Strategic Plan

Prepared by: Steven Carlisle

Table of Contents
Executive Summary .....................................................................................................................4 Strategic Analysis ........................................................................................................................5 Market Assessment .................................................................................................................5 Current Industry Situation ...................................................................................................5 Competitive Variable Model Porters Five Forces ..............................................................6 Threat of Rivalry ..............................................................................................................6 Table 1: Market Concentration (C4) Measured by Market Share ..................................7 Table 2: Incidence of personal beer consumption, 2003-07 .........................................8 Threat of Substitute Goods ..............................................................................................8 Threat of New Entrants....................................................................................................9 Power of Suppliers .........................................................................................................10 Power of Buyers ............................................................................................................11 Strategic Mapping .................................................................................................................11 Figure 1: Strategic Group Map of Brewing Industry ...........................................................12 Major Competitors ................................................................................................................13 SABMiller ..........................................................................................................................13 Molson Coors ....................................................................................................................14 MillerCoors ........................................................................................................................14 Leap Growth Opportunities ...................................................................................................15 Value Innovation ...............................................................................................................15 Factors Industry Take for Granted .................................................................................15 Factors Taken for Granted and the Value to Customers .................................................17 Table 3: Top 15 super-premium and craft beer brands, 2004 and 2006 .....................18 Table 4: Top 10 regular imported beer brands, 2004 and 2006 ..................................19 Industry Offerings Consumers do Not Need ...................................................................19 Customer Wants Not Addressed ....................................................................................20 Customer Needs Not Addressed ....................................................................................20 Diamond Mining ....................................................................................................................21 Market Segmentation ...........................................................................................................22

Long-term Value Sophisticated Customers .....................................................................22 Short-term Value Unsophisticated Customers ................................................................23 Discontinuities.......................................................................................................................24 Economic ...........................................................................................................................24 Chart 1: Weighted Average of Currency Exchange Rates ................................................26 Political/Legal ....................................................................................................................27 Technological ....................................................................................................................28 Social .................................................................................................................................29 Demographic .....................................................................................................................31 Table 5: Personal consumption of beer by race/ethnicity, May 2006-June 2007 ............31 Table 6: Personal consumption of beer by household income May 2006-June 2007 ......32 Table 7: Incidence of personal consumption of beer by age May 2006-June 2007 .........33 International .....................................................................................................................34 Critical Industry Value Drivers ...............................................................................................35 Firm Analysis .........................................................................................................................37 Mission Statement ............................................................................................................37 Value-Chain Analysis .........................................................................................................38 Analysis of Primary Activities .........................................................................................38 Inbound Logistics .......................................................................................................38 Operations .................................................................................................................39 Outbound Logistics ....................................................................................................39 Marketing and Sales ..................................................................................................40 After Sales Service .....................................................................................................41 Analysis of Secondary Activities .....................................................................................42 Firm Infrastructure ....................................................................................................42 Management Profile ..............................................................................................42 Planning .................................................................................................................42 Scanning ................................................................................................................43 Culture ...................................................................................................................43 Financial Analysis ...................................................................................................44 Table 8: Financial Ratios of the Top Three Brewers Compared to Industry in 2007 ..........................................................................................................................44

Table 9: Anheuser-Busch Ratio Comparison 2003 - 2007 ....................................47 Legal ......................................................................................................................48 Quality ...................................................................................................................49 Human Resource Development .................................................................................49 Technology Development ..........................................................................................49 Procurement..............................................................................................................50 Analysis of Current Strategies ............................................................................................51 Critical Strategic Strengths and Weaknesses ......................................................................53 Table 10: Anheuser-Busch Distinctive Competencies, Strengths, and Weaknesses ........53 Business Plan ............................................................................................................................56 Recommendation Craft Brew Market .................................................................................56 Justification .......................................................................................................................56 Table 11: Purchase Price of Craft Brew Firms .................................................................57 Table 12: Projected Cash Flows over 5 years for Craft Beer Strategy ..............................58 Implementation.................................................................................................................59 Timeline ............................................................................................................................60 Chart 2: Timeline for Brewing Industry ..........................................................................60 Recommendation A-BNation.com ......................................................................................61 Justification .......................................................................................................................61 Table 13: Projected Cash Flows Over Project Life (5 years) for A-BNation.com Strategy.62 Implementation.................................................................................................................62 Timeline ............................................................................................................................64 Chart 3: Timeline for A-BNation.com ..........................................................................64 Recommendation Recycling................................................................................................65 Justification .......................................................................................................................65 Table 14: Projected Cash Flows Over Project Life (5 years) of Recycling Strategy ...........66 Implementation.................................................................................................................66 Timeline ............................................................................................................................68 Chart 4: Timeline for Recycling ......................................................................................68 Appendices ...............................................................................................................................69 Appendix 1 Craft Brew Estimates ........................................................................................69 Bibliography ..............................................................................................................................71

Executive Summary
In the brewing industry the hot trends in the market today come from mergers and acquisitions, marketing, and imports and craft beer. The first trend is larger payers in the market have been merging for the last few years to combat the leader in the market, AnheuserBusch. The second trend is marketing changes; companies are going back to the core brands and messages that made the core brands the best sellers. The final trend is in the craft beer and imports market; craft beer has continued its double digit growth, in 2007 it was 14%. The competitive environment of the brewing industry is high and therefore may not be as profitable. Increased threat in the market from craft beer, lack of after sales service, and rising costs from suppliers have cut into the profit of the company. All three of these areas are consistent with current trends in the market and therefore need to be addressed by AnheuserBusch. To combat the growth of the craft brew market Anheuser-Busch must purchase more independent craft brewers. Four brewers have been targeted for growth over the next year based on the region where they operate. We will purchase brewers in the Northeast, Southeast, Midwest, and West Coast. Over the course of five years as the companies are integrated into the Anheuser-Busch family growth of these brands will increase by 50% over what they are today. The purchase price is $4.7 million with a Net Present Value of $170,000. Currently, there is no after sales service in the brewing industry; firms do not reach out to consumers to measure attitudes, behaviors, or satisfaction. In order to grow the customer base, it is recommended that Anheuser-Busch create a new portal which will allow the entire family of brands to be marketed to consumers. The portal will replace the existing product websites and allow consumers to have one place for all things Anheuser-Busch including the entertainment division. The cost of producing this portal will be $52,000 with a Net Present Value of $122,000. Finally, Anheuser-Busch needs to combat rising costs of materials to the firm for packaging. We plan to utilize an existing resource, Anheuser-Busch Recycling Corporation, and expand the scope of the business to include paper, plastic, and glass. This will help lower threats from suppliers and costs of procurement. Collection sites will be set up at local distributors and liquor stores with Anheuser-Busch branded collection bins. The collection of recyclables will give consumers the impression that Anheuser-Busch is a greener company than the competition. The cost of this project is $1.4 million with a Net Present Value of $326,000.

Strategic Analysis
Market Assessment
Current Industry Situation In the brewing industry today, there is high competition between the top three or four largest firms. The firms produce a variety of beer which includes: light beer, premium beer, popular beer, super-premium, ice beer, malt liquor, and flavored malt beverages (Scopes and Themes, 2007). In addition to the products listed above, new players are entering the market in the form of craft beers which are typically made in smaller batches and are often seasonal. The current trends include: consolidated companies, changes in marketing, addition of craft beers and imports. In the brewing industry one current trend is to merge operations under a few larger brands (Hoover's Industry Snapshots, 2008). Hoovers Industry Snapshot states, Although it is in a close race with wine, beer remains the industry's top seller, and major brands are growing slowly. As a result, many global brewers are merging operations to reduce costs and gain market share (Hoover's Industry Snapshots, 2008). In recent months SABMiller PLC has started joint venture with Molson Coors Brewing Company in hopes to create more competition for beer industry leader Anheuser-Busch (SABMiller-Molson Venture Clears Hurdle, 2008). Furthermore, Anheuser-Busch was just presented an offer of purchase from InBev, one of the worlds largest brewers, in the amount of $46 billion (Sorkin & Merced, 2008). Another trend comes in the form of marketing; firms are starting to alter marketing of their brands to better appeal to newer customers or to get lost customers back. Coors Brewing Company has altered its own marketing strategies from the former T&A-driven effort that

starred the Coors Twins (Mullman, Coors soars as consistent Cold Train steams ahead, 2008) which did not help the company gain ground on market competitors, therefore Coors has returned to more traditional advertising that helped them become a larger player in the domestic beer market; they now focus on technological innovations and how the product is made. Other trends include growth in imports and craft beer which has helped the market grow (Market Size and Trends, 2007). According to Mintel, Domestic beer has consistently lost share to other alcoholic beverages, including distilled spirits, wine, and even imported beer (Market Size and Trends, 2007). Furthermore, seasonal beers have taken a strong hold in the beer market. Craft beers are better able to adapt to this market however, larger brewers have also jumped on the bandwagon but the results for larger breweries have not been as successful as those of craft beer. Clearly, innovation is on the side of smaller players, many of which are at the forefront of experimenting with beer styles and pushing the taste envelope forward (Market Size and Trends, 2007). To compete in the market today larger breweries need to be more innovative and introduce products that make people believe they are getting a craft beer. Competitive Variable Model Porters Five Forces Threat of Rivalry Threat of rivalry is high in the brewing industry. Threat of rivalry can be measured on two dimensions: market concentration and demand for product. Market concentration can be measured by the C4 Ratio (or top four firms) in which a market is considered to be concentrated if the C4 Ratio is 50% or higher. As a result

of high market concentration significant interdependence exists between firms in the industry. Additionally, if demand for a product is low the rivalry is high. In the brewing industry, the C4 ratio has been relatively constant over the last decade (see Table 1 below). Currently, the top four firms control 80.9% of the market while the largest player controls 48.2% of the market. Furthermore, the remaining three companies only control 32.7% of the remaining market.

Table 1: Market Concentration (C4) Measured by Market Share Firm 1998 2003 2004 2005 2006 Anheuser-Busch 51.6% 49.5% 49.4% 48.6% 48.2% SABMiller 19.0% 18.4% 18.5% 18.4% 17.8% Coors 10.2% 10.8% 10.6% 10.6% 10.9% Pabst No Data 3.9% 3.6% Approx. 2.1% Approx. 2.0% Heineken USA No Data Approx. 2.1% Approx. 2.2% 3.6% 4.0%
Sources: (Lazich, 2000), (Bossons-Martines, S & P Industry Surveys, 2006), (Bossons-Martines, S & P Industry Surveys, 2007), (Bossons-Martines, S & P Industry Surveys, 2007)

With market concentration extremely high, brewers are interdependent on one another. Due to the high market concentration and interdependences of the firms, if one firm launches a new advertising campaign, others will follow. Similarly due to the interdependency, if one firm launches a new beverage, others will try to copy that beverage. This can be seen in the 2007 launch of the new Miller Chill, a lime infused beer produced by SABMiller. AnheuserBusch recently introduced a new Bud Light Lime in April 2008 (Bud Light Lime Makes a Splash With Refreshing Twist, 2008). Demand in the brewing industry for traditional brews is regaining ground as gas prices rise; and consumers look for ways to reduce their expenses, however, it is still lower than that of micro and craft beer. As is shown in Table 2 on the following page, over the last four years

consumption of domestic beer has dropped by 4% while consumption of imported beer has increased by 1% and consumption of craft beer has decreased by 1%. In a recent article, Miller Brewing Company stated that People are still willing to pay a premium to have [high-end brands] but we've also seen a recent spike in our economy brands (Fackler, 2008). Molson Coors stated in a recent press release that April sales to retailersare up at a high single-digit rate (Reuters, 2008). Furthermore, Standard & Poors reports that, we think we may see some modest trading down by consumers from spirits and wine to beer as incomes are pressured in a softer economic environment (Esther Kwon, 2008). As a result, as the economy weakens, demand for domestic beer may have started an upward trend. The results of the extremely high market concentration and low demand provide evidence that rivalry between firms is high. Threat of Substitute Goods Threat of substitute goods is high in the brewing industry. There are many substitutes for the brewing industry ranging from other alcoholic beverages such as wine and liquor to non-alcoholic beverages such as soft drinks, bottled
Light/low-calorie beer Regular domestic beer Imported beer Micro-brewed (Craft) beer Ice beer No-alcohol beer Malt liquor 29% 29% 25% 11% 8% 5% 5% 29% 26% 26% 9% 6% 5% 4% 27% 25% 26% 10% 6% 5% 4%

