Defining and Solving the Root Problem to Securethe Future of Mountain Man Brewing Company.

By: Jason Vanmali

1

Mountain Man saw its first ever decline in sales for 2005 because larger national brewers areattracting a portion of non-loyal Mountain Man customers away from the company.

2006E 2010E

Market Share 1.34% 1.13% 0.21%

Price Per Barrel $97.00 $97.00

Quantity (Barrels) 509,600 470,039 39,561

Revenue $49,431,200.00 $45,593,765.00 $3,837,435.00

TVC $34,107,528.00 $31,459,698.00

Gross Margin $15,323,672.00 $14,134,067.00

Fixed Costs $9,645,920.00 $9,645,920.00

Total Advertising $1,350,000.00 $1,350,000.00

Operating Margin $4,372,752.00 $3,138,147.15

Other income $151,320.00 $151,320.00

Net Income After Taxes (35%) $2,714,680.00 $1,941,437.00 $773,243.00

What Changed?• The removal of laws that limited promotion of

beer in retail establishments in some states ofthe East-Central region of the U.S. have beenremoved which allowed large brewers to attractour non-loyal customers by offering deepdiscounts.• Non-loyal MM lager customers spread

their consumption across up to five otherbeer brands and price is a factor in thebeer purchasing decision.

• Since there is less customer demand for MMlager, our small sales force did not sell as muchproduct to retailers and to our distributors.

How Big Is The Problem?• We are projected to lose approximately four

million dollars in annual revenue by 2010.

2

MMBC will face a larger issue down the road that will threaten the existence of the company ifwe’re myopic in our strategy and only focus on a short-term solution of getting our non-loyalcustomers back.

• A small group of core customers make up the largeportion of our sales.

• Through the analysis of our target market, it wasuncovered that our core customers are aging andmarket research indicates that the quantity ofconsumption for beer decreases after 54 years.

• It is unlikely that we can get our corecustomers to consume the same amount ofbeer after 54 years due to the concerns ofage-related health problems.

• Younger consumers will not replaceour loyal MM customers becausethey prefer to drink light beer andthey find MM lager too bitter andstrong.

• This is the looming issue that MMBC must addressif they want to secure the company’s future.

Profile of Beer Drinkers in East-Central Region

AgeDomestic Light Beer

Domestic Premium Beer MM Lager

21-24 9% 8% 2%

25-34 20% 20% 15%

34-44 24% 23% 19%

45-54 22% 23% 32%

54-64 14% 14% 19%

65+ 12% 12% 13%

3

The MM brand will dissociate itself from the blue-collar, working man’s image moving forward and focuson emphasizing patriotism and strong family values rooted in the company’s history and tradition.

Generation Time Period How Consumers Lived and

Thought (East-Central U.S.)

MM Brand MM Lager Does The

Brand Match

the Lifestyle of

Consumers?

Does The

Product Match

the Needs of

Consumers?

Silent Generation

/Baby Boomers

Industrial

Revolution

-Worked blue-collar jobs like

mining, farming, construction.

-Emphasis on being strong,

rugged, putting in a hard and

honest days work.

-They prefer to drink a

premium, domestic beer.

-Proudly American.

-Blue-collar, working

man’s beer.

-Slightly higher alcohol

content, distinctly bitter

flavour, high perceived

quality.

-Not differentiated

other than slightly

highly alcohol content

from other domestic

premium beers.

Yes Yes

Generation X Information Age -Shift from traditional industry

to an economy based on

information and

computerization.

-Blue collar to white collar.

-They prefer to drink light

beer.

-Proudly American.

-Hasn’t changed from

a blue-collar, working

man’s beer.

-Slightly higher alcohol

content, distinctly bitter

flavour, high perceived

quality.

-Not differentiated

other than slightly

highly alcohol content

from other domestic

premium beers.

No No

• Consumers are proudly American.• Strong family values and a rich company history and tradition is a strong point of differentiation for MMBC.• This rebrand won’t detract current loyal customers and we can attract new customers that drink premium,

domestic beer since MM lager is a proven quality beer with numerous high-recognition awards.• This rebrand can give us the option to launch a light beer to attract younger adults which can play off

Mountain Man’s brand equity.

4

MMBC

End Consumer

Retailers (Convenience stores, independent

alcohol stores, grocery stores etc…)

Distributors

Restaurants/Bars

• The intermediaries act in their own best-interestsand will only stock product that will sell.

• The quantity of beer we can sell solely dependson how many customers request our productwhen they visit retailers or restaurants/bars.• We lost revenue in 2005 because large

brewers did a better job at creatingdemand from our non-loyal customers byoffering large discounts.

