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Boston Beer Company Pest & Industry Analysis Jonathan Klingenberg.

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1 Boston Beer Company Pest & Industry Analysis Jonathan Klingenberg

2 Boston Beer Company Established in 1984 in Boston, Mass by Jim Koch with the idea of offering the highest quality full-flavor beers. The Boston Brewing Company, BBC, brews over 30 styles of beer, Twisted Tea, and Hardcore Cider but are most known for Samuel Adams beer They have roughly 750 employees. They are an American Craft Brewer, which means they are defined as being small, independent, and traditional. They distribute locally through a network of 400 wholesalers and then to Canada, Europe, Israel, Mexico, the Caribbean, and the Pacific Rim. They are the number one craft brewer in the US and are now the largest American owned brewery. Their products are available in all 50 states and more than 20 foreign countries, but the US accounts for more than 99% of their sales. The headquarters are in Boston and they have breweries their, Cincinnati, and Pennsylvania. Company Overview

3 Financial Information  The company went public in 1995, with a growth strategy of creating and offering the highest quality of full- flavored beers.  In 2010 their market value was 1,285 million dollars, which grew more than 8 times from their 147 million dollar value in  They have no bonds, preferred stock, or debt; and they have 13.6 million shares of common stock. For year ending Dec 25 th, 2010 Barrels sold2,272,000 Revenue$505,870,000 Gross Profit$256,327,000 Net Income$50,142,000

4 Pest Analysis PestFactorO/TImpact : 1=low 5=high Rank 1=biggest 4=smallest Political Strict rules against alcohol related crimes and incidents High taxes on beer sales in US Threat Economic Struggling Economy Highprices of fixed costs like barely and hops Threat Social Popularity of beer Health Concerns Opportunity Threat Technological Brewing process Spends no money on R&D Threat Opportunity

5 Pest Analysis Political The US has a zero tolerance policy when it comes to crimes such as drinking and driving. Strict Laws A 2003 study showed that taxes on alcohol represented 40.8% of the retail price; in comparison total taxes for all other products in the US was 24.2%. However since BBC is a craft brewery they pay a $7 excise tax on the first 60,000 barrels produced and $18 per barrel there after, large breweries pay $18 for every barrel produced which saves BBC $660,000 dollars a year. High Taxes FactorsAnalysis

6 Pest Analysis Economic The beer market has essentially proven recession proof over time, however some consumers have switched from premium beers to a less expensive domestic beer. Struggling Economy Since BBC will only use the highest quality ingredients they have to travel all across the world to get the best hops and barely. High Prices of Fixed Costs FactorsAnalysis

7 Pest Analysis Social Beer is the third most popular beverage in the world, and the US consumes the second most in the world(over billion cases in 2009). Popularity of Beer While alcohol can have some negative side affects if consumed in bulk, it is generally accepted as a social norm and the US is second in the world in beer consumption. Health Concerns FactorsAnalysis

8 Pest Analysis Technological BBC uses a traditional four vessel brewing process with each step having several phases. The extra time, man power, and money spent on this process is necessary for them to make the highest quality of beer. Brewing Process BBC has high zero R&D costs which allows them to spend more money on things like marketing, the brewing process, and quality of ingredients and stay profitable. R&D Costs FactorsAnalysis

9 Industry Analysis  The Boston Beer Company is in a very unique situation when it comes to defining their industry. They are an American craft brewer which requires them to be small, independent, and traditional: SmallAnnual production of less than 6 million barrels a year IndependentLess than 25% of the craft brewery is owned by an alcoholic beverage industry member who is not themselves a craft brewer. TraditionalAt least 50% of its volume must be malt beers.

10 Industry Analysis So even though BBC has to indirectly compete against all forms of alcohol available to consumers they are directly competing for a small specialty market that makes up just 6% of alcohol sales in the US. This has enabled them to create their own niche market: domestically brewed premium beer. BBC has worked incredibly hard to try and avoid head to head competition with the major players in the American beer market and compete against the premium imports.

11 Porter’s Five Forces ForcesAnalysis Threat of New Entrants It is easy to start a small brewery in the US, currently 1,525 small breweries, but hard to be big enough to be competitive and threaten a craft brewery as large as BBC, which makes this a moderate threat level. The Power of Suppliers Since BBC has such high standards for their beer and such a small group of suppliers who have the exotic ingredients that they require it makes this a high threat level. The Power of Buyers BBC’s ability to differentiate their product and the fact that they sell to so many consumers makes outweighs the low switching costs and makes this a moderate threat. The Threat of Substitutes The endless amounts of other options for consumers, including other beers, wine, and spirits makes this a high threat level for BBC. Intensity of Rivalry The intensity of the beer industry as a whole is incredibly competitive, but since BBC has been able to create their own niche market where they make up 24% of the market it makes this a moderate threat level. Gray = low threat levelGold = moderate threat levelRed = high threat level

12 Threat of New Entrants: Barriers to Entry Nature of BarrierExtentAnalysis Supply-side economies of scale HighLarger breweries have a big cost advantage. Demand-side benefits of scale HighThe more customers a brewer has the more likely others are to buy that product. Capital requirementsLowSmall craft breweries are cheap and easy to start. Incumbency advantages independent of size HighBBC enjoys both great brand loyalty and access to raw materials incumbents could not get. Customer-switching costsLowIt is easy for buyers to switch suppliers and comes at little to no cost to them. Unequal access to distribution channels MediumTo get the highest quality ingredients is very difficult however most breweries do not use the highest level ingredients and substitutes are not hard to find. Restrictive Government PolicyLowThe government does not impede new entrants from joining the market.

13 Bargaining Power of Suppliers There are no substitutes available. It means the suppliers’ products are differentiated. It makes switching costs irrelevant because BBC refuses to lower standards Both the suppliers and the buyers are completely dependent upon each other. BBC has such high standards for their ingredients that they will only get two-row malted barely and their hops from small family owned farms along the “hop belt”, along the 48 th latitude. BBC insists they will never lower their standards to save money so as a result:

14 Bargaining Power of Buyers Weak for Buyers There are so many buyers, even though Sam Adams has a small portion of the US beer market they still sell to millions of buyers. BBC attempts to differentiate itself from the rest of the market. Buyers do not have the means to the ingredients to produce this product or the exact recipe required. Strong for Buyers The buyer’s low switching costs. While buyer’s cannot produce BBC’s product exactly millions of beer drinkers do brew their own beer at home.

15 Threat of Substitutes Numerous other alcoholic options including other varieties of beer and wine and spirits No switching costs Makes the threat of substitute products very high.

16 Intensity of Rivalry The intensity of the rivalry within the beer market as a whole is incredibly intense with the top three brands fighting for 80% of the market. However BBC has worked to avoid these top brands and meet the needs of a small niche within this bigger market.

17 Intensity of Rivalry IssueWithin Entire Beer Industry Within Craft Breweries Competitors are numerous and equal in size and power Few competitors equal in size but face ones much bigger and more powerful Many competitors in this market but none even close to their size, BBC’s sales are larger than the next five companies combined. Industry growth is slowUS beer sales declined approximately 2.7% in 2010 and the top three brands competed for over 80% of the market share. The craft brewing industry increased its sales by roughly 12% in 2010, with BBC taking 24% of that market. Exit barriers are highSince assets are highly specified it makes it hard to leave this particular industry. Since assets are highly specified it makes it hard to leave this particular industry Rivals are highly committed to the business and seek market leadership The top brands in the beer industry and very committed and definitely seek market leadership. Most new craft breweries are small and don’t have the means to sell outside of their regions or cities.

18 Blue Ocean Strategy  Almost every bit of success that BBC has experienced over the years can be attributed to the fact that it was based on a complete blue ocean strategy idea when it was created in  When BBC started they marketed themselves as a domestically brewed premium beer, creating their own niche and allowing them to avoid direct competition with the giants of the beer industry.  They have kept this approach over the years and used it to become the largest US owned brewery.

19 Conclusion By directly attacking the premium imports and avoiding competition with lower costing domestic beers BBC created their own niche market, domestically brewed premium beer. This has enabled BBC to become the largest US owned brewery and dominate in their market and among all other craft breweries. BBC was ambitious and worked hard to market themselves as having the highest quality full flavored beers and advertising that foreign beers have less premium ingredients and are not as fresh as beer brewed domestically.

20 Boston Beer Company Competitor & Market Analysis Jonathan Klingenberg

21 Who is Boston Beer Company’s Competitors Sam Adams consists of over 99% of all Boston Beer Company’s sales. Over 99% of that is sold in the US despite the fact that they are sold in over 20 countries. So beer sold in the US seems to be their market, however BBC has made a very conscious effort to stay away from low priced domestics and compete directly against high priced imports and other craft beers. But it is fair to say that BBC competes against three different kinds of competitors: 1. all beer sold in the US 2. high priced imports 3. all other craft brewers

22 What Beers are People Drinking? Most Popular Beers in US Percentage of Sales in US by Company  Bud LightInbev  BudweiserInbev  Miller LiteMillerCoors  Coors LightMillerCoors  Corona ExtraImport  Natural LightInbev  HeinekenImport  Mich UltraInbev  Busch LightInbev  Miller High Life MillerCoors  GuinnessImport  Sam Adams Craft Brew

23 Domestic Beers Popular Brands with sales rank in US Key Demographic it markets to Percentage of US market Production in 2010 Recent Market Trend Resources Bud Light 1 Budweiser 2 MillerLite 3 Coors Light 4 Mich Ultra year olds; young men they hope they can keep drinking their product Over 80% million barrels Fell 2.1% from last year -Strong brand loyalty -Owned by large companies -Lower prices -Ability to expand market abroad

24 Analysis Domestics make up huge proportion of American beer sales BBC has strategically avoided head to head combat with these giants time and time again.. This makes companies like Inbev and MillerCoors an Indirect Threat.

25 Imported Beer Popular Brands with sales rank in US Key Demographic it markets to Percentage of US market Production in 2010 Recent Market Trend Resources/ limitations Corona 5 Heineken 7 Guinness 11 St. Pauli Girl N/A Beck’s N/A Business professionals; men looking for a higher quality beer Roughly 6% million barrels Declined 6.9% from last year -Already established abroad -Part of larger companies -Higher priced due to transportation costs

26 Analysis BBC has strategically avoided head to head combat with domestic giants. They have instead attacked the quality of high priced imported beers, insisting they are not as fresh as Sam Adams. This has led them into a market where they compete directly with popular imported beers making them a Direct Threat.

27 Craft Beers Popular Breweries Key demograp hic it markets to Percentag e of US market Production in 2010 Recent market trend Resources/ limitations Sierra Nevada New Belgium Brewing Company Spoetzl brewery Pyramind Breweries Matt Brewing CO year old males Roughly 7%9,951,956 million barrels 11% market growth -Emerging trend in beer consumption -Small companies with little capital -Limited availability

28 Analysis BBC is larger than any other craft brewery (making up over 21% of the market) and are larger than the next 5 combined. This has enabled them to separate themselves and make most craft breweries an Indirect Threat However a select few craft breweries have been able to reach a size big enough to be considered a Sierra Nevada New Belgium Brewing Co. Direct Threat

29 Size of American Market There are currently over 310 million people living in the US. According to the 2000 census only 14.6% of the population was under the age of ten. If the percentages stay the same then there are roughly 265 million people in the US of legal drinking age. This makes for a very large American beer market.

30 Market Analysis  The US consumes the second most beer in the world.  In 2009 they consumed billion cases, 80% of which was consumed by men.  They make up part of an expanding worldwide beer market expected to consume more than 2 billion hls by 2013.

31 State by State Breakdown of Consumption Map of US Regional Drinking Groups. North Central, blue; New England, yellow; Middle Atlantic, orange; Pacific, red; South Coast, dark grey; Dry South, light gray. Groups are also identified as Wet, Moderate or Dry based on the % reporting 5+ drinking day in the past month and per capita apparent consumption of alcohol.