Table 2: Incidence of personal beer consumption, 2003-07

2003 2005 2007 % Change over 4 years -2% -4% 1% -1% -2% 0% -1%

Source: (Mintel/Simmons NCS Fall 2006 , 2007)

water, and fruit juice. One article stated, Beer is losing market share to other beverages, to spirits and especially wine (Strenk, 2008, p. 83). Many liquor manufacturers are producing more pre-mixed bottle beverages. For example, Smirnoff Vodka has created new cocktails using their vodka. Additionally, Smirnoff now produces a beverage called Smirnoff Ice which is a malt beverage which comes in a variety of flavors (Smirnoff Ice, 2008). It is clear with the quantity of substitute goods in the market beer faces a larger threat from substitutes. Threat of New Entrants Threat of new entrants is high in the brewing industry. Threat of new entrants can be measured by demand for the product and entry barriers. Demand for domestic beer is relativly low, as compared to import beer and craft beer because many consumers tastes and preferences have changed along with the income level. One Standard & Poors article stated that consumption trends for imported beers and craft beers will also benefit from higher disposable incomes, as consumers trade up to better beers (Esther Kwon, 2008). With the advent of craft beers, it is no longer difficult for smaller companies to enter the brewing industry. However, with the rise of costs from materials, the trend toward introducing new craft brews into the market may start to drop. As a result of the emerging craft and micro brew industry and the import beer industry, the threat of new entrants is high.

Power of Suppliers Power of suppliers is moderately high in the brewing industry. Power of suppliers is measured on two factors: product differentiation and potential of vertical integration. In the brewing industry there is little product differentiation on the ingredients used and the type of packaging used. Furthermore, larger firms can afford to, and have, backwardly integrate into the packaging and growing of key ingredients. According to an article in The Wall Street Journal, The costs of virtually every commodity needed to make and market beer, from grains to aluminum, have been skyrocketing (2008, p. B8). Furthermore, in the United States, some U.S. farmers have reduced acreage, converted hops fields to other crops, or sold their farms to developers (Angrisani, 2008, p. 27). Finally, this article goes on to state that rising fuel prices have had an impact on ingredient costs. As for vertical integration, Coors had developed joint ventures for production of items such as aluminum and glass bottles to transportation (Molson Coors Brewing Company Form 10-K, 2007). Anheuser-Busch has operations that include: raw materials, packaging, transportation, and recycling (Anheuser-Busch Business Units, 2007). It is evident that brewers recognize that suppliers have control due to the backward integration techniques that these two companies have undertaken. As a result of increased costs from suppliers and the lack of vertical integration on the part of most breweries, it is clear that suppliers do have control in the brewing industry.

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However, by vertically integrating, Coors and Anheuser-Busch have attempted to lower the threat of suppliers. Power of Buyers Power of buyers is high in the brewing industry. Bargaining power of buyers can be measured by three factors: value cognizance, product differentiation, and demand characteristics. Value cognizance in the brewing industry for consumers is high because consumers recognize the brand differences of the key players of the industry. However, product differentiation in the brewing industry is relatively low; the three largest firms all make the same basic product. Furthermore, the rate of demand is still relatively low, as compared to craft brews, but has started an upward trend. Currently, one could infer that the power of the buyer is high due to high value cognizance, low differentiation, and low demand. Consumers could easily switch to a different brand if their preferred beer was not available or if the preferred brewer drastically altered the brew. Taking all five forces into consideration, the competitive nature in the industry is high; as a result, the industry may not be attractive or profitable. Furthermore, it may be difficult for current companies to compete unless they can counter the threats.

Strategic Mapping
Looking at the strateic groups located in Figure 1 on the next page, there are six distinct groups in the brewery industry based on price and quailty and three categories based on geographic region. The first category is local brews, which are produced in small batches and typically are not sold out of the home city; as Figure 1 shows in green, local brews typically only

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compete in one group based on price and quality. The second category is regional brews, which are produced in relatively small batches and typically are not sold outside a specific region; as Figure 1 shows in yellow, regional beers compete in two different groups based on price and quality. Finally, there are national brews which are produced in larger batches and sold through out the United States; as Figure 1 shows in blue, in the national brew category the companies compete on three different group based on price and quality. The top three domestic beer manufacturers are relatively consistent in following the medium and high price/quality and national coverage catagories. However, where they are missing opportunities falls in the regional and local markets where they would have to compete head-to-head with craft brews and micro-brews. For example, if they were to produce a low to medium priced beer in the Pennsylvania to Ohio region they would have to compete head-tohead with the Pittsburgh Brewing Company which produces Iron City beer.

Figure 1: Strategic Group Map of Brewing Industry

Michelob Leinenkugel High

Shiner Bock

Boont Amber Ale

Price/Quality

Medium

Miller Bud Light Coors

Iron City

Low

Colt 45

Local

Regional

National

Geographic Region

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Major Competitors
In the domestic brewing industry there are three key players: two of these players compete head to head with Anheuser-Busch. SABMiller was formed when South African brewery SBA purchased Miller in 2002 (Our History 2000 - 2008, 2008). Molson Coors was formed when Canadian brewery Molson and American brewery Coors joined forces in 2005. SABMiller The second place brewery based on Market Share is SABMiller. SABMillers corporate office is located in Woking, Surry; SABMiller is currently traded on two stock exchanges; London and Johannesburg. Over the last year the stock price has lost ground at -15.90% (Share Price Chart, 2008). A further analysis of the financial statements is presented in the Firm Analysis section. SABMiller has a broad range of product lines with 29 different products under nine different brands. The spectrum includes offerings on the national level with price points low to high range. SABMiller also competes globally in several countries. The companys strategic goals include: Creating a balanced and global spread of business, Developing strong, relevant brand portfolios in the local market, Constantly raising the performance of local businesses, and Leveraging our global scale (Our strategic priorities, 2008). SABMiller currently serves the majority of developed nations and a few that are developing. It is clear that SABMiller has clear goals set for the company; each of the strategies has a clear definition for the company to follow.

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Molson Coors The third place brewery based on Market Share is Molson Coors. Molson Coors corporate office is located in Toronto, Canada; Molson Coors is currently traded on the New York Stock Exchange. Over the last year the stock price has gained ground at around 1.19% (New York Stock Exchange, 2008). A further analysis of the financial statements is presented in the Firm Analysis section. As the third place brewery based on market share in the United States, Molson Coors has a narrow range of product lines with 12 different products under seven brands. The spectrum includes offerings on the national level with price points in the mid to high range. Molson Coors also serves several international markets. The companys strategic vision states, Our vision is to be a top performing brewer winning through inspired employees and great brands. As an innovative, brand-led company, we will drive growth, deliver results, reinvest in productivity, and build a winning, value-based culture (Molson Coors Corporate Responsibility, 2008). Molson Coors has a strong vision; however, there are no clear measurable attributes defining how the company plans to achieve this vision. MillerCoors In June 2008 SABMiller and Molson Coors entered into a joint venture to merge companies in the United States. As a result, this merger will give the combined company approximately 30% of market share. Further, SABMiller and MCBC expect that the enhanced brand portfolio, scale and combined management strength of the joint venture will allow their

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businesses to compete more vigorously in the aggressive and rapidly changing U.S. marketplace and thus improve the standalone operational and financial performance (2007, p. 4). At this time it is not possible to assess the impact of the joint venture on the industry and should be reevaluated over the course of the next year to measure the impact.

Leap Growth Opportunities

Value Innovation Factors Industry Take for Granted In the brewing industry the factors that the larger breweries take for granted include: brand image, craft brews, growing import beer markets, and pairing beer with food. The first factor the big three breweries take for granted is brand image. The marketing campaigns are designed to give the consumer the impression that drinking their brand will provided them with a certain lifestyle. They have forgotten about brand attributes that consumers are looking for in the form of taste the increasing importance of this factor is indicated by the finding that the fastest growing segment of beer is in craft brew. In fact, the growth in the craft brew segment for 2007 was eight times the amount of domestic beer (Theodore, 2008). The second factor that big three breweries take for granted comes in the form of craft brews. In the craft beer markets, larger breweries have been slow to respond to the increased pressure from these smaller companies. One article stated, theres a lot of potential in the craft beer phenomenonits a real opportunity for big brewers to widen their product portfolio and reach a new customer (Strenk, 2008, p. 83). One company has reacted; Molson Coors has

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produced Blue Moon starting in 1995 and most people do not know that it is produced by Coors (Strenk, 2008). The craft beer market had an increase of 12% in consumption over the industry standard of 1.5% for domestic beer (Theodore, 2008). The third factor the big three breweries take for granted comes from the import beer market. In the beer market, sales were up according to one industry report 1.5%; domestic beer was up 1.5% while import beer was up 1.4% in 2007 (Theodore, 2008). However, this article goes on to state that Im still seeing signs of trading up as the top five performing beer brands were all high end (Theodore, 2008, p. 14). Anheuser-Busch has tried to take a stab at the import market by entering into a joint venture with InBev to distribute its top brands in the United States. However, for Anheuser-Busch the addition of craft and import beers has hurt the company; The number one U.S. brewer-which holds about 49% of the market-stumbled last year as it absorbed dozens of new import and craft brands into its wholesaler network. There were supply-chain woes and marketing stumbles (Mullman, Brewing Battle, 2008) according to one article. The final factor the big three breweries take for granted is in the food and beer pairing arena. It has long been tradition for diners to order wine with Veal Marsala at their local Italian restaurant. Restaurants such as Ruth Chris Steak House will suggest wine to go with your dinner. Pizza restaurants have started to suggest beer with dinner to improve the dining experience, providing diners the best beverage to complement their meal. However, the big three are missing out! When looking at industry trade magazines they all discuss pairing craft

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brews with a meal and since the big three are lacking in this area they are losing sales to these craft brews. Factors Taken for Granted and the Value to Customers Factors that the big three breweries take for granted are: craft beer, brand image, and import beer. The big three provide no value for consumers even though one firm has tried to enter this market. Brand image is a place that consumers find value but the big three take this for granted when developing advertising campaigns and sell a lifestyle rather than the product. Finally, the big three take for granted the impact of the import beer market in hopes that the products they sell will carry the company and consumers will not switch. In the craft beer segment the big three breweries provide no value for customers. Miller, Anheuser-Busch, and Coors are lacking products that fall into the craft beer segment. As a result, the big three are missing out on an important segment of the market. Coors has attempted to add a craft beer with Blue Moon and it has been successful; however, as Mintel/Adams Beverage Group reports it is not in the Top 15 Super-premium and craft beer brands, as can be seen in Table 3 on the next page. Furthermore, Anheuser-Busch, Coors, and SBAMiller have products in the top 15 (Michelob, Michelob Amber Bock, Michelob Golden Draft, George Killians Irish Red, and Leinenkugel Original Premium); however, these brands are considered super-premium and not craft beers.

