TEAM 4

MOUNTAIN MAN BREWING COMPANY

Introduction: Mountain Man Beers Success: The United States is the largest beer consumer in the world with the East Central region having sales of 18.3%. Mountain Man Brewing Company is a family owned brewery located in West Virginia that has been strong presence as lager brand in this region since its establishment in 1925. Ever since, it has marketed towards the blue collar, middle to lower income population in the region with its bitter, higher alcohol content lager. Over the years its brand identity has been associated as an old school, regional brewing company and its consistency in taste and blend. There have been multiple instances where 3 generations of families have grown up consuming Mountain Man Beer and felt that Mountain Man Brewing Company has retained the quality ever since its introduction. It has therefore, created a legacy as West Virginias Beer and a Working mans beer and has not deviated from its core branding, maintaining itself as a single product company. Competitor Position: Being solely a lager manufacturer, Mountain Man Brewing Companys competitors in its operating region are domestic, regional and import beer manufacturers. These manufacturers have a diverse portfolio manufacturing light beer, with the light beer market growing at an annual rate of 4% in the region. With its core identity as a lager, Mountain Man Beer has a strong presence and respect among its customers who are in the age group of 45 plus. Among Mountain Man Beers competitors, domestic producers like Anheuser Busch, Miller Brewing Company and Adolf Coors accounted totally for 74% of the beer shipment in the region. Apart from these Domestic powerhouses, there is a significant

presence among second tier brewers, import brewers and small craft/specialty in the region. While other regional competitors have faded away due to loss of brand identity over the last 30 years in conjunction with the states repealing of laws that prohibited discounts in retail stores, Mountain Man Beer has survived because of its focus on its customer base and its brand equity. Mountain Man Beer has established itself in the region as strong presence in the lager category and has been at the top in market position for the last 50 years with revenues just above $50 Million by 2005. In its pricing, Mountain Man Beer was positioned similar to premier domestic brands like Budweiser and Miller. Its higher than average content of alcohol and bitter taste set it apart in the region in the traditional lager category. Mountain Man Beer, the Brand: With its picture of mine workers from the Coal Miners Union on its bottles unchanged since 1925, Mountain Man Beer has a certain old school, working man feeling to it that it had built over the years. Along with the strong, bitter taste, this was the ideal working mans beer and its authenticity and quality that remained unchanged over the years added a sense of history to drinking lager. Unlike large producers, Mountain Man Brewing Company has done grass-root marketing in building its brand image among the heartland states. It has so far, thus, saved millions of dollars in advertising costs that the bigger brands spend. Over the years, the Mountain Man Beer brand has built a large loyal customer base that vouch by its drinkability. With a brand loyalty rate at 53%, Mountain Man Beer makes other competitive brands envious. Overall, with a loyal middle income, middle age customer base, and with a strong flavor that defines the character of West Virginia, Mountain Man Beer has grown steadily over the years as regional leader in lager. The brand identity is strong and well established and despite competition from domestic and import brands, $50 million revenue speaks for itself.

Declining Projections? Despite building a brand identity and regional presence, Mountain Man Lagers sales have declined for the first time ever, by 2% in 2005(Appendix) compared to the previous fiscal year. There were a variety of reasons for this decline. Firstly, the customer base that has sustained Mountain Man Beers sales over the years (middle income, middle age: 45+), is fading away and the being overshadowed by a young population between the age group of 21 and 27. This young population is key consumer base for the beer industry and is often categorized as First time drinker demographic and do not have a specific brand loyalty. More importantly, this group which accounted for 27% of total beer consumption preferred light beer, specifically mainstream brands. The light beer market is projected to grow at a rate of 4% annually, while the premium beer market is projected to decline at a rate of 4% (Appendix). The light beer market in 2005 accounted for 50.4% of volume sales (Exhibit 5) and with a growing young population who have a preference for light beer, this percentage would grow. With mainstream brands making both premium beer and light beer, young consumers tended to go along with a brand family. This is hurting Mountain Man Beers prospects; with only a single product and a perceived old school image, the young consumers would see it as a niche product. Also, Mountain Man Beer is not sold in restaurants and pubs which were frequented most by a young drinking population. A Do nothing Strategy: An underlying fact of life for Mountain Man Beer is that lager sales are projected to decline by a minimum of 2% annually(Appendix). The highest growth segment in the beer industry is light beer and Mountain Man Beer would need to diversify its product portfolio in order to compensate for a potential