32 Key Trends Despite the fact that the American market is generally dominated by lower-priced domestics craft beer saw a 11% increase in volume and a 12% increase in sales last year even though beer sales as a whole fell 1%. This can be attributed to both Americans newly acquired appreciation of high quality beers and the sheer number of craft breweries in the US. There were over 1,753 breweries that operated in the US last year 1,525 of which were considered small breweries. Craft breweries sold an estimated 9,951,956 barrels last year and their retailer dollar value was an estimated 7.6 billion.

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34 Target Market BBC started out being solely in the New England market as is common for most small craft breweries to stay regional. They eventually made their way into the New York, Chicago, DC, and Philly regions as their product grew and became more popular. In 1992 they made their way out to Oregon and California and established themselves across the country. Although BBC’s regional sales are not disclosed they have been very open with the fact that the New England region still makes up for a large part of their sales and they continue to try and promote to that with their marketing efforts.

35 Social Media So in this case BBC seems a little behind the curve and this could be a way for them to improve themselves and become even more visible to the public. BBC is available on both facebook and twitter. You can also sign up to receive their newsletter on their website. However even though you can find them on these popular social networks they don’t have their own page on either one. Lots of companies today have their own page where you can follow them and receive promotions on specials and new products.

36 Conclusion  The American beer market is fiercely competitive. It consists of three primary players:  Domestics  Imports  Craft Beers  Domestics account for the majority of this market with the two largest companies (Inbev and MillerCoors) accounting for roughly 80% of it.  This makes entrance into the American market incredibly difficult for smaller companies and virtually impossible if they have to compete with these larger companies on a direct level.  BBC has been able to be successful by creating their own unique market and minimizing their direct competitors.

37 Conclusion  In this effort to minimize their competitors they have avoided strong points like:  The low price of domestics  The enormous amounts of money the larger companies have available to them  This means that BBC directly competes with higher priced imports and a select group of craft beers.  Which enables them to experience a market stronghold and continued success.

38 Boston Beer Company Internal & SWOT Analysis Jonathan Klingenberg

39 The Boston Beer Company has established itself as a powerhouse in their own niche market. They have been able to do this by: Using only the highest quality ingredients Spending no money on R&D and instead using extra time and money on the quality of ingredients, the brewing process, and a thorough marketing campaign Continually developing new seasonal styles of Sam Adams beer to stay ahead of their competition with the latest trends and styles in the beer industry Employing a marketing strategy that avoids the giants in the beer industry and directly attacks high priced imports Using a combination of creativity and tradition with their brewing style giving their beer its own unique flavor As a result of these efforts BBC has established Sam Adams as the leader in craft beers, a product that routinely wins award after award, and one of the most recognizable brands in America.

40 BBC’s 5 Year Performance Year Barrels Sold 1,1621,8762,3412,2222,272 Revenue315,250380,575449,554453,446505,870 Gross Profit 164,276189,359183,887213,818256,327 Net Income 18,19222,4918,08831,11850,142 *All numbers are in thousands *In 2008 a product recall occurred and is the reason for the lower numbers that year. 23.6%N/A284.7%61.1% increase

41 Distribution Chain BBC has 3 brewing locations: *Boston, Massachusetts *Cincinnati, Ohio *Breinigsville, Pennsylvania From there the beer goes through a network of over 400 wholesalers and roughly 265 sales people. They then sell the beer to retailers such as: *bars *taverns *restaurants *grocery stores *stadiums At this point the beer has made it to its final destination where the consumer can enjoy it at their leisure. In the US, the alcohol is a 3-tier structure by law: producer, wholesaler, and retailer.