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Table 3: Top 15 super-premium and craft beer brands, 2004 and 2006
Brand Supplier 2004 Thousand 2.25-gallon cases Yuengling Traditional Lager Samuel Adams Boston Lager Michelob Sierra Nevada Pale Ale Michelob Amber Bock George Killian's Irish Red Fat Tire Amber Ale Shiner Bock Widmer Hefeweizen Michelob Golden Draft Light Saranac Amber/Golden/Pale Ale Henry Weinhards Redhook ESB Pyramid Hefeweizen Leinenkugel Original Premium Yuengling Brewery Boston Beer Anheuser-Busch Sierra Nevada Brewing Anheuser-Busch Molson Coors Brewing New Belgium Brewing Gambrinus Widmer Brothers Brewing Anheuser-Busch F.X. Matt Miller Brewing Redhook Ale Brewery Pyramid Breweries Jacob Leinenkugel/Miller Brewing 18757 9500 11500 7314 6800 7585 3710 3234 2194 3000 2750 3200 2120 870 1236 2006 Thousand 2.25-gallon cases 21765 10700 8200 7685 7100 6800 4510 4026 3100 3000 2850 2800 2500 1335 1200 Change 2004-06 %

16 12.6 -28.7 5.1 4.4 -10.3 21.6 24.5 41.3 0 3.6 -12.5 17.9 53.4 -2.9

Source: (Mintel/Adams Beverage Group, 2007)

Value for customers comes from the image that their preferred brand compromises. Some brewers advertise more heavily during sporting events even going as far as to sponsor events; while other brewers advertise lifestyles. As a result, manufacturers are starting to alter the messages they send through advertisements. One article states, Miller Genuine Draft will snag more TV time with a test of two ad messages--one tactic presenting MGD as the beer for consumers with higher standards (Beirne, 2008). On another front, Anheuser-Busch has decided to start looking for marketing to appeal to non-sports fans (Beirne, 2008).

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In the import beer segment, the big three are also lacking, as shown in Table 4 below, the top performers are foreign owned companies. As a result, the big three are missing out on an important segment of the market. Only one company has a division in the United States, Heineken USA whose parent company is based in the Netherlands. In order to compete in the international beer market, domestic breweries need to purchase or develop joint ventures that will allow for importation of these international beers. Table 4: Top 10 regular imported beer brands, 2004 and 2006
Brand Supplier 2004 2006 Change 2004-06 %

Thousand Thousand 2.25-gallon cases 2.25-gallon cases Corona Extra Heineken Modelo Especial Tecate Labatt Blue Guinness Stout Becks Dos Equis Stella Artois Bass Grupo Modelo Heineken USA Grupo Modelo Heineken USA InBev Diageo-Guinness InBev Heineken USA InBev InBev 97,930 63,125 10,951 14,569 14,196 10,774 7,602 5,865 2,359 6,285 116,218 68,500 19,616 17,775 12,800 11,753 7,700 7,500 6,250 5,650

18.7 8.5 79.1 22 -9.8 9.1 1.3 27.9 164.9 -10.1

Source: (Table listing for Imported Beer and Flavored Alcoholic Beverages - US - December 2007, 2007)

Industry Offerings Consumers do Not Need When it comes to beer consumers do not really find value in innovation based on trends. In an article found in Beverage World, the author stated, During the low-carb trend we saw a host of beverages aimed squarely at the low-carb consumer. Some of them had successful debuts, but time has shown it to be a weak platform on which to build a brand (Foote, 2005). The article goes on to state that the rise of Light beer were not reactions to a

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consumer consumption fad; they were harbingers of change in the American diet. They addressed consumer needs, not trends (Foote, 2005). Customer Wants Not Addressed The customer want not being addressed by the big three breweries in the United States is craft beer. The largest want that consumers have that is not being addressed by the big three is in the form of craft beer. Anheuser-Busch tried and has not succeeded in the manufacture and marketing of the craft beer brands they purchased. In Cheers to Craft the author states, Consumers are trading up to products with more character, taste and variety and just more history, heritage and tradition vs. mass marketed products (Furman, 2005). This further supports that the big three are underperforming in the area of customer wants. Customer Needs Not Addressed The consumer need not being addressed by the big three in the United States is substitute goods. The area of consumer needs not addressed by the big three breweries comes in the form of substitute goods. Of the big three, none of them offer any substitute goods to replace beer in the United States. For example, SABMiller has purchased two facilities in Zambia which bottles and distributes Coca-Cola (SAB buys into Coca-Cola in Zambia, 2002). This purchase not only gives SABMiller alternatives to beer but will also allow the company access to the beer market in Zambia.

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Diamond Mining
In the beer industry, the big three breweries have advantages that they could utilize in other markets. These advantages are: recycling, production, and packaging. The first advantage the big three could use in other markets is in the area of recycling. Anheuser-Busch currently owns and operates an aluminum recycling center. They could expand this division of the company to include other items such as paper, glass, and plastic. If they were to expand this area of the business they could cut their operating costs related to purchases of raw materials to make packages for the products they sell. Additionally, the company would be able to advertise, using green marketing, they are helping the environment by cutting waste. Furthermore, as more and more companies are looking for lower cost options, Anheuser-Busch could leverage this division and expand further into other areas of recycling. For example, they could benchmark Caterpillars efforts through Progressive Rail Services and find ways to recycle materials like steel (Caterpillar, Inc. Businesses & Brands, 2008). The second area of advantage for the big three breweries comes to production of the final product. They are in a position to leverage these advantages into other markets; for example, soft drinks, bottled water, and bottled juice. As previously pointed out, SABMiller owns and operates two Coca-Cola facilities in Zambia which has given them access to markets that were previously unattainable. The big three could expand their product lines by either acquiring a current beverage company or by developing their own beverages. Furthermore, the breweries are in a position to enter into the craft beer and local beer markets by either

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purchase or new product innovation on a smaller more regional scale. The results of either entering into the soft drink market or entering into the craft brew market would help to further diversify the companies. Additionally, entering into the soft drink market would give the companies access to markets that have previously been unavailable to them. The final area the big three could use to their advantage comes in the form of packaging. Currently both Coors and Anheuser-Busch, either through joint venture or ownership, operate their own manufacturing facilities for bottles. The companies could expand this portion of the business and create divisions solely responsible for package manufacturing which would include: glass and plastic bottles, cans, cardboard boxes, etc. By leveraging the size of the company they could capture a new market and help to lower the cost of raw materials for their own needs.

Market Segmentation
Long-term Value Sophisticated Customers In order to keep current sophisticated customers, firms need to accomplish two things: enter the craft beer market and enter the import market. Sophisticated customers seek out craft brews; domestic beer market leaders must get into the craft brew market which will allow them to remain the market leaders. The upscale customer is looking for more option when considering alcoholic beverages, in particular beer. This can be seen in the growth of the craft beer market. Firms need to figure out a way to enter these markets, not on a large scale but on more regional/local scale. To accomplish this, firms could purchase or create craft brews based on regions throughout the United States.

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Furthermore, domestic beer manufacturers need to enter the import beer market. These firms need to utilize their power and purchase international companies and get the imports cleared through the government to add to the product mix already being sold in the United States. By getting into the import market, firms will continue to cater to the upscale customers. Short-term Value Unsophisticated Customers For firms to continue to create value for themselves it is important to move unsophisticated customers into the sophisticated customer segment. In order to accomplish the domestic firms must educate these customers through marketing. There are two types of unsophisticated customer. The first is the customer that continually goes after the same type of beer; for example, those customers that drink only Budweiser; we will call these customers bottom of the keg. The second type of unsophisticated customer is the customer that typically drinks craft beer with dinner and does not realize that there are domestic beers that will complement the meal just as nice as a craft brew; we will call these customers top of the keg. By educating unsophisticated customers, firms will be better positioned to offer more specialty beer. To convince the bottom of the keg consumers to trade up the domestic breweries need to look at marketing. One way that domestic beer brewers can educate the bottom of the keg customer is through a sampling program at local bars. Wine bars typically have wine tastings to educate customers in hopes that customers will trade up to more expensive blends. Domestic beer manufacturers can learn from the marketing efforts of the wine country. A second way

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that domestic beer companies can get bottom of the keg drinkers to trade up is to implement some form of contest around the more expensive products. In order for domestic beer companies to get the top of the keg consumer to trade up is through marketing. These consumers will not respond to traditional marketing of advertisements; however, if domestic firms partnered with casual dining restaurants to pair beer selections with their meal, similar to wine pairings, the top of the keg drinker will respond. For example, Anheuser-Busch could partner with Applebees Grill and Bar and get recommended beers listed on the menu under the food selections.

Discontinuities
Economic There are several economic issues that breweries operating in the United States need to be aware of when forming strategies. First, there has been an increase of mergers and acquisitions resulting in larger conglomerates that compete based on economies of scale. Second, the economy is softening; therefore, consumers have less money to spend on luxury items. Third, the cost of goods to manufacturers is increasing making producing goods more expensive. Finally, the value of the dollar as compared to other countries is falling thereby making it cheaper to import goods into the country and increasing demand for these imports. In recent times, large domestic beer companies have merged to better compete in an ever increasing market. SABMiller and Molson Coors recently announced they are joining forces to better compete with Anheuser-Busch. The CEO of Molson Coors was quoted on the SABMiller website stating, This combination of our two highly complementary U.S. businesses

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creates a stronger brewer and allows us to compete better (SABMiller and Molson Coors sign definitive agreement to form MillerCoors U.S. Joint Venture, 2007). This statement is obviously in relation to the 49% market share of Anheuser-Busch. InBev, the worlds largest brewer offered Anheuser-Busch $46 billion for the purchase of the company. Anheuser-Busch studied the offer and ultimately decided against the buy out on the basis that the bid was not high enough (Birnbaum, 2008). Currently, the economy in the United States is trending downward and the Fed has warned about inflation (What's News, 2008). With gas prices on the rise, brewers need to be aware that consumers are starting switch to lower costs beverages as income shrinks. Additionally, consumers are seeing that there money is buying less and as a result luxury items like beer may no longer be a top of the mind purchase. SABMiller reported that they have seen more demand for lower priced beer since January (The Associated Press, 2008). Furthermore, brewers will be better able to position domestic beer as a replacement for craft brews and international beers. Breweries need to keep in mind that consumers income is not going to stretch as far and should promote that their products are less expensive than import and craft beers. As was previously stated, one of the biggest issues that brewers face is the increase in cost of goods for manufacture i.e. aluminum and grains. As the Wall Street Journal reported in April 2008, prices for all inputs are on the rise due to economic pressures in the market and crops being changed by farmers to other forms of grains (Anheuser-Busch Profit Slips 1.3% as Costs Rise, 2008). Additionally, the rising cost of gas has impacted transportation costs for

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brewers. The larger brewers can take advantage of their economies of scale to purchase larger quantities which could lead to volume discounts for these items. The final economic factor affecting the brewing industry is the value of the dollar as compared to other countries. Exchange rates of the Dollar as compared to other countries directly affect the import and export of beer. For example, if the US Dollar is at 1.4234 as compared to the Euro it will take 1.4234 Dollars to get 1 Euro. As Chart 1, below, points out, since January 2000 the exchange rate of the dollar as compared to other currencies is falling. The trend make imports cheaper to bring into the United States allowing beer import companies to better compete in the market. As a result, brewers who export their products need to position themselves in foreign markets as a premium beer. Chart 1: Weighted Average of Currency Exchange Rates

