Larry Brownlow, soon to be completing his MBA, heard that Coors would be expanding in two counties of South Delaware. Coors currently does not have any distribution hubs in this or the surrounding areas. Consumers in the area know the Coors brand and see the product as a good tasting and quality product. The consumer interest in the Coors product is high and will provide the demand for the product. Larry has always believed that the best business opportunities and rewards are in smaller owner operated businesses and is interested in the opportunity to invest in one of the Coors distributorships in South Delaware.
Larry has $500,000.00 in a trust that will become available in a few months. Larry is very busy completing his MBA and with his family that he is not able to do the proper research for the Coors investment opportunity so he enlisted the help of Manson and Associates.
Manson and Associates is based in Wilmington, Delaware and conduct general research; they have conducted other feasibility studies in the South Atlantic region of the country.
They are best known for their computer modeling and simulations and they deliver quality work to their customers. Larry has $15,000.00 available to spend on feasibility research, which is not enough to cover all of the proposed research so Larry will have to decide which research items provide him with the right information. The research information will provide Larry with the proper data to decide whether or not he should invest in the Coors opportunity.
Larry Brownlow has been given the opportunity to invest in a new Coors distributorship expansion in South Delaware. In this case there exists two problems that Larry Brownlow must address. The first problem identified in this case is Larry’s limited research budget of $15,000.00. Larry’s research budget is not enough to cover all of the research provided by Manson and Associates. Larry must decide what research will be most beneficial to him for his decision of whether or not to invest in the Coors distributorship opportunity. The second problem is Larry must make a decision on whether or not to invest in the business opportunity of starting a Coors distributorship.
Since Larry has a limited research budget of $15,000.00. It is critical that he selects the research that will assist him the most in his decision to invest in the Coors opportunity. The required information to make a well-informed decision will be comprised of the following components: Industry demand, projected market share, consumer acceptance of Coors, required investments, product pricing, costs, and potential profits.
To determine the demand on the beer industry the information from Studies A & B is required to perform a per capita analysis. The cost for these two studies is $2,500.00. The over age 21 population, in Delaware, will be considered for both a per capita consumption along with populations in both Kent and Sussex counties. The demand is computed by multiplying gallons of per capita beer consumption by the population in Kent and Sussex counties. For example, the demand for the year 2000 would be: 39.4 gallons per capita x (75,200 + 85,300) = 6.324 million gallons of beer. In analyzing the data for Studies A & B the data has a continuing growth trend so the demand should increase year over year as well. The industry demand can also be computed by using a tax-based approach.
The data from Study E, which costs $200.00, will be required to perform this analysis. Study E only provides tax information for 1997 and 1998 so the tax will have to be projected forward to 2000. The tax increase between 1997 and 1998 is 6.3%. Table 1 shows what the projected taxes are through the year 2000, a 6.3% linear tax increase is assumed. The Beer taxes are based on a volume sold basis and are taxed at $0.06 per gallon. To determine the demand the taxes paid by each wholesaler in the year 2000 should be divided by $0.06 to determine how many gallons each wholesaler sold. Table 2 shows the number of gallons sold by each wholesaler and the total number of gallons sold by all wholesalers combined. The demand as computed by the tax-based approach is 5.758 million gallons of beer.
Now there are two demand calculations so one needs to be selected for Larry and his decision. The best demand calculation is the tax-based approach. The tax-based approach is better because it is determined from the taxes that have been paid by wholesalers in the direct market area so it more accurately reflects the demand in this market area. Both of these demand estimates have some degree of error so potentially a better demand forecast could be used, however, despite many attempts at demand determination for beer it is difficult to understand the nature of the demand generation (Fogarty, 2010). The per capita approach is based upon the broader population of Delaware.
To determine the projected market share you need the industry demand calculations and the data from Study C, which costs $2,000.00. The market share data shows a very stable 8.8% market share. The projected market share for Larry and his distributorship would be 6.3237 million gallons of beer multiplied by 8.8%, which equals 556,486 gallons of beer using the per capita demand calculations. Using the tax-based demand calculations the projected market share is 506,733 gallons of beer. The data provided by Manson and Associates could be evaluated and their computer models improved. Wilcox (2001) computed the market share of all major US beer suppliers. The market share for Coors is ~13%. Manson and Associate’s models could be improved by periodically reviewing the model output with industry trends and historical industry data. To this point Larry has spent $4,700 of his $15,000 research budget.
Customer acceptance is of vital importance for Larry’s success. The data on public perceptions of the Coors brand and what people have to say about the Coors product, this requires that Study G be performed at a cost of $6,000 leaving $4,300 in the research budget. According to Mosher (2012) the beer industry has been growing steadily especially in the youth market; older patrons tend to be more drawn to spirits. With this data Larry may want to target the majority of his advertising to the younger (21 and over) demographic. Larry should not totally ignore the older demographic, however, and should also apply some advertising here as well.
Larry estimated what his initial investments would be for the Coors opportunity and that investment would need to be $800,000, but he left out cash and accounts receivables. Data from Study F is required to estimate these line items. The costs the