42 Distribution Current Distribution History of Distribution  Sam Adams does not specify sales by region but two things are known: 1) Over 99% of their sales comes from the US 2) A majority of their US sales comes from where the beer first started in the Northeast region 3) Even though the majority of Sam Adams sales are in the US they still distribute to over 20 other countries  1987-Sam Adams first became available in Boston and the New England market  1988-They expanded to the New York Market  1990-They moved into the DC and Chicago markets  1992-Started distributing to the western states like Oregon and California  1996-Established itself abroad for the first time selling in places like Germany, Ireland, Japan, and Hong Kong

43 Functional Analysis Business UnitAnalysis Marketing/Sales BBC has a sales force of roughly 265 people, all of which go through extensive training on the brewing process so they can better explain any potential questions that consumers may have. The sales force generally develops strong relationships with its distributors and retailers in order to successfully compete against other beers for a share of the distributors attention, time, and selling efforts. This enable BBC to gets its product out to the public and generate enough sales revenue to stay successful. Human Resources BBC polices itself by following a code of business conduct and ethics. The HR department is the group in charge of making sure all company employees follows this code. In addition they handle all hiring for the company and oversee all training new employees go through. Finance/Accounting Keeps records of all the necessary financial data in order to relay this info to company executives, stockholders, and all the required government agencies. Procurement Acquires the necessary materials and service in order for Sam Adams to be produced and distributed to the public in the most smooth and financial friendly way possible.

44 BBC’s Product Line  BBC will routinely both put out and retract one of their many varieties of beer they produce; they currently have 39 different varieties of beer including their two most popular Sam Adams and Sam Adams Light. Traditional Beers Seasonal Beers Brewmaster’s Collection Imperial Series Barrel Room Collection Specialty Beers Sam Adams Light ChocolateBo ck Cranberry Lambic Dunkelweizen Harvest Pumpkin Ale Holiday Porter Noble Pils Octoberfest Old Fezziwig Ale Summer Ale White Ale Winter Lager East West Kolsch Rustic Saison Black Lager Blackberry Witbier Boston Ale Cherry Wheat Coastal Wheat Cream Stout Honey Porter Irish Red Latitude 48 IPA Revolutionar y Rye Ale Scotch Ale Double Bock Imperial Stout Imperial White Wee Heavy American Kriek New World Tripel Stony Brook Red Imperial Pilsner Infinium Millennium Triple Bock Utopias

45 Company Resources ResourceExplanationBenefit Strong financial positionBBC has shown continued growth over the years all the while having no debt. Since BBC has no debt and strong financials they have access to a 50 million dollar line of credit if needed but they have never used it. Strong ReputationBBC uses only the highest quality ingredients, forces the strictest freshness dating requirements on themselves, and has won countless awards for both quality and taste. When people think of Sam Adams they associate it with the highest quality beer. This has led them to become the largest American owned brewery in the world. Domestically brewed and distributed Since BBC brews their beer domestically they are able to produce the freshest product in their niche market. In turn BBC uses this in their marketing ploy against imported competitors and it gives them a distinct advantage. Solid relationship with suppliers Since BBC will only use the highest quality ingredients they are limited to specific locations throughout the world where they can purchase the necessary materials. Having a good relationship with the farmers in these locations ensures BBC that they will always be able to get the ingredients that they need.

46 BCG Matrix Stars Question Marks Cash Cow Market Growth Rate High Low Relative Market ShareHighLow *The bottle of Sam Adams represents BBC within their small niche beer market. *The bottle of Sam Adams light represents BBC within the entire US beer market. Dogs

47 BCG Matrix Sam Adams within their niche market Within the niche market that BBC has worked hard to establish itself in that consists of select craft beers and a few high priced imports Sam Adams has positioned itself towards the top left corner. They take over 21% of this market share and have shown a continued growth rate since its creation in BBC within the entire American beer market Within the entire American beer market BBC is positioned more towards the lower right side of the matrix. The US beer market has declined slightly the last few years despite continued growth in the craft market. In addition they consist of approximately 1% of all beer sold in the US.

48 Value Chain Analysis ProcessActivity Raw Materials & Logistics Malt, hops, yeast, water, and certain spices, fruits, and herbs are brought in according to taste to production facilities in Massachusetts, Ohio, or Pennsylvania. ProductionAt these locations the ingredients are put through a brewing process that consists of brewing, fermentation, finishing, and packaging. Each step has several phases and takes time, but they all add their own unique and special flavor to the beer. DistributionOnce the product is finished it is distributed to one of over 400 wholesalers who then passes it along to the retailers and then ultimately the final consumer. Marketing & SalesBBC has a sales team of approximately 265 people who are all educated and trained on the brewing process in order to have a better understanding of the product. Each member of the marketing and sales team also carries a sample of hops, barely, and other ingredients with them in an effort to better educate the consumer on just how high the level of quality is for Sam Adams.