Weighted Average of Currency Exchange Rates

January 2000 - July 2008
120.0000 100.0000 80.0000 Rate 60.0000 40.0000 Month/Year Rate Linear (Month/Year Rate)

20.0000
Mar-01 Dec-02 May-02 Mar-08 Jul-03 Apr-05

Oct-01

Jan-00

Jun-06

Feb-04

Aug-00

Sep-04

Jan-07

Month/Year

Nov-05

Source: (United States Federal Reserve, 2007)

Aug-07

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Political/Legal Domestic brewing companies face a great deal of political and legal pressure from the community. Breweries operating in the United States face several political and legal issues ranging from underage drinking to drunk driving. However, there are other issues that these companies need to take into account. The first issue comes in the form of marketing energy drinks based with alcohol added. Next, there has been a rise of issues surrounding online content and it being accessible to underage drinkers. Finally, there are increased pressures for companies to lower heath care costs by charging employees premiums based on behavior. One of the more recent issues has been the addition of caffeine to energy drinks. A suit was filed by several state attorney generals to stop the sale of caffeinated energy drinks based on the type of marketing they pursue (Alcoholic Energy Drinks Under Scrutiny, 2008). As a result, Anheuser-Busch pulled their energy drinks this month (Anheuser-Busch To Stop Selling Alcoholic Energy Drinks As Part of Legal Settlement, 2008). Another legal issue surrounding the domestic beer brewers is online content. Recently beer manufacturers have been under fire saying that the web presence does not do enough for keeping underage people out of their web sites. For example, Anheuser-Busch has faced increased pressure to do more after the launch of its Bud.tv web site (Mullman, A-B Lowers its expectations for Bud.TV, 2007). The final legal issue surrounding domestic beer brewers is the potential for companies to crack down on drinking as they have done with smoking to promote a healthier work environment. In a recent article, Whirlpool suspended workers who it claims misrepresented

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themselves on their health benefits forms saying that they were non-smokers. This was apparently done to get around paying a surcharge that the company imposes on smokers (Marquez, 2008). The result for breweries is increased pressure to lower the cost of healthcare to better compete could force companies to begin to include drinking alcoholic beverages in this type of program. Technological In the brewing industry there is not a high amount of technological innovation. The first area is innovations with the type of brewing equipment and packaging in the form of aluminum bottles and green packaging. The second area comes in the form of micro-breweries. Microbreweries have impacted the market because smaller companies can enter the market and compete and tend to innovate more often than larger breweries. The first form of technological innovation is found in equipment and packaging. There are more efficient machines that require less labor to run and provide better energy efficiency which performs the job better than traditional labor while saving the company valuable labor costs (Saunders, 2007). Furthermore, consumers are seeking out greener products and there is a new bottle for packaging beer; aluminum bottles. Aluminum bottles are slowly replacing glass as consumers become greener. In the article, Designing a Green World it states, People are interested in using that technology, stretching the boundaries of shaping and decorating the bottle (Scott, 2008, p. 32).

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The second form of technology comes from the advent of micro-breweries. Microbrewers typically push innovation in beer. According to one website, Craft brewers are an innovative lot. Often, innovation means taking old or established ideas and applying them in new ways (Rabin, 2008). The article then goes on to discuss a brewery in Colorado that created a new system for pasteurizing beer that involves a tunnel built underground. Furthermore, micro-brewers typically experiment with adding different flavors to beer such as one brewery that crafted a beer using lavender. Social The main social issues in the alcoholic beverage industry come in the form of advertising. The first issue from advertising comes in the form of whether the advertisement is designed for people of drinking age or not. The second issue from advertising comes in the form of imagery and copy, the text used in the advertisement. The third issue from advertising comes from the impact of responsible drinking campaigns. Finally, the fourth issue comes from the way social status around healthy lifestyles The first issue deals with advertisements aimed at people of drinking age. Often, these advertisements come into question as to whether or not they are actually aimed at underage consumers. Beer manufacturers claim that they put the warnings in place to discourage underage drinking. In a 1998 study, teens viewing print and television advertisements eye movements were tracked. The article compares Diet Coke and Miller Light viewing by teens and the length of time spent looking at the advertisement. The end result was that the teens spent more time looking at the Miller Light advertisement than the Diet Coke advertisement.

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One conclusion stated, About one third of those students did not look at the cautionary statement think when you drink (Fox, Krugman, Fletcher, & Fisher, 1998, p. 67). From this study, one can argue that beer advertisements need to pay attention to the imagery that is used and the message context that is being sent. The second issue in the social area comes in the form of visual imagery and wording used in advertisements. One recent billboard advertisement featured a popular Mexican beer with the slogan Finally, A Cold Latina, as you can imagine this advertisement caused an uproar in the Latina population. As a result, one can assume that the advertisement had damaged the image of the company in the consumers eyes (Martinez, 2007). It is clear that the industry executives that approved this advertisement had not taken the cultural issues surrounding stereo types into consideration. The third issue from advertising is the push of responsible drinking campaigns. Over the years government groups, political groups, and social groups have increased pressure on alcoholic beverage makers to include some form of warning in advertisements about responsible drinking. Then there are groups like Mothers against Drunk Driving who have started advertising using fear tactics about driving drunk. Some states have even started requiring the use of specialized equipment in cars for DUI offenders that measures the blood/alcohol content and will keep the car from starting if the level is over the state mandated levels.

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The fourth issue comes in the pressures to lead a healthy lifestyle. In response to the growth of the healthy lifestyle, the alcoholic beverage industry has started making various versions of low-fat, low-carb beer drinks; this trend can be seen in any local grocery or package store. As was discussed earlier, these fads may not be a good source to build a brand on and that the introduction of light beer was based on the change of the diet in the United States. Demographic Demographic trends in the United States are shifting; nationalities, income levels, and age play a major factor in beer preferences. As more and more foreign born people come to call the United States home, breweries need to be prepared to alter the current offerings. Income levels will continue to rise (or fall); breweries need to be prepared to change marketing strategies on a moments notice and introduce premium beverages that appeal to people with higher incomes. With the aging population, breweries need to respond by catering to this market that has higher disposable income while keeping in mind the young professionals. The first area of concern in demographics come from the shift in demographics in the United States; the beer industry needs to pay attention to the product offering to ensure that they have flavor profiles
Race/ethnicity: White Black Asians Hispanics

Table 5: Personal consumption of beer by race/ethnicity, May 2006-June 2007

Any % 47 38 34 46 Light % 29 17 17 25 Regular domestic % 26 24 25 22 Microbrew % 11 3 6 5 Ice % 5 11 4 7

Source: (Mintel/Simmons NCS, 2007)

that go with ethnic cuisine (Mergers, acquisitions and changing demographics, 2007).

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Demographic trends in the United States are shifting toward a more diverse culture and with that shift beer consumption is shifting right along. Table 5, on the previous page, shows that in the area of regular domestic beer Hispanics and Asians make up almost 50% in the category that the big three breweries compete in heaviest. In the light beer category, Hispanics and Asians make up 42% of the population.

The second issue in demographics that a brewer needs to consider comes from income levels. In most industries, income plays a factor in marketing and innovation. As the economy worsens the beer industry needs to keep in mind they need to be able to shift marketing strategies based on lower incomes due to the shrinking wallet in the United States. More importantly, the beer industry needs to keep in mind that as income increases so do beer preferences. One article stated, The primary drivers of trading up are growth in real incomeand the composition of income (Cioletti, 2006). The article then goes on to point out, as a result
Income: Under $25K $25K-49.9K $50K-74.9K $75K-99.9K $100K+

Table 6: Personal consumption of beer by household income May 2006-June 2007

Any % 34 41 46 50 55 Light % 17 23 28 34 34 Regular domestic % 20 23 24 28 31 Microbrew % 4 5 10 12 18 Ice % 8 7 6 5 5

Source: (Mintel/Simmons NCS, 2007)

of this trend companies in the alcoholic beverage industry have seen an increase in profits over the years (Cioletti, 2006). To further support this notion of increased income equals higher consumption of premium beer see Table 6 above. As is shown in the Microbrew category, as

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income increases from $25,000 to $100,000 or higher there is a shift of 14 percentage points in the consumption of microbrew. However, one can not discount the fact that in the light and regular categories there is also an increase but the increase is not as great. The third issue in demographics that brewers need to consider comes from age. With the aging population in the United States, brewers need to keep in mind that consumer tastes may change as well. The Baby Boomer population has more disposable income when they retire than their parents had and with that comes more discretionary spending on luxury items like beer. As Table 7 below points out, at this time, age does not really play a major factor in beer consumption as do both demographics and income. However, breweries still need to plan for the shift. On the other hand, younger people are turning to microbrews so breweries need to plan accordingly to appeal to this segment of the market. Table 7: Incidence of personal consumption of beer by age May 2006June 2007
Any % Age: 21-24 25-34 35-44 45-54 55-64 65+ 49 50 52 48 43 31 Light % 31 31 33 28 25 16 Regular domestic % 29 28 28 27 25 17 Microbrew % 11 13 12 12 8 3 Ice % 12 8 7 6 4 2

Source: (Mintel/Simmons NCS, 2007)

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International The first international issue that the brewing industry faces comes from mergers and acquisitions which have created massive changes. Miller and SAB, a South African brewery, merged into one company in 2002. Coors and Molson, a Canadian brewery, joined forces in 2005; more recently in 2008, SBAMiller and Molson Coors created a joint venture in the United States to better compete with Anheuser-Busch. InBev, the worlds largest brewery announced in June 2008 that they wanted to buy Anheuser-Busch. These mergers and acquisitions have done nothing to help the three breweries to compete with international beers; instead, it is creating a more concentrated market. In order to better compete in the industry, the big three (or now big two) need to think about purchasing international breweries to add to the product mix in the United States. The second international area of concern for brewers comes from trade barriers. In 1993 a report was written that discusses the trade barriers between the United States and Canada. Domestic companies complained that because Canada had restrictions on beer imports that in order to compete domestically; the US Government needed to put tariffs on beer imported from Canada (Wickens & Lowther, 1993). Not only are trade barriers affecting the import market but also the export market. Many brewers are trying to grab a piece of the pie in India. An article about beer trends in India it states that beer consumption is one of the lowest in the world. According to the article, Brewers must contend with a dizzying list of bureaucratic restrictions that make it tough and expensive to win customers and to build a national footprint. Steep tariffs render imports uncompetitive. And state excise taxes of as

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much as 150% can push the price of a pint of domestic brew up to more than $3, or about triple what a shot of local whisky might cost (Lakshman & Carter, 2007, p. 50). Brewers need to keep in mind these emerging markets and how profitable they may become as time goes on. The third international issue that breweries need to consider comes from emerging markets. India is a very attractive market in most consumer goods; however, as was pointed out above, it ranks in the bottom of consumption for the world. Even though it ranks in the bottom, companies are setting up joint ventures with Indian companies to produce domestic beer internationally. Another up and coming emerging market is China where Craft Brews have already started to enter. Molson was the first beer importer to China according to one article (Mills, 1994). In order to compete, domestic brewers need to introduce their own craft brews and consider joint ventures to get their product to market.