decline in lager sales in the future. However, to introduce Mountain Man Light, the company would have to consider a possible cannibalization of Mountain Man Lager by Mountain Man Light that would end up hurting the sales of its core brand. An advertising campaign in the east central region would cost a onetime fee of $750,000. The incremental selling, general, and administrative (SG&A) costs would be an annual $900,000 (not accounted for inflation). As for production costs, Mountain Man Light would cost $4.69 more per barrel than the core brand. Even considering a 5% loss in sales for Mountain Man Lager, there should be enough barrels of Mountain Man Light sold to compensate. While a short term investment could be avoided under a do-nothing strategy, over a period of time, the revenue from Mountain Man Lager would eventually only reduce assuming the beer market grows based on its segment projections and based on revenue decline compared to previous years (2% decline in revenue) (Appendix). While the light beer market would continue to grow, Mountain Man Beer would be at risk of fading away from public conscience and due to low visibility amongst newer, younger consumers. By 2010, Mountain Man revenues would have declined by 9.6% compared to 2005 (Based on revenue in 2005 and projected revenue of $45,593,765 in 2010 from an annual revenue loss of 2%). While Mountain Man may keep its existing customer base satisfied, that customer base is being replaced in the coming years, and Mountain Man Brewing Company needs to reposition itself as beer manufacturer in region. Mountain Man Light, Prospects: While the initial investment and the increased production costs and SG&A costs would cause a dent in the first year of introduction, considering an annual market share growth by a quarter point by the introduction of Mountain Man Light, the company positions itself as a diverse player in the beer industry. It can then capture restaurants and pubs that it has never penetrated before and thereby cater to a young, growing population who are already aware of the legacy of the company. By considering a

5% loss in sales in Mountain Man Lager and based on Chriss projections in SG&A, revenue percentage loss annually and fixed costs for introducing Mountain Man Light, there would need to be 160,246 barrels manufactured by the end of the second year to break even for the investment costs. This could be achieved in terms of volume sales by limiting the annual revenue loss due to the introduction of Mountain Man Light to 4.15% instead of 5% (Appendix). At a 4.15% worst case revenue loss in Mountain Man Lager, the number of barrels of Mountain Man Light needed to break even by the second year would be 150,085(Appendix). And by projecting the number of Mountain Man Light barrels based on an annual increase of 0.25% in market share, Mountain Man can manufacture 150,104 barrels of Mountain Man Light. By penetrating the restaurant and pub market with Mountain Man Light, the company will have a small yet a potential entry for its core brand, Mountain Man Lager as well. It can do so without additional branding and marketing efforts and thus limits its revenue loss in lager to a ceiling of 4.15% Conclusion: In conclusion, it would be fair to say that a well-established regional powerhouse in the manufacture of Lager beer is at risk of being lost due to dwindling sales, shrinking market share and redefined beer industry. Great companies embrace change as part of growth and for Mountain Man Brewing Company to grow, it has to change and diversify its core business to catch up with changing times and characterize the strength and toughness that its lager has always defined. And by working digilently as it always has, to satisfy its new customer base, Mountain Man Light has a great potential to grow based on the reputation of the company as well as the growth in the market itself. And they can do so by limiting the revenue loss in their core brand due to the new brand to 4.15%. This is Mountain Mans moment of tryst with its destiny and they should make full use of it.

Appendix PROJECTING REVENUES:

Assuming 2% drop in revenue every year:

Year
2006 2007 2008 2009

Revenue
$49,431,200 $48,442,576 $47,473,724 $46,524,250

Revenue Calculations:
2007 Net Revenue COGS Income after tax $33,425,377 $32,756,870 $32,101,732 $2,991,320 $2,931,502 $2,872,872 2008 2009

$48,442,576 $47,473,724 $46,524,250

FEASIBILITY ANALYSIS: Continuing with 4.15% CAGR and MMBC increasing its market share at 0.25%/year, we get the projected revenue from light beer:

Year

Revenue from Light Beer

2005

$4,916,405

2006

$10,226,123

2007

$15,952,753

Projecting new revenues:

2007 Net Revenue COGS Income after tax $53,358,952 2008 $57,699,848 2009 $62,477,003

$37,063,518 $2,669,810

$40,324,202 $3,908,543

$43,906,770 $4,724,656

Comparing YoY:

Breakeven Calculation: