Boston Beer HBS Case

     In this paper I will be talking about the U.S. beer industry and in short an overview of the brewing industry worldwide. I will talk about the barriers to entry, economies of scale, government intervention, pricing, current market trends, product differentiation, and imports. The focus being mainly on the U.S. brewing industry oligopoly. The U.S. brewing industry has three major players: Anheuser-Busch, SAB Miller, and Coors/Molson. Anheuser-Busch is currently the largest brewer in the world, producing over 100 million barrels a year. Anheuser-Busch currently owns over 50% of the market in the United States, with Miller trailing behind at 20% and Coors at about 11% with the rest of the market occupied by imports and craft breweries. When analyzing any industry, how easy it is for newcomers to enter the market is a great importance. If there are high barriers to entry

The cost of equity was found using CAPM, with the given market risk premium of 5%, a beta of .88, and risk-free rate of 4.03%. The beta was found by running a regression of Southwest’s percent change in stock price versus the S&P 500’s percent change in stock price for two years (June 28, 2000 to June 28, 2002). The risk-free rate was the return on a ten-year treasury note issued on June 28, 2002, according to the U.S. Treasury’s website. The tax rate of 39% was used to account for tax savings from leverage. In order to calculate the firm’s leverage, the market value of equity was found from the price per share on July 24, 2002 (Yahoo Finance) and the shares outstanding on the balance sheet of the July 10-Q report, as shown in Exhibit X. The debt value was approximated at the book value since data could not be found regarding its market value. This analysis resulted in a debt weight of 11.74% and equity weight of 88.26%. The final approximation for the weighted average cost of capital was 8.64%.

The next project was bottling Gordon Biersch signature beer and retailing it. This had three biggest challenges: this project was entirely Gordon’s baby and demanded time and attention; secondly the freshness of the bottled beer versus the freshly brewed was an issue for which they decided the beer would have a shelf life no longer than three months. Thirdly and the most exciting challenge was the head-to-head competition with other microbreweries and premium beers. Despite the tough competitive environment, Gordon Biersch aimed to achieve 11% of the market in three years (by 1996). This retail venture required huge investment, thus they decided to start small to prove to the investors that they could pull it off.

The Boston Beer Company, Inc., founded in 1984, is a leading brewer in United States, offering wide variety of high quality full-flavored, handcraftedbeers. It is distinctive due to the time-honored recipe of brewing and authentic, consistent quality of alcoholic beverages. Samuel Adams Boston Lager is the pride of BBC, regular handcrafted beer “stands for quality, inner self-worth, authenticity, and unique New England or Yankee toughness” ( Martin Roper, Chief Operating Officer). Unfortunately, the company experienced the failure of conquering light beer segment

The Boston Beer Company is the country’s largest producer of craft beer, with their flagship brand being Samuel Adams. An American Craft Brewer is defined as small, independent, and traditional. To be considered these terms, the brewery must adhere to the following guidelines: Annual production of 6 million barrels of beer or less. Less than 25% of the craft brewery is owned or controlled (or equivalent economic interest) by an alcoholic beverage industry member who is not themselves a craft brewer. And a brewer who has either an all malt flagship (the beer which represents the greatest volume among that brewers brands) or has at least 50% of its volume in either all malt beers or in beers which use

2 Required rate of return on equity is estimated by using CAPM. See Details »

This represents a 7% increase in stock price. Further, the additional leverage and return of excess cash to shareholders will significantly increase ROE. If the market determines that an 80% debt capital structure is feasible for BBBY, then we will expect further capital gains as investors applaud shareholder friendly policies and re-examine EPS estimates. However, if top line growth and same store sales growth continue to trend downward, investors may become skeptical of BBBY management’s ability to continue generating over 30% EPS growth, and thus question the ability of the company to service its debt in the future.

The Boston Beer Company and Samuel Adams have both had a long history. Since the 1870s, six generations of the Koch family have been involved with beer. In the early 1980s, the seventh generations almost turned his back on the family business. After graduating from graduate school, Jim Koch wanted to stray always for the family business and seek a career in management consulting. After a short time in the consulting business, Koch decided that he just could not ignore his destiny to create a new, different beer. In 1984, Koch was on the search for a “better beer”. The only options at the time on the market were pale lagers from mass producers (Company), Koch decided there needed to be a change. In April 1985, Samuel Adams made in bar

Cost of Equity = Risk free rate + (Market return – risk free rate) X beta

Samuel Adams has long been one of America’s most popular beer companies. The Boston Beer company prides itself on great tasting beer for the consumer, and profitable growth for the company. Although Samuel Adams beer is a popular beer in New England, it only holds just over 1% of the market share of the beer industry. Overwhelmed by popular brews such as Bud, Coors and Corona, Samuel Adams struggles to gain market share. Even with their low market share, they are still a profitable business. Their mission statement reads:

The forecast comes to 1.13 which is higher than the usual percentage of the business. 1.13 means the firm has a debt of 113% which is extremely high. That is a sign that the company is going into debt to stay in operation, but this is not okay for their shareholders. The only way to ensure the company remains in business without these massive debts is by lowering all cost of services and maximizing profits, therefore, turning around the firm to profitability.

* We assume the cost of capital to be a stated annual rate to facilitate calculations;

AB beer was brewed by a special system that involved adding fresh hops to freshly milled grain, fermenting with proprietary yeast in a temperature-controlled vat and employing a filtration process. The bottled beer was not exposed to the air until it was opened by the consumer—and was hand-dated for peak consumption within 14 days. AB’s attention to the highest quality, traditional European brewing methods and locally sourced ingredients helped them to build a strong local reputation and loyal consumer following. Shipman wanted to control every aspect of the process, from the equipment used, the processes employed, to the people who brewed

Capital asset pricing model was developed by Sharpe (1964) and furthered through the works of Lintner (1965), Mossin (1966), Treynor (1965) and Black (1972). This model calculates expected/required rate of return for any risky financial asset. Capital Asset Pricing Model formula is shown in figure 1.1. Essentially, this represents investors need to be compensated for their time value of money and risk. Beta is measure of volatility and will be further examined in later stages of this essay. For example, if our particular company has a high standard deviation of the rate of return, an investment in the company might appear

When selecting Capitalization Rates you should consider the risk characteristics of an investment opportunity or security. In the Capital Asset Pricing Model (CAPM), the higher the risk involved in investing asset, the higher the minimum expected rate of return to attract investors to invest. Capitalization rate of financial asset is the function of riskiness of asset.