Critical Industry Value Drivers

In the area of critical value drivers for the brewing industry there are a few things that the big three can do to incrementally increase their share of the market and a few things they can do to achieve larger growth. To incrementally increase the market companies can: develop substitute goods, develop or purchase craft brews, and purchase international beer breweries. To achieve larger (leap) growth the big three need to: use existing facilities to enter new industries. The first incremental increase comes in the form of substitute goods. These beverages would be alternative alcoholic beverages to compete head to head with pre-mixed cocktails

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that are offered by manufacturers such as Bacardi. This form of entrance will capture the portion of the market that does not regularly consume beer. The second incremental increase comes in the form of craft brews. The craft brew market is growing faster than domestic beer; therefore, the big three should either create their own blends or purchase regional or local craft breweries to help capture this portion of the market. The final area of incremental increase comes in the form of international beer. With the shift in demographics and the fact that more Americans are trading up to imports the big three need to increase this area of their business. The increase in import beer would help the companies capture shifts in demographics and also help to capture the portion of the beer market that turns to imported beer. The area that firms need to tackle in the leap growth area comes in the form of diamond mining. Currently, the big three have access to business units that produce packaging, recycling, and top of the line production processes. If the firms leveraged the packaging component they could enter into the package market and make bottles, cans, and boxes for other drink manufacturing companies. The firms could then leverage the aluminum recycling component to further expand the business. By benchmarking other recycling firms, the big three could help create a greener world and then promote this key fact. Furthermore, these companies could use their technology to expand into the soft drink, water, or juice industry.

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Firm Analysis
Mission Statement The Anheuser-Busch mission statement as quoted from the customer service department is (Lisa, 2008): Our Mission:

Be the world's beer company. Enrich and entertain a global audience. Deliver superior returns to our shareholders.

Upon reading the mission statement it is clear that Anheuser-Busch needs to reevaluate the mission of the company. A mission statement should include the definition of the business, statement of core values, and major goals and objectives (Hill & Jones, 2004). The statement above does not include core values or major goals and objectives. The definition of the company, Be the worlds beer company is weak and does not include who are the customers, what needs are being satisfied, and how the needs will be addressed; instead it is focused on the product of the company (Hill & Jones, 2004). The core values statement should include values, norms, and standards of which the firm was founded (Hill & Jones, 2004). The goals and objectives of the firm should focus on mid to long-term goals (Hill & Jones, 2004). Any organization not including these three components in the mission statement does not provide clear guidance to its stakeholders. Furthermore, the mission statement is a core part of the business and should be accessible on the company website and included in the annual report; Anheuser-Busch does neither of these, the mission statement had to be requested from the Customer Service Department through e-mail.

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Value-Chain Analysis Value-Chain analysis provides a unique look into the inner-operations of the company. We look at both Primary Activities of the company and Secondary Activities of the company. There are three types of outcomes in the value-chain analysis Distinctive Competencies, Strengths, and Weaknesses. Distinctive competencies are areas in which the company outperforms the competition. Strengths are areas in which the company performs well but does not outperform the competition; instead the company is in line with the industry norms. Weaknesses are areas in which the company is underperforming as compared to the competition or areas where the company or industry does not perform. Analysis of Primary Activities Inbound Logistics As compared to the other competitors, inbound logistics is a distinctive competency for Anheuser-Busch. Anheuser-Busch owns and operates Manufacturers Railway Company which operates a fleet of insulated beverage railcars and grain hopper cars (Anheuser-Busch Business Units, 2007). Additionally, Anheuser-Busch also owns its own farms which Produces and enhances the quality of raw materials for the company's beers (Anheuser-Busch Business Units, 2007); located in Bonners Ferry, Idaho and Huell, Germany (Anheuser-Busch Business Units Major Operations, 2007). In addition to these two areas, Anheuser-Busch also has operations in grain elevators, mills, and seed. The competitors do not have these types of operations and has to outsource these areas.

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Operations As compared to the other competitors, operations are a strength for Anheuser-Busch. Anheuser-Busch Produces more than 100 beers, flavored alcohol beverage and non-alcohol brews at 12 breweries in the United States and 15 around the world and imports other beers for distribution in the United States (Anheuser-Busch Business Units Major Operations, 2007). Anheuser-Busch practices productivity programs to help cut operating costs. In 2007, this included a new program to achieve additional operating cost efficiencies (Anheuser-Busch 2007 Annual Report, 2007). In the brewing industry, all three of the major brewers are operating at or near the same area on experience curves and economies of scale; therefore these two areas do not provide a competitive advantage to Anheuser-Busch. When compared to the competition, this is an area that they all perform well in and it must be maintained in order to compete. Outbound Logistics As compared to other competitors, outbound logistics is a distinctive competency for Anheuser-Busch. Manufacturers Railway Company allows for delivery of beer to four breweries (Anheuser-Busch Business Units, 2007). Additionally, Anheuser-Busch owns and operates the St. Louis Refrigerated Car Company which Manages rail/truck transload operation and other properties in St. Louis (Anheuser-Busch Business Units, 2007). This unit of the business gives Anheuser-Busch strength in getting the product to the end consumer. Furthermore, AnheuserBusch has a network of distributors where it sells nearly 70 percent of the companys volume through exclusive wholesalers (Anheuser-Busch Business Units Major Operations, 2007).

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Moreover, Anheuser-Busch operates 13 company-owned distributors (Anheuser-Busch Business Units Major Operations, 2007). The competitors do not have the outbound transportation and has to outsource this operation to get the product to the end consumer. Further, the competitors have distribution networks in place but none are of the scale that Anheuser-Busch maintains. Marketing and Sales As compared to the competitors, marketing and sales is considered a strength for Anheuser-Busch. Anheuser-Busch is a market leader in advertising through innovation of ideas and campaigns. Promotion, channel selection, pricing, and product mix for Anheuser-Busch are industry norms. Anheuser-Busch was the first brewery to utilize a themed advertising campaign in the 1880s (Anheuser-Busch, 2008). Early on the founder realized that different consumers had different tastes and therefore created a family of brands each one geared to a different consumer. In 2008 Anheuser-Busch celebrated its 10th consecutive USA TODAY Ad Meter victory. The USA TODAY Ad Meter is a real-time consumer poll that ranks Super Bowl ads throughout the game (Anheuser-Busch, 2008). In addition to being a trend setter through advertising, Anheuser-Busch has decided that to increase its advertising spending this year in order to try and get consumers to switch after the merger of SABMiller and Molson Coors in the United States (Mullman, A-B primes marketing pump, looks to take advantage of turmoil in '08, 2008). It is clear that Anheuser-Busch is the leader and the rest of the brewery industry follows their lead in advertising.

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Advertising is where the strength ends for Anheuser-Busch; promotion, channel selection, and pricing fall into line with the rest of the industry. All of the major competitors sponsor events and programming in order to ensure their product is seen by the masses. The channel selections for marketing that are typically used include event sponsorship, team sponsorship, and magazine and internet advertising. Furthermore, pricing within the industry is relatively constant due to the high level of industry concentration. As a result, Anheuser-Busch is following the industry trends and needs to think outside the box to push the boundaries of promotion, channel selection, and pricing which would give them a distinctive competency in this area. After Sales Service In the brewing industry there is little to no after sales service; as a result this is a weakness that Anheuser-Busch faces. The company could encourage consumers to visit the internet site and register to become part of the Anheuser-Busch family. As part of this, the company could send out periodical surveys to gain input from consumers on product related issues.

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Analysis of Secondary Activities Firm Infrastructure As compared to the competitors, firm infrastructure is considered a strength for Anheuser-Busch. Management Profile The Board of Directors at Anheuser-Busch has a high level of experience in the brewing industry. From the Chairman of the Executive Committee, August A. Busch, III with 45 years of experience on the board to the newest member August A. Busch, IV with two years experience on the board. The entire board has a combined 202 years of experience on the board; however, the company may want to consider rotating some of the members to gain new perspectives. The board has a good mix of outsiders to the company as compared to insiders, people who work for Anheuser-Busch. As for decision making, there are no records of management performance therefore the analysis of the top management of the firm cannot be completed. To further complicate matters, there are no bios of the directors therefore one cannot asses the diversity of the board. As compared to the competition, Anheuser-Busch fails! SABMiller and Molson Coors both have Bios of the board and also how each board is operated. Anheuser-Busch could simply add the bios of the board and top management to the website. Planning Anheuser-Busch does not plan well for the business and as a result, net income has slipped. The company underwent some changes in 2006 altering the scope of the business. As a result, net income has increased. One of these changes included getting into the craft beer

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segment of the market. As was previously mentioned, craft beer grew at a rate of 14% in 2007. To answer this issue, Anheuser-Busch developed its own specialty beers and forged partnerships with several craft brewers (Anheuser-Busch 2007 Annual Report, 2007). This area is one that Anheuser-Busch needs to pay attention to improve its firm infrastructure. Scanning Anheuser-Busch dose scan the market well and as a result, however, competitors are at times able to introduce products that consumers want faster. In 2007 SABMiller introduced Miller Chill, a lime infused beer and in 2008 Anheuser-Busch introduced Bud Light Lime. Nevertheless, they continue to introduce new items to the market faster; for example, in 2007 Anheuser-Busch noticed that Hispanics put tomato juice in their beer so Anheuser-Busch introduced Budweiser and Bud Light that has tomato juice included (Anheuser-Busch 2007 Annual Report, 2007). This is another area that Anheuser-Busch needs to focus on to improve the firm infrastructure. Culture Anheuser-Busch culture is one of diversity and community. On the employment website it states, When you become a part of our family, your input, ideas and insights are accepted and valued (Busch Careers, 2008). The company also sponsors several different programs ranging from education of African Americans to Hispanic scholarships for college (AnheuserBusch Community Diversity, 2007). The company also takes part in various other initiatives including Teach for America, Susan G. Komen Race for the Cure, Habitat for Humanity, and United Way just to name a few. Furthermore, Anheuser-Busch has several employee groups

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supporting different groups of employees. In comparing them to the competition, they are similar with differing employee groups, program sponsorships, and initiatives. Financial Analysis Anheuser-Busch is a leader in the brewing industry from market share to product innovation. How do they stack up against the competitors based on financial results? Table 8 below shows several financial ratios and companies with the industry standard. The industry standard was calculated as a weighted average based on the market share for the top three competitors. Table 8: Financial Ratios of the Top Three Brewers Compared to Industry in 2007
Ratio Current Ratio Debt Equity Ratio Asset Turnover Revenue Per Employee Account Receivables Turnover Return on Assets Return on Equity Return on Sales P/E Ratio Industry Average 0.83046 1.98778 0.93299 0.56898 19.98504 0.09614 0.45898 0.12617 14.17043 AnheuserBusch 0.87877 2.90021 1.10689 0.61554 20.72243 0.12331 0.67118 0.12760 18.75986 SABMiller 0.58984 0.18305 0.64797 0.27812 24.81148 0.05738 0.11447 0.15059 0.19434 Molson Coors 1.02376 0.87538 0.61849 0.85770 8.16134 0.03696 0.06954 0.07705 17.09000

Current Ratio measures the ability of a firm to pay off its debt in the short term using cash, inventory, and accounts receivables. A ratio of less than one implies that a company could not pay off its debt. Both SABMiller and Anheuser-Busch fall in this category, see Table 8 above. However, Anheuser-Busch is over the industry average and Molson Coors is over the average and would be able to pay off debt in the short term.