• In the future, MMBC should look into selling beerdirectly to the end-consumer through it’s brewerywhich can add another source of revenue throughits distribution channels.• Consumers who live in close proximity to

the brewery show strong brand loyaltybecause they support the company’stradition and strong family values. Byadding a brewery tour, this will increaseconsumer engagement and attract moreconsumers to purchase our product.

MMBC should focus on targeting advertising and promotional efforts at end-consumers inan effort to create increase demand and sell more product.

$$$

$$$

$$$

5

MMBC should launch Mountain Man Light to attract younger consumers. Through ourrebranding, we will also be able to attract non-customers who drink premium, domestic beer inorder to increase sales and secure the company’s future.

1. The NPV of launching light beer is $10,904,548.00, which indicates a strong profitable venture. It is $8,258,942.00 better than the alternative of increasing distribution to neighboring states. (See page 9 and 12).

2. “Alternative 1: launch light beer,” has a more realistic and achievable breakeven target. We have to sell 217,433 barrels of MM Light versus 843,094 barrels of MM Lager. (See page 9 and 11).

3. “Alternative 1: launch light beer” can attract non-customers who drink premium, domestic beer and a younger audience to help secure MMBC’s future whereas “alternative 2: increase distribution” will primarily attract new customers that will drink Mountain Main Lager and not a younger audience.

4. MMBC is alone among major and regional beer companies in not having expanded its product line beyond its flagship lager product. “Alternative 1: launch light beer” solves this issue whereas “alternative 2” does not.

6

Alternatives to Secure the Company’s Future

1. Launch a light beer.

2. Expand our distribution to other neighboring States near the East-Central region of the United States by appealing to consumers who drink domestic, premium beer.

Criteria to Assess Alternatives

1. Strategy needs to have a positive NPV.

2. Strategy needs to have an achievable breakeven target (barrels) to cover costs of the investment.

3. The strategy must solve the short and long term problems by increasing sales and by attracting new customers to replace the existing core customers who are aging.

7

Alternative 1: MM Light will target both men and women between the ages of 21-27 years old that are eitherin college or are young professionals within the East-Central region of the United States.

8

Target Audience Product – MM Light Promotion Price Placement

• The key consumer segment for beer companies are younger audiences between 21-27 years old.

• They consume in quantity and are a growing segment.

• MMBC will target men and women in college and young professionals just entering the workforce as this is when consumption of beer is the highest.

• Their parents taught them “The American Way” and they are very patriotic.

• This segment has not acquired a taste for full flavoured beer or has notestablished loyalty to one particular brand.

• They prefer to consume light beer.

• Packaging will have symbolism related to America (rebrand).

• The product will be made with the same care, quality and authenticity as MM lager with lighter alcohol content.

• We will appeal to our customers by offering premiums such as 28 beers for the price of 24 for a three month period after launch.

• Other premiums will include beer koozies, caps and t-shirts with the brands logo.

• We will also appeal to them by holding sampling events at local bars near college campuses to induce trial.

• Bars will serve the beer in a chilled MM glass that will have the new brand logo.

• T.V. advertisements will display families spending quality time together, parents drinking MM Lager and the young adults drinking MM Light. The parents will reminisce about their past and cheers their children for their accomplishments (either school or work related). Will play off, “Life, liberty and the pursuit of happiness.”

• Advertising expenditures will complete with the tagline, “Proudly American, Family Owned since 1925.”

• Beer is fairly pricedand competitive to other domestic products.

• The price will be the same as MM lager, $4.99 for a 6-pack and $2.25 for a 12-ounce serving of draft beer.

• Quality, authenticity and patriotism are strong factors to influence purchase.

• MM Light will be sold heavily in convenience stores, independent alcohol stores and grocery stores in close proximity to college campuses and yuppie white-collar work companies.

• It will also be in local bars and restaurants in close proximity to college campuses and yuppie white-collar work companies.

9

Alternative 1: Launching Mountain Man Light is a viable solution to increase sales and securethe company’s future.

• The NPV after investment costsis $10,904,548.00 whichindicates a strong profitableventure. (Page 13)

• MMBC will need to sell 217,433barrels of Mountain Man Lightover a two year period in orderto break even.• We are expected to

surpass this and sell288,300 barrels.

• This strategy is forecasted toincrease sales by 16% by theend of 2016. It will not detractcurrent core customers and itwill attract a younger audiencewhich will help to secure thecompany’s future.