49 Strengths Brand name High quality product Strong financials Brand Loyalty Strong relationship with both suppliers and distributors Weaknesses Limited amount of suppliers Competes with other brewers for distributors attention and selling efforts Almost entirely dependent of male consumers and the domestic market Opportunities Niche target market Higher volume of beer consumed in US Increasing popularity of craft beer Changes in craft brewery requirements Numerous marketing opportunities Threats High taxes on alcohol in US Uncertainty of economy Dependence on its distributors Increasing popularity of brewing one’s own beer Potential increase in energy and other fixed costs Environmental Regulations BBC’s SWOT Analysis; ordered by importance SWOT Analysis

50 Strengths/WeaknessesAnalysis Brand Name/LoyaltySince BBC uses only the highest quality ingredients they have established themselves as brand known for quality and taste. This has inspired incredible brand loyalty from consumers and just hearing the name Sam Adams gives people assurance that they will be getting the highest quality product available. Strong FinancialsBBC has no debt. They have access to a 50 million dollar line of credit, although they have never had to use it. This gives them great stability and an assurance that a bad year or failed product will not bankrupt them. Relationships with Suppliers/Distributors BBC is very loyal to both their suppliers and their distributors. This strong relationship they have created ensures them that they will always keep their suppliers and distributors. Limited SuppliersEven though BBC has a strong relationship with their suppliers they are a very limited amount of them. Since they will not sacrifice quality for price they can only get certain supplies in certain regions of the world which means they are totally dependent on the few small farms they get their hops and barely.

51 Key Assets Cash/Cash Equivalents $55,481 Accounts Receivable $17,856 Inventories $25,558 Goodwill $1,377 Other Assets $1,508 Deferred Income Tax $4,425 Prepaid Expenses & Other Assets $9,710 Property, Plant, & Equipment Brewery in Pennsylvania Brewery in Ohio Land in Freetown, Massachusetts (currently on the market) Totaling $147,021 Total Assets $262,936 *All numbers are in thousands

52 Generic Strategy Overall Cost Leadership Differentiation Cost Focus Differentiation Focus Low Cost Higher Cost Broad Narrow Competitive Scope Competitive Advantage

53 Generic Strategy Sam Adams has established a generic strategy of differentiation focus. Within their narrow segment they have achieved differentiation by establishing themselves as the highest quality domestic beer. This enables Sam Adams to not have to worry as much on price and put more effort and focus on acquiring the highest quality ingredients and their own creativity during the brewing process. With an industry that is flooded with seemingly unlimited options and Sam Adams having no way to compete with other domestics through pricing, their focus on quality, creativity, and freshness enables them to achieve differentiation and be successful.

54 Grand Strategy Market penetration consolidation Product development Market development Diversification Existing New Products Existing New Markets

55 Grand Strategy Concentrated growth BBC has such a high percentage of their sales come from Sam Adams beer in not only the US but the northeast region specifically that they should continue to increase their efforts and resources in targeting this specific region for continued growth and success. Product development BBC puts continued efforts and resources towards developing new styles of Sam Adams with their seasonal beers. This has become a key strategy of theirs and allows them to stay ahead of their competitors and produce additional revenue. Vertical integration Since BBC is so dependent on the few suppliers that they have it would make sense for them to look into acquiring them and making sure that they are guaranteed exclusive rights to the necessary supplies they need.

56 Conclusion  BBC has experienced enormous success over the years sticking to their business model.  They have made Sam Adams a brand synonymous with quality and great taste and a brand recognizable throughout the entire US.  However BBC has experienced about as much growth as they can have within the US and if they ever want to see substantial growth then they are going to have to find better ways to market abroad.


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