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Debt Equity Ratio measures how much the company utilizes financing to fund the growth of the company. Anheuser-Busch is above the industry average and therefore relies heavily on financing to fund growth of the company, see Table 8 above. Part of this may come from the entertainment division which owns and operates several theme and water parks throughout the country. In the theme park industry, companies have to innovate in order to compete year after year. Neither SABMiller nor Molson Coors has any interest in the theme park industry. Looking specifically at the theme park industry, Cedar Fairs Debt Equity ratio is 6.08737 (Cedar Fair 2007 Annual Report, 2008) therefore, the Anheuser-Buschs debt equity for the brewing portion of the business may be lower. Asset Turnover measures how well the company utilizes its assets in producing goods and sales. Anheuser-Buschs Asset Turnover is above the industry average therefore does well at utilizing its assets in producing products and sales. Furthermore, Anheuser-Busch utilizes its assets better than the competitors as is noted in Table 8 on the previous page. Revenue per Employee measures the productivity of employees. Anheuser-Busch is just above the industry average therefore may have more employees that it needs to be productive. It is important to note that Molson Coors has far fewer employees and has higher Revenue per Employee than the industry, see Table 8 on the previous page. Anheuser-Busch may need to take a look at how Molson Coors is operating to see if it can benchmark it operations. Accounts Receivable Turnover measures how efficient the company collects is at collecting on accounts. Anheuser-Busch is above the industry standard at 20.722 which means that it collects on accounts in an average of 20 times each year; see Table 8 on the previous

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page. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient (Receivables Turnover Ratio, 2008). Return on Assets measures how much had to be invested in assets to generate $1 in sales. Anheuser-Buschs Return on Assets is higher than the industry average therefore, for every $1 invested in the company earns .12331 of profit as compared to the industry average, see Table 8 on page 44. In part this means that the managers are efficient in planning how to use its resources (Return on Assets, 2008). Return on Equity measures how well the company spends investors money to generate profit. Anheuser-Busch is slightly better than the industry at planning and spending investors money; see Table 8 on page 44. On the other hand Molson Coors is poor in the area of spending investors money. As a result, potential investors would be enticed to buy into Anheuser-Busch and not Molson Coors. Return on Sales measures how well a company is generating sales for every dollar spent on production. Anheuser-Busch is just above the industry average and therefore needs to pay closer attention to production costs, see Table 8 on page 44. However, it is important to note that of the three, Anheuser-Busch leads the pack because it is earning more money than it costs to produce products where the competitors are losing money on production. Price-Earnings Ratio or P/E Ratio measures how much growth investors are expecting in the future (Price Earnings Ratio, 2008). Anheuser-Busch is performing higher than the industry along with Molson Coors; therefore, investors in both companies are expecting future growth,

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see Table 8 on page 44. It is worth pointing out that the P/E Ratio of SABMiller is very low as compared to the industry and therefore, investors should not expect much growth. To get a better picture of how well a company is operating, one needs to look at several years worth of the above ratios. Overall Anheuser-Busch is performing better in all areas than the 2007 Industry Average. As Table 9 below points out, Return on Invested Capital had a weak year in 2005. Return on Invested Capital measures how well the managers are at providing returns to its lenders and shareholders. Furthermore, based on the 2007 Industry standard, Anheuser-Busch is performing quite well year over year. One area that needs to be addressed by managers is Revenue per Employee. As was pointed out before, Anheuser-Busch is just above the industry average and therefore needs to benchmark what the competition is doing to increase productivity. A second area that the company may want to address is the Account Receivables Turnover; the trend is longer times to collect on accounts and shows that the current collection practices may no longer be working. Table 9: Anheuser-Busch Ratio Comparison 2003 - 2007
Current Ratio Debt Equity Ratio Asset Turnover Revenue Per Employee Account Receivables Turnover Return on Assets Return on Equity Return on Sales P/E Ratio Return on Invested Capital Industry 2007 0.8305 1.9878 0.9330 0.56898 19.9850 0.0961 0.4590 0.1262 14.1704 N/A 2003 0.8778 2.6867 1.1110 2.8644 24.3803 0.1413 0.7655 0.1620 21.2419 1,621 2004 0.9235 3.1028 1.0610 2.8832 24.6519 0.1385 0.8397 0.1639 18.3141 1,721 2005 0.8871 2.3845 1.0422 0.4776 25.3207 0.1111 0.5501 0.1192 18.2809 1,259 2006 0.8145 1.9432 1.0965 0.5950 21.8232 0.1200 0.4989 0.1449 19.4466 1,378 2007 0.8788 2.9002 1.1069 0.6155 20.7224 0.1233 0.6712 0.1276 18.7599 1,454

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Legal The largest area of concern for Anheuser-Busch in the legal area is in lawsuits based on underage drinking and the market of the product. In California, Michigan, Ohio, West Virginia, and Wisconsin a suit was filled that claimed that marketing specifically focused on underage drinkers. In the Anheuser-Bush 2007 10-K is stated, These suits had named a large number of other brewers and distillers and sought to blame minors intentional violations of state alcohol laws on lawful product advertising, generally asserting theories of consumer fraud, unjust enrichment and public nuisance (Anheuser-Busch 2007 10-K, 2008). The cases have since been dismissed and are no longer a current threat; however, these types of suits will always be brought on by the public. Another issue in the legal environment for Anheuser-Busch concerns one of the suppliers of cansheets. It stems around the agreement and the company, Novelis Corporation and the fact that they feel in 2006 that aluminum process had increased and wanted to charge Anheuser-Busch more for each sheet of aluminum. Novelis feels that Anheuser-Busch breached its contractual duty pursuant to the b.10 provision to "meet to discuss a new pricing mechanism with the continued intent to provide competitive pricing to A-B" in good faith (Novelis Corporation, 2008). Anheuser-Busch claimed that Novelis had intended to raise the price and as a result breeched the contract. The issue was closed as the judge found that Novelis had in fact violated the terms of the agreement (Novelis Corporation, 2008). The 2007 10-K goes on to state that The Company is not a party to any other pending or threatened litigation, the outcome of which could be expected to have a material adverse

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effect upon its financial condition, results of operations or cash flows (Anheuser-Busch 2007 10-K, 2008). Quality Quality for Anheuser-Busch comes in many different forms; quality of beer, entertainment, marketing, materials, and production (Anheuser-Busch 2007 Annual Report, 2007). The company does not specifically state quality standards however, as compared to its competitor does a good job ensuring that they have quality products. Furthermore, the Longhorn Glass Corporation in Texas has become a benchmark for other such facilities (Anheuser-Busch 2007 Annual Report, 2007). Human Resource Development As compared to the competitors, human resource development is considered a strength for Anheuser-Busch. In evaluating each of the breweries career areas on their websites each of them offer the same types of positions, compensation, and hiring practices. SABMiller and Molson Coors have a clearly defined strategy for employee retention; this is due to the merger of the two firms in North America; Anheuser-Busch has no clearly defined strategy for developing its personnel. Technology Development As compared to the competitors, technology development is considered a strength for Anheuser-Busch. Anheuser-Busch leads the industry in implementation of computerized technology for production and sales (Anheuser-Busch 2007 Annual Report, 2007). However, Coors leads the industry on product innovation for packaging. One article states about Coors,

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a constant stream of innovations touts special tap handles that pour beer below freezing temperatures; labels that turn blue when the beer is cold enough to drink; frost-lined cans; and a lined 12-pack case that holds ice (Mullman, Coors soars as consistent Cold Train steams ahead, 2008). The most recent package innovation from Anheuser-Busch was the aluminum bottle in 2005. As compared to Molson Coors, Anheuser-Busch has some learning to do in the technology development arena. Additionally, as was stated earlier, the brewers operating in the craft beer market have newer production facilities that require less labor and energy. Procurement As compared to the competitors, procurement is considered a distinctive competency for Anheuser-Busch. Anheuser-Busch is a leader in the field for procurement activities; from the business unit that produces its cans and lids to its packaging business unit. No other competitor has the capacity or resources that Anheuser-Busch has built into its network through backward vertical integration. As stated in the 2007 Annual Report, Like all brewers, in 2007 the company experienced cost increases in raw materials due to the rising prices of brewing ingredients, but Anheuser-Buschs inventory management and strategic acquisition programs positioned the company well. (2007, p. 12). With this statement in mind one can see why procurement is a distinctive competency. The Metal Container Corporation business unit not only produces aluminum cans and lids at its eleven plants for the company; but, also helps to increase profitability through selling suppliers to other companies (Anheuser-Busch Business Units, 2007). The Anheuser-Busch Recycling Corporation is the recycling unit of the company. This unit provides lower cost advantages to the company for materials as it recycles

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used aluminum (Anheuser-Busch Business Units, 2007). Eagle Packaging, Incorporated Supplies 100 percent of Anheuser-Busch requirements for liner material for both the crowns and closures used in beer packaging (Anheuser-Busch Business Units, 2007). Finally, Longhorn Glass Corporation manufactures glass bottles for the brewery in Houston, Texas (AnheuserBusch Business Units, 2007). Through vertical integration, Anheuser-Busch has the advantage in procurement when compared to its competitors. Analysis of Current Strategies One of the first strategies that Anheuser-Busch has for 2008 is to revitalize current brands (Anheuser-Busch 2007 Annual Report, 2007). It plans to do this by increasing advertising spending by 10% (Anheuser-Busch Optimistic about U.S. Beer Sales and Profitability, 2008) in hopes to reinforce brand images of Budweiser and Bud Light. Over the last few years, the company has lost sight of these two brands. Furthermore, to support the increased costs Anheuser-Busch has successfully raised its prices (Anheuser-Busch Cos. Reports Improved Sales and Earnings Per Share for the First Quarter2008, 2008). This strategy is consistent with current industry trends as the domestic beer market is a Mature Industry. By implementing this strategy they are engaging in market signaling and price leadership. Another key strategy that Anheuser-Busch is focusing on this year is its marketing strategy (Anheuser-Busch 2007 Annual Report, 2007). With the recent announcement of SABMiller and Molson Coors joining forces to better compete in the North American market, Anheuser-Busch has decided that they need to refocus marketing efforts in hopes of gaining consumers. It plans to focus on fewer brands with it advertising message to help grow the

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market (Anheuser-Busch Optimistic about U.S. Beer Sales and Profitability, 2008). This press release goes on to state, This strategy includes more frequent updates of ad creative and increased media weight, especially over the key summer selling months (Anheuser-Busch Optimistic about U.S. Beer Sales and Profitability, 2008). This strategy is also consistent with current industry trends; considering this industry is in the mature phase, this type of marketing helps to deter other companies from entering the market. The third strategy that Anheuser-Busch plans to focus on this year is new product launches. With the introduction of several new products in the first quarter the company realized a net sales increase of 6.2%. The products introduced included innovative new products, such as Bud and Bud Light Chelada, and Landshark Lager (Anheuser-Busch Optimistic about U.S. Beer Sales and Profitability, 2008). Like the previous two strategies in a mature market, this is also consistent with current industry trends. This type of strategy helps increase the differentiation of the company and increase competitive pressures. The final strategy that Anheuser-Busch plans to focus on this year is international expansion. The leading market for Anheuser-Busch is China which is the largest and fastest growing beer market in the world (Anheuser-Busch Optimistic about U.S. Beer Sales and Profitability, 2008). As a result of operations in China and Mexico where it has a 50 percent investment in Grupo Modelo, the leading brewer in Mexico and the brewer of Corona, the leading U.S. import brand (Anheuser-Busch Optimistic about U.S. Beer Sales and Profitability, 2008) the company has realized a pretax income was up $18 million, primarily due to increased profits in China, Canada and improved results in the United Kingdom (Anheuser-

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Busch Cos. Reports Improved Sales and Earnings Per Share for the First Quarter2008, 2008). This strategy is also consistent with current industry trends of consolidation. However, this strategy is not consistent with an industry that is in the mature phase; rather, it is a strategy typically used in a declining industry. Critical Strategic Strengths and Weaknesses Table 10: Anheuser-Busch Distinctive Competencies, Strengths, and Weaknesses Value Chain Activity Performance Inbound logistics Distinctive Competencies Outbound logistics Procurement Operations Strengths Marketing and sales Firm infrastructure Human resource development Technology development After sales service Weakness

Anheuser-Busch has several areas where they perform well and a few areas they could use improvement a summary can be seen in Table 10 above. Of the distinctive competencies listed above for Anheuser-Busch, all three areas are critical importance to the success of the company. In the strength category, Anheuser-Busch needs to focus on firm infrastructure and technology development to move these two into the distinctive competency category. In the weakness category, Anheuser-Busch along with all of the other firms in the market needs to pay attention to after sales service to develop it into a strength before the competition.

