment is simply too much of an opportunity to let pass. In order to reduce the risks that come with launching MML (alienating core customers, promoting a failed product), we recommends the following measures: * To avoid losing brand equity at the consumer level for MMB, pilot the MML launch outside West Virginia, as this is MMBC’s strongest and most loyal market; should the testing prove successful, then consideration can be made on moving into West Virginia. Shoul d the MML growth forecast not be realized after two years, return focus to MMB distribution at a national level; while advertising and sales at the grass roots level has been good for MMBC, there has been no attempt to reach a larger marketing through the traditional channel of television media. * Despite the expected decrease in the premium beer market, MMB still has potential to capture more market share by expanding its advertising activities and consumer base outside the ERC. Exhibit 1 – Lager Standalone Projections MMB Standalone (next five years)Â  | | 2005| 2006| 2007| 2008| 2009| 2010| Barrels| 520,000| 509,600| 499,408| 489,420| 479,631| 470,039| Price per Barrel| $97. 00| $97. 00| $97. 00| $97. 00| $97. 00| $97. 00| Net Revenue| 50,440,000| 49,431,200| 48,442,576| 47,473,724| 46,524,250| 45,593,765| COGS| 34,803,600| 34,107,528| 33,425,377| 32,756,870| 32,101,732| 31,459,698| Gross Margin| 15,636,400| 15,323,672| 15,017,199| 14,716,855| 14,422,517| 14,134,067| SG&A | 9,583,600| 9,583,600| 9,583,600| 9,583,600| 9,583,600| 9,583,600| Other Op. Exp. 1,412,320| 1,412,320| 1,412,320| 1,412,320| 1,412,320| 1,412,320| Operating Margin| 4,640,480| 4,327,752| 4,021,279| 3,720,935| 3,426,597| 3,138,147| Other Income| 151,320| 151,320| 151,320| 151,320| 151,320| 151,320| Net Income before Tax| 4,791,800| 4,479,072| 4,172,599| 3,872,255| 3,577,917| 3,289,467| Prov. Income Tax| 1,677,130| 1,567,675| 1,460,409| 1,355,289| 1,252,271| 1,151,314| Net Income After Tax| 3,114,670| 2,911,397| 2,712,189| 2,516,965| 2,325,646| 2,138,154| Net Present Value| 3,114,670| 2,599,461| 2,162,141| 1,791,526| 1,477,990| 1,213,246|Exhibit 2A – MMB + MML Projections | 2005| 2006| 2007| 2008| 2009| 2010| 2011| MML Barrels| 0| 48Â  735| 101Â  369| 158Â  136| 219Â  282| 285Â  066| 355Â  763| MMB Barrels| 520Â  000| 407Â  680| 399Â  526| 391Â  536| 383Â  705| 376Â  031| 368Â  510| Growth%| Â  | -12%| 10%| 10%| 10%| 10%| 10%| Price per Barrel| $97| $97| $97| $9 7| $97| $97| $97| Net Revenue| 50Â  440Â  000| 44Â  272Â  273| 48Â  586Â  872| 53Â  318Â  166| 58Â  489Â  738| 64Â  126Â  451| 70Â  254Â  508| COGS| 34Â  803Â  600| 30Â  776Â  437| 34Â  000Â  363| 37Â  531Â  192| 41Â  386Â  351| 45Â  584Â  213| 50Â  144Â  138| COGS/Revenue| 69. 00%| 69. 52%| 69. 98%| 70. 39%| 70. 6%| 71. 08%| 71. 37%| Gross Margin| 15Â  636Â  400| 13Â  495Â  837| 14Â  586Â  509| 15Â  786Â  974| 17Â  103Â  387| 18Â  542Â  239| 20Â  110Â  370| SG&A| 9Â  583Â  600| 11Â  233Â  600| 10Â  483Â  600| 10Â  483Â  600| 10Â  483Â  600| 10Â  483Â  600| 10Â  483Â  600| Other Op. Expenses2| 1Â  412Â  320| 1Â  412Â  320| 1Â  412Â  320| 1Â  412Â  320| 1Â  412Â  320| 1Â  412Â  320| 1Â  412Â  320| MML, Extra Ad Expenses| 0| 400Â  000| 400Â  000| 400Â  000| 400Â  000| 400Â  000| 400Â  000| Op. Expenses| 10Â  995Â  920| 13Â  045Â  920| 12Â  295Â  920| 12Â  295Â  920| 12Â  295Â  920| 12Â  295Â  920| 12Â  295Â  920| %| Â  | 18. 64%| -5. 75%| 0. 00%| 0. 00%| 0. 00%| 0. 00%| Op.Profit| 4Â  640Â  480| 449Â  917| 2Â  290Â  589| 3Â  491Â  054| 4Â  807Â  467| 6Â  246Â  319| 7Â  814Â  450| Op. Margin| Â  | -90. 30%| 409. 11%| 52. 41%| 37. 71%| 29. 93%| 25. 10%| Other Income| 151Â  320| 151Â  320| 151Â  320| 151Â  320| 151Â  320| 151Â  320| 151Â  320| Net Income before Tax| 4Â  791Â  800| 601Â  237| 2Â  441Â  909| 3Â  642Â  374| 4Â  958Â  787| 6Â  397Â  639| 7Â  965Â  770| Prov. Income Tax| 1Â  677Â  130| 210Â  433| 854Â  668| 1Â  274Â  831| 1Â  735Â  575| 2Â  239Â  173| 2Â  788Â  019| Net Income After Tax| 3Â  114Â  670| 390Â  804| 1Â  587Â  241| 2Â  367Â  543| 3Â  223Â  212| 4Â  158Â  465| 5Â  177Â  750| Net Income Margin| 6. 18%| 0. 88%| 3. 27%| 4. 44%| 5. 51%| 6. 48%| 7. 7%| NPV| 3Â  114Â  670| 348Â  932| 1Â  265Â  339| 1Â  685Â  170| 2Â  048Â  409| 2Â  359Â  625| 2Â  623Â  209| Exhibit 2B – Inputs & S tress Test Results Inputs| | Stress scenario| MMB, Avg. Market Share Growth| 0. 25%| | Year| MML, Avg. Market Share Growth| Reduction Rate| MMB, Var. Cost per Barrel| 66. 93| | 2006| 0. 04%| 30. 19%| MML, Var. Cost per Barrel| 4. 69| | 2010| 0. 28%| 17. 28%| Reduction Rate| 20%| | 2011| 0. 23%| 21. 80%| Discount Rate| 12%| | | | | MMB, Growth Rate| -2%| | | | | Price per Barrel | $97| | | | | MMB, Extra Ad Expenses| $0| | | | | MML Growth Rate| 2%| | | | | MML, SG&A in 2006| $900,000| | | | |MML, SG&A Extra Launch| $750,000| | | | | Exhibit 3 – MMB (stand alone) vs. MMB + MML ——————————————– [ 1 ]. Forecast prepared according to the 2% compound annual decrease rate provided by the Client [ 2 ]. SG&A and Other Operating Expenses are quantity independent in the consider range of production. [ 3 ]. The Stress Scenarios included in this Exhibit denote the maximum reduction rat e possible in order to achieve the target market growth desired by the Client should they move ahead with MML; in order to remain profitable, these are the reduction rate ceilings.