Break Even Analysis Year 1 + Year 2$97 - $71.62 = $25.38

What We Need$5,518,454.00/$25.38 =

217,433 Barrels

Projected$7,317,060.7/$25.38 =

288,300 Barrels

Revenue $27,965,125.62

TVC $20,648,064.92

Gross Margin $7,317,060.70

Fixed Costs** $5,518,454.00

Net Income $3,093,946.7

NPV (2006-2010E) $12,745,698.59

Investment Costs $1,841,150.00

NPV After Investment Costs $10,904,548.59

**Fixed Costs Breakdown:• Associated marketing launch ($1,841,150.00) – Page 13• Increased incremental SG&A expenses for a two year

period ($1,800,000.00)• Potential lost sales of Mountain Man Lager for a two

year period ($1,877,304.00)

10

Target Audience Product – MM Light Promotion Price Placement

• Men aged 35 to 54 years old who drink premium, domestic beer.

• Men aged 35-54 years old make up approximately 46% of domestic premium beer drinkers.

• Males make up a staggering 70% of this category.

• Slightly higher

alcohol content,

distinctly bitter

flavour, high

perceived quality.

• Won numerous

awards such as

“America’s

Championship

Lager.”

• Great selling point

when marketing to

new States.

• Will emphasize the strong American image rooted in tradition and history.

• The challenge will be creating demand for a new product in a new State. This will be implemented through the tactics listed below.

• Product sampling will need to be done at local bars and independent alcohol stores.

• T.V. advertisements will be run for a six month period depicting the proven quality, “voted best beer in West Virginia and Indiana for eight straight years.”

• Can offer consumer promotions such as premiums (28 beers for the price of a case). Big incentive to purchase our brand.

• Quality, authenticity and patriotism are strong factors to influence purchase.

• Will keep the price the same for consistency, $4.99 for a 6-pack and $2.25 for a 12-ounce serving of draft beer.

• Will be sold in traditional channels like grocery stores, convenience stores and independent alcohol stores.

• Pennsylvania and Virginia are the two States MMBC will be expanding distribution to.

• We will need to purchase new transportation trucks and hire drivers to distribute the product.

Alternative 2: MMBC will expand distribution to Pennsylvania and Virginia as they are neighboring states to the East-Central region of the U.S.

• The NPV after investment costs is $2,645,606.00 which indicates a profitable move.*

• MMBC will need to sell 843,094barrels of Mountain Man Lightover a two year period in orderto break even.

• We are expected tosurpass this and sell1,091,880 barrels.

• This strategy is forecasted toincrease sales by approximately6% by the end of 2016. It willnot detract current corecustomers while gaining newones and it should help securethe company’s future.

• One drawback is that itdoes not take advantageof the opportunity toappeal to a youngeraudience.

11

Alternative 2: Increasing MMBC’s distribution to two new States is another viable solution to increase sales and secure the company’s future.

NPV (2006-2010E) $6,536,755.77

Investment Costs $3,891,150.00

NPV after Investment Costs $2,645,605.77

*Appendix 2: Page 14

Break Even Analysis Year 1 + Year 2$97 - $66.93 = $30.07

What We Need$25,882,990.00/$30.07

= 843,094 Barrels

Projected$33,520,728.07/$30.07

= 1,091,880 Barrels

Revenue $108,131,380.87

TVC $74,610,652.80

Gross Margin $33,520,728.07

Fixed Costs** $25,882,990.00

Net Income $7,637,738.00

**Fixed Costs Breakdown:• Investment costs ($3,891,150.00) – page 14.• SG&A expenses for a two year period ($21,991,840).

12

Alternative NPV After Investment Costs

Breakeven (2 year period)

Does it solve the short term and long term problem?

Rank

Launch Light Beer.

$10,904,548.00 217,433 barrels of MM Light.

• Forecasted to increase sales by 16% by the end of 2016.

• It will not detract current core customers and it will attract a younger audience which will help to secure the company’s future.

1

ExpandDistribution to Neighboring States.

$2,645,606.00 843,094 barrels of MM Lager.

• Forecasted to increase sales by approximately 6% by the end of 2016.

• It will not detract current core customers while gaining new ones and it should help secure the company’s future.

• Drawback of not capitalizing on attracting younger audience.

2

MMBC should move ahead with alternative 1 – launch light beer.