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Anheuser-Busch has distinctive competencies in the areas of inbound logistics, outbound logistics, and procurement. In order to remain successful, these three areas need to be further refined to increase profitability. If Anheuser-Busch can continue to utilize these three areas they will continue to hold the dominate position in the market. In the strength category there are two areas that Anheuser-Busch needs to focus on in order to move them into the distinctive competency category; firm infrastructure and technology development. This will enable Anheuser-Busch to fend off hostile takeover by competition. In order to improve firm infrastructure, Anheuser-Busch needs to focus on scanning the industry, diversifying the board, and planning for growth. Anheuser-Busch would have noticed a few years ago that the craft brew market was taking off if it had scanned the industry. As a result, they just entered into the market in 2007 and had poor results with the brands they acquired either through joint venture or purchase. Another area that they could have spotted was the trend of different cultures in the United States. If the board was more diverse, the company may have introduced culturally inspired beverages faster. As a result, SABMiller was able to introduce Miller Chill one year ahead of them. The final area of firm infrastructure that Anheuser-Busch needs to focus on is planning. The company seems to be aligned along business units and functional areas rather than product lines in addition to a vertical hierarchy. As a result, the firms profits started slipping and they had to undergo some changes to the way the firm is organized. Net Income started slipping in 2005 and had the company been

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organized by product line and the hierarchy was horizontal it may have been able to alter the strategies faster to meet the demands of the market. In order to improve technology development Anheuser-Busch needs to encourage employees to experiment with package design and needs to rethink its bottling process. Coors is the market leader when it comes to package design and customers have noticed. From the label that turns blue to the box that holds ice customers love technology so much that it has helped to boost profits even if the innovations do not really improve the drinking experience. The second area that would help in technology development is in the area of production. Current Anheuser-Busch operates twelve breweries; the most recent opening was in 1993. The company needs to look at new methods for production of smaller batches to improve the craft beer segment they entered into last year. New brewing technology will help to lower costs through less labor and less energy which will increase net profit. Focusing on these two areas, firm infrastructure and technology development, would allow Anheuser-Busch to add them to the distinctive competencies of the organization. In the weaknesses category all three of the top brewing firms fail at after sales service. Anheuser-Busch and the others may not see the importance of this type of service as they are a product oriented firm that caters mostly to wholesalers. If Anheuser-Busch were to lead the market in creating a more consumer friendly website that includes options to join ABnation.com with periodical e-mail surveys to gauge changes in consumer taste and preference along with satisfaction, the company could lead the market in after sales service. Focusing on after-sales service would move this area from a weakness into a strength.

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Business Plan
Recommendation Craft Brew Market
Anheuser-Busch entered into the craft beer market late in the game and did not plan accordingly. Instead they jumped into the craft brew segment by acquiring a few smaller firms. For the first strategy, Anheuser-Busch needs to focus on is growing the craft beer segment of the business. They can do this in two ways, first would be create their own craft beer and second purchase, form joint ventures, or partner with smaller craft breweries to expand the market. As it takes time and money to invest in product development, of which AnheuserBusch has neither; because, the current debt/equity of the company is higher than the industry average and has come under fire as a potential hostile takeover target for InBev. AnheuserBusch should form partnerships through purchasing ownership share of smaller firms to increase this portion of the business and diversify the company. Justification The strategy expansion of the craft beer segment will be using an incremental-growth strategy. This strategy will decrease the competitive threat, decreases power of the buyer, and creates more barriers to entry. Even though Anheuser-Busch tried previously to enter the craft beer market and did not have great results the company can still be a key player in this market. The addition of the four selected companies; along with the suggested timeline will allow successful integration into the Anheuser-Busch family. Additionally, these opportunities will allow Anheuser-Busch to learn how to become a key player in the craft beer market as each of these firms understands the craft beer market. Furthermore, as the companies are integrated

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into the family, this would be considered product innovation because they could then build on the craft beer lines of the acquired companies. It will cost an estimated 4.7 million to purchase a percent of ownership in these four firms. Table 11, below, provides a breakdown of the estimated value of each firm, the percent of ownership being purchased, and the purchase amount. Goose Island will get the majority of funding for the purchase as it is the larger firm and has more geographic coverage. Erie Brewing Company has a smaller market which is reflected in the purchase price. Table 11: Purchase Price of Craft Brew Firms
Value of Company Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon Total purchase Price $ 4,050,000 $ 2,400,000 $ 900,000 $ 2,100,000 Percent of Ownership 0.49 0.49 0.51 0.51 $ $ $ $ $ Purchase Price 1,984,500 1,176,000 459,000 1,071,000 4,690,500

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Table 12 below shows investment, sales, costs, depreciation, cash flow, and the net present value calculated based on five years of sales. The discount rate is at the industry standard of 12% and the NPV is greater than zero; therefore, the firm should invest in this strategy.

Table 12: Projected Cash Flows over 5 years for Craft Beer Strategy
2008 Investment Outlays Sales Revenue Estimated Operating Cost Depreciation Equipment EBIT Taxes on Operating Income (40%) NOPAT Add Back in Depreciation Operating Cash Flow Est. Salvage Value of Equipment (30%) Projected Cash Flow Discounted Cash Flows (ROR=12%) NPV (5,315,500) (5,315,500) 169,791 1,150,653 917,294 1,415,521 1,128,445 1,593,932 1,134,529 1,786,773 1,135,527 -5315500 3,835,509 2,001,087 125000 1,709,422 683768.84 1,025,653 125000 1,150,653 4,759,035 2,483,167 125000 2,150,868 860347.3 1,290,521 125000 1,415,521 5,381,109 2,807,889 125000 2,448,220 979288.002 1,468,932 125000 1,593,932 6,053,497 3,158,875 125000 2,769,622 1107848.872 1,661,773 125000 1,786,773 6,356,072 3,316,819 125000 2,914,254 1165701.466 1,748,552 125000 1,873,552 187500 2,061,052 1,169,496 2009 2010 2011 2012 2013

The investment outlay, seen in Table 12, for the strategy of developing partnerships includes the purchase price of $4.7 million; see Table 11 on page 57, and equipment costs to upgrade the facilities after the purchase. The purchase price includes all legal and regulatory fees. The sales revenues for each year are estimated to total $26.4, see table 12, million and was determined by taking the sales of comparable firms and multiplying that by the estimated growth of 5%, then that was multiplied by the percent of ownership and after that the estimated growth after the purchase. The estimated costs shown, in Table 12 includes the cost of goods sold and manufacturing costs associated with the partnership. These estimates were

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taken from the Applied Technology Website where it estimates costs of 5000 barrels to be $522, 457 (20 BBL. BOTTLE-PROFIT, 2002). For a more detailed breakdown of the costs revenue stream see Appendix 1. Implementation In order for the craft brew segment to grow, Anheuser-Busch needs to form partnerships with smaller craft beer brewers. The firms that Anheuser-Busch should enter into partnerships with are: Goose Island Beer Company in Chicago, Illinois, Highland Brewing Company in Asheville, North Carolina, Erie Brewing Company in Erie, Pennsylvania, and Devils Canyon Brewery in Belmont, California. For this analysis it is assumed that all four would be willing to enter into a partnership. The reason these four firms have been chosen is that they each carry a good selection of beverages and serve different markets across the United States. In these joint ventures, Anheuser-Busch would have a minority interest in two of the firms and a majority interest in the other to firms. The minority interest would be in Goose Island Beer Company and Highland Brewing Company because these firms are more established and it would be costly to purchase a majority of ownership. The majority interest would be in Erie Brewing Company and Devils Canyon Brewery because these two firms are small and distribution needs to be expanded. As part of the partnership, Anheuser-Busch would offer its help in production and distribution of the products. In addition, the companies would share revenues with Anheuser-Busch.

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Timeline The timeline for completion of the joint ventures is one year; each joint venture is expected to take thirteen weeks. During these weeks discussions with each company will start one week before negotiations; negotiations will last twelve weeks. Chart 2: Timeline for Brewing Industry

Q3 08

Q4 08 Sep Oct Nov Dec Jan

Q1 09 Feb Mar Apr

Q2 09 May Jun

Q3 09 Jul

ID 1 2 3 4 5 6 7 8 9 10 11 12

Task Start Talks with Goose Island JV - Goose Island Beer Company Complete Goose Island Start Talks with Erie Brewing JV - Erie Brewing Company Complete Erie Brewing Start Talks with Highland Brewing JV - Highland Brewing Company Complete Highland Brewing Start Talks with Devils Canyon JV - Devils Canyon Brewery Complete Devils Canyon

Start 7/28/2008 8/4/2008 10/24/2008 10/27/2008 11/3/2008 1/23/2009 1/26/2009 2/2/2009 4/24/2009 4/27/2009 5/4/2009 7/24/2009

Finish 8/1/2008 10/24/2008 10/24/2008 10/31/2008 1/23/2009 1/23/2009 1/30/2009 4/24/2009 4/24/2009 5/1/2009 7/24/2009 7/24/2009

Duration
Jul Aug

1w 12w 0w 1w 12w 0w 1w 12w 0w 1w 12w 0w

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Recommendation A-BNation.com
Currently each of the Anheuser-Busch products has its own web site. The second strategy consists of building a new web portal for the Anheuser-Busch brands, A-BNation.com. This portal will be home to the entire family of Anheuser-Busch products. Currently, with each product having its own web site there is no information about other Anheuser-Busch products therefore, if a consumer sees an advertisement on television and tried to look up the product at www.budlight.com and the product was a Budweiser product they would not find the product advertised. The result is, if a consumer sees a commercial about a product on television and is not sure what the name of the product was they can just click their way to A-BNation.com and research the different products. Justification The strategy of creating A-BNation.com will give Anheuser-Busch the competitive advantage in the after sales service area using a leap-growth strategy by creating value innovation. Furthermore, the strategy will increase service innovation for the company by allowing consumers to have a voice in types of marketing, products, and provide insight on competitors. It is estimated that the cost of creating the portal is $52,000 for the purchase and development. Further it is estimated that marketing costs will total $500,000 as the portal will be added to all packaging and currently planned marketing. The $625,000 will cover the cost of POP and other related items. Table 13 on the next page gives a breakdown of the expected revenues, costs, projected cash flows, and the net present value. Costs associated with the

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purchase of the domain name are estimated at $2,000 and the development of the portal, testing, and hosting are estimated to me $50,000. The discount rate is at the industry standard of 12% and the NPV is greater than zero; therefore, the firm should invest in this strategy. Table 13: Projected Cash Flows over Project Life (5 years) for A-BNation.com Strategy
Investment Outlays Sales Revenue Site Maintenance Marketing Estimated Operating Cost Depreciation EBIT Taxes on Operating Income (40%) NOPAT Add Back in Depreciation Operating Cash Flow Estimated Salvage Value Projected Cash Flow Discounted Cash Flows (ROR=12%) NPV 2008 (52,000) 2009 2010 2011 2012 2013

50,000 50,000 125,000 175,000 (125,000) (125,000) (125,000) (52,000) (52,000) 121,921 (125,000) (111,607)

100,000 51,500 125,000 176,500 (76,500) (76,500) (76,500) (76,500) (60,985)

250,000 53,045 125,000 178,045 71,955 28,782 43,173 43,173 43,173 30,730

500,000 54,636 125,000 179,636 320,364 128,145 192,218 192,218 192,218 122,158

750,000 56,275 125,000 181,275 568,725 227,490 341,235 341,235 341,235 193,626

Implementation By recreating a portal encompassing all of the brands Anheuser-Busch would create one place where consumers could get information about the Anheuser-Busch family. In order for the new portal to happen the marketing department needs to sit down and decide on site content. Once becoming a registered user, consumers could set up preferences for their preferred product and the portal would be designed to focus on that product. However, one area of the home page for each consumer will be consistent across all product lines, that area

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will be scrolling information about new products and suggestions for food and beverage pairings. This portal will be useful in educating consumers about other products that AnheuserBusch sells. Furthermore, another feature would be the option to opt into a consumer advisory board. This advisory board would include surveys about new marketing campaigns, new product interest, and opinions about competitor product lines. Another feature would be the addition of information about the Anheuser-Busch Entertainment division with links to contests and information about each park. The addition of this portal will allow Anheuser-Busch to promote all products and services that the company offers.

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Timeline The creation of A-BNation.com will take three and a half months. The process will start with sending out a request of proposal offer to marketing firms. After a firm is chosen, the site name and creation of site will take place. After the first round of modifications are complete, the site will be approved or changes will be made and a test site will be built. After the site is uploaded and tested bugs will be fixed and the site will go live. After allowing the site to be active for approximately a week a marketing blitz will start with a contest for admission to one of the Anheuser-Busch Entertainment parks. In order to be included in the running, users must register for A-BNation.com. Chart 3: Timeline for A-BNation.com
Aug 2008 Sep 2008 8/24 8/31 9/7 9/14 9/21 9/28 Oct 2008 10/5 10/12 10/19 10/26 11/2

ID 1 2 3 4 5 6 7 8 9

Task Name Send out offer of proposal Choose Firm to create site Purchase site name Firm creates mock site Presentation and modifications to site Site changes approved, modifications made if needed Site uploaded and tested Bugs fixed and Site Launched Initial Marketing Campaign Starts

Start 8/4/2008 9/1/2008 9/8/2008 9/8/2008 10/6/2008 10/13/2008 10/20/2008 10/27/2008 11/3/2008

Finish 8/29/2008 9/5/2008 9/8/2008 10/3/2008 10/10/2008 10/17/2008 10/24/2008 10/31/2008 11/3/2008

Duration
8/3 8/10 8/17

4w 1w .2w 4w 1w 1w 1w 1w .2w

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Recommendation Recycling
The third strategy consists of increasing the recycling business units scope. Currently the recycling unit focuses only on aluminum. This strategy would increase the scope to paper, plastic, and glass. By utilizing the recycling program, Anheuser-Busch will be able to accomplish two things. The first area comes in the form of green marketing and the second area comes in the form of reduced raw materials cost for packaging. Justification The strategy of creating diversification of the recycling division would improve procurement activities through internal development. Even though Anheuser-Busch is in the brewing industry they are also currently operating in the recycling industry so adding the capability of recycling paper, plastic, and glass would be considered closely related to this industry. This strategy would be considered cost leadership in incremental-growth strategy. It would decrease power of suppliers because Anheuser-Busch would be obtaining more of the raw materials it uses in production and packaging from internal sources. Additionally, it decreases the threat of substitutes because the firm can lower prices through savings it gains from vertically integrating. It is estimated that this project would cost $1.4 million in initial outlays. Of that $1 million would be improvements to the existing recycling facility, $200,000 would be for the collection bin design and manufacture, and $200,000 would be for the benchmarking of Caterpillar and Severnside in the UK. There is an expected cost savings of $250,000 per year on raw materials to produce packaging. This saving is not taking in to account the possibility of

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sales of these materials to other companies. Table 14, below, shows the breakdown of the revenue, costs, projected cash flows, and net present value. The discount rate is at the industry standard of 12% and the NPV is greater than zero; therefore, the firm should invest in this strategy.

Table 14: Projected Cash Flows over Project Life (5 years) of Recycling Strategy
Investment Outlays Sales Revenue Cost Savings Estimated Operating Cost Depreciation EBIT Taxes on Operating Income (40%) NOPAT Add Back in Depreciation Operating Cash Flow Estimated Salvage Value (20%) Projected Cash Flow Discounted Cash Flows (ROR=12%) NPV 2008 (1,400,000) 2009 2010 2011 2012 2013

300,000 250,000 99,000 100,000 351,000 140,400 210,600 100,000 310,600 (1,400,000) (1,400,000) 326,171 310,600 277,321

500,000 250,000 165,000 100,000 485,000 194,000 291,000 100,000 391,000 391,000 311,703

750,000 250,000 247,500 100,000 652,500 261,000 391,500 100,000 491,500 491,500 349,840

850,000 1,000,000 250,000 250,000 280,500 330,000 100,000 100,000 719,500 820,000 287,800 328,000 431,700 492,000 100,000 100,000 531,700 592,000 200,000 531,700 792,000 337,905 449,402

Implementation Expanding the recycling business unit into other mediums, Anheuser-Busch will realize cost savings from raw materials and packaging. In order for this expansion to happen Anheuser-Busch needs to benchmark its current facilities with firms like Caterpillar and Severnside, the U.K.s largest recycler of paper. The benchmark will allow Anheuser-Busch to discover processes that are currently not being utilized as well and give them insight on the

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process of collection. One the benchmarks have been set, Anheuser-Busch can have recycling centers set up at local liquor stores and distributors. By having recycling centers set up at liquor stores, Anheuser-Busch will have branded collection bins so that consumers will be aware of the companys desire to create a greener environment. Additionally, it will allow the route drivers to pick up recycled containers and paper products to fill the trucks as they become empty as they deliver product. Similarly, the collection sites at the distributors will allow the company to fill empty semi-trucks that deliver product to distributors and carry the recyclables back to the main recycling center where the items will be sorted based on type and color.

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Timeline The recycling program will take six months to complete. It will begin with contacting Caterpillar and Severnside for access to benchmark each companys processes. It will move on from there with several tasks happing in tandem. Upon completion of the marketing campaign, the program will be gauged to measure consumer interest. One year later the program will be evaluated to measure impact on the company and if the program needs to be modified, scrapped, or left alone. Chart 4: Timeline for Recycling
Q4 08 Q1 09 Dec Jan Feb Mar Q2 09 Apr May

ID 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Task Name Contact Caterpillar and Severnside to set up benchmark opportunities Observe Caterpillar and Severnside Form task force to set standards and gauge results of benchmark Develop collection bins Modify existing facilities Establish plan for distributor collection Establish plan for liquor store collection Develop marketing materials Set up recycling centers Start Collection Begin marketing campaign Review program Modify plan of needed Measure impact on company

Start 10/6/2008 10/13/2008 10/13/2008 11/10/2008 11/10/2008 11/24/2008 12/1/2008 12/1/2008 12/8/2008 12/8/2008 1/6/2009 4/6/2009 4/14/2009 12/9/2009

Finish 10/10/2008 12/5/2008 1/2/2009 11/21/2008 12/5/2008 11/28/2008 12/5/2008 12/26/2008 12/26/2008 4/10/2009 3/30/2009 4/10/2009 4/20/2009 12/22/2009

Duration
Oct Nov

1w 8w 12w 2w 4w 1w 1w 4w 3w 18w 12w 1w 1w 2w

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Appendices
Appendix 1 Craft Brew Estimates
Sales with 5% growth each year 2008 Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon 2,250,000 2,000,000 1,000,000 1,750,000 % ownership Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon 2009 % sales increase Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon Total Sales 10% 1,212,750 1,078,000 561,000 981,750 3,835,509 2009 Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon Total Operating Costs Total Operating Profit 633055.5 562716 292842 512473.5 2,001,087 1,834,422 0.49 0.49 0.51 0.51 2009 2,362,500 2,100,000 1,050,000 1,837,500 2009 1,102,500 980,000 510,000 892,500 2010 30% 1,504,913 1,337,700 696,150 1,218,263 4,759,035 2010 785564.325 698279.4 363390.3 635933.025 2,483,167 2,275,868 2010 2,480,625 2,205,000 1,102,500 1,929,375 2010 1,157,625 1,029,000 535,500 937,125 2011 40% 1,701,709 1,512,630 787,185 1,377,574 5,381,109 2011 888291.9675 789592.86 410910.57 719093.4975 2,807,889 2,573,220 2011 2,604,656 2,315,250 1,157,625 2,025,844 2011 1,215,506 1,080,450 562,275 983,981 2012 50% 1,914,422 1,701,709 885,583 1,549,770 6,053,497 2012 999328.4634 888291.9675 462274.3913 808980.1847 3,158,875 2,894,622 2012 2,734,889 2,431,013 1,215,506 2,127,136 2012 1,276,282 1,134,473 590,389 1,033,180 2013 50% 2,010,143 1,786,794 929,862 1,627,259 6,356,072 2013 1049294.887 932706.5659 485388.1108 849429.1939 3,316,819 3,039,254 12,617,386 26,385,223 2013 2,871,634 2,552,563 1,276,282 2,233,493 2013 1,340,096 1,191,196 619,908 1,084,839

Sales as percent of ownership

Sales growth through brand advertising and marketing and expansion through AB distribution systems

Estimated Operating Costs

Equipment Investments due to business expansion 10 year straight line depreciation Annual Purchase Price Depreciation 250000 25000 125000 125000 125000 12500 12500 12500

Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon

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Investment Outlays 2009 Equipment Purchase Price Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon EBIT (ROS est at 15%) Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon 50000 25000 25000 25000 Based on 2008 estimated sales 337,500 300,000 150,000 262,500 Value of Company Goose Island Highland Brewing Company Erie Brewing Company Devils Canyon Total purchase Price $ 4,050,000 $ 2,400,000 $ 900,000 $ 2,100,000 Percent of Ownership 0.49 0.49 0.51 0.51 Purchase Price $ 1,984,500 $ 1,176,000 $ 459,000 $ 1,071,000 $ 4,690,500 Projected Cash Flows over 5 years 2008 2009 2010 Investment Outlays Sales Revenue Estimated Operating Cost Depreciation Equipment EBIT Taxes on Operating Income (40%) NOPAT Add Back in Depreciation Operating Cash Flow Est. Salvage Value of Equip. (30%) Projected Cash Flow Discounted Cash Flows (ROR=12%) NPV (5,315,500) (5,315,500) 169,791 1,150,653 917,294 1,415,521 1,128,445 1,593,932 1,134,529 1,786,773 1,135,527 -5315500 3,835,509 2,001,087 125000 1,709,422 683768.84 1,025,653 125000 1,150,653 4,759,035 2,483,167 125000 2,150,868 860347.3 1,290,521 125000 1,415,521 5,381,109 2,807,889 125000 2,448,220 979288.002 1,468,932 125000 1,593,932 6,053,497 3,158,875 125000 2,769,622 1107848.872 1,661,773 125000 1,786,773 6,356,072 3,316,819 125000 2,914,254 1165701.466 1,748,552 125000 1,873,552 187500 2,061,052 1,169,496 2011 2012 2013 50000 25000 25000 25000 50000 25000 25000 25000 50000 25000 25000 25000 2010 2011 2012 2013

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