Appendix 1 13

Innovation 2006E 2007E 2008E 2009E 2010EMarket Size (Barrels)* 37,905,518 38,707,294 39,599,238 40,584,484 41,666,488

Market Share:

MM Lager 1.34% 1.24% 1.16% 1.09% 1.02%

MM Light 0.25% 0.50% 0.75% 1.00% 1.25%

Total Share 1.59% 1.74% 1.91% 2.09% 2.27%

TOTAL 2006E 2007E 2008E 2009E 2010E

Revenue $58,461,679.81 $65,330,170.86 $73,365,508.27 $82,276,925.24 $91,745,439.92

TVC $40,783,001.26 $45,985,503.94 $52,015,103.91 $58,674,490.74 $65,747,051.40

Gross Margin $17,678,678.55 $19,344,666.92 $21,350,404.37 $23,602,434.51 $25,998,388.52

Total Fixed Cost $11,895,920.00 $11,895,920.00 $11,895,920.00 $11,895,920.00 $11,895,920.00

Net Income After Taxes (35%) $3,857,151.06 $4,940,043.50 $6,243,772.84 $7,707,592.43 $9,264,962.53

Investment Costs Breakdown – Alternative 1• T.V. Advertisements $1,200,000.00 - Run 10 times per week x 4 weeks per month x 6 months x $5,000 per advertisement shown.• Creation of T.V. Advertisement $150,000.00• Consumer Promotion: Beer Premiums (28 for 24) --> $341,150.00

• 4 extra beers per case x 13.78 cases in a barrel = 55 extra beers per barrel.• 55 beers / 24 bottles (case) = approximately 2.3 extra cases.• $71.62 to produce a barrel of MM Light / 13.78 cases per barrel = $5.20 to produce a case.• $5.20 VC per case x 2.3 extra cases = Approximately $12.00 we have to pay per barrel.• 94,764 barrels of MM Light/10 months = 9,476.4 barrels x 3 months = 28,429.2 barrels.• 28,429.2 barrels x $12.00 = $341,150 for consumer promotion premiums.

• Consumer Promotions: Koozies, T-shirts, Caps $100,000.00• Consumer Promotions: Free Samples $200,000.00• Total Investment = 1,841,150.00

NPV (12% discount) $12,745,698.59

Investment Costs $1,841,150.00

NPV After Investment Costs $10,904,548.59

*The sum of the 6-year CAGR by type of beer consumed in the East-Central region of the United States has been applied to Market Size.

14Appendix 2

Innovation 2006E 2007E 2008E 2009E 2010EMarket Size (Barrels)* 37,905,518 38,707,294 39,599,238 40,584,484 41,666,488

Market Share:

MM Lager 1.45% 1.46% 1.48% 1.50% 1.53%

*The sum of the 6-year CAGR by type of beer consumed in the East-Central region of the United States has been applied to Market Size.• 1 truck can hold 30 kegs x 10 trucks = 300 x 2 trips per week = 600 x 52 work weeks in a year = 31,200 new kegs sold in 2006.

Investment Costs Breakdown – Alternative 2

• 10 Distribution trucks at $150,000.00 each $1,500,000.00• 10 Drivers at an annual salary of $50,000.00 $500,000.00• T.V. Advertisements $1,200,000.00 - Run 10 times per week x 4 weeks per month x 6 months x $5,000 per

advertisement shown.• Creation of T.V. Advertisement $150,000.00• Consumer Promotions: Free Samples $200,000.00• Consumer Promotion: Beer Premiums (28 for 24) --> $341,150.00

• 4 extra beers per case x 13.78 cases in a barrel = 55 extra beers per barrel.• 55 beers / 24 bottles (case) = approximately 2.3 extra cases.• $71.62 to produce a barrel of MM Light / 13.78 cases per barrel = $5.20 to produce a case.• $5.20 VC per case x 2.3 extra cases = Approximately $12.00 we have to pay per barrel.• 94,764 barrels of MM Light/10 months = 9,476.4 barrels x 3 months = 28,429.2 barrels.• 28,429.2 barrels x $12.00 = $341,150 for consumer promotion premiums.

• Total Investment = $3,891,150.00

TOTAL 2006E 2007E 2008E 2009E 2010E

Revenue $53,314,111.07 $54,817,269.80 $56,848,666.10 $59,050,424.82 $61,837,234.83

TVC $36,786,736.64 $37,823,916.16 $39,225,579.61 $40,744,793.12 $42,667,692.03

Gross Margin $16,527,374.43 $16,993,353.64 $17,623,086.49 $18,305,631.69 $19,169,542.80

Total Fixed Cost $10,995,920.00 $10,995,920.00 $10,995,920.00 $10,995,920.00 $10,995,920.00

Net Income After Taxes (35%) $3,693,803.38 $3,996,689.86 $4,406,016.22 $4,849,670.60 $5,411,212.82

NPV (12% Discount) $6,536,755.77

Investment Costs $3,891,150.00

NPV after Investment Costs $2,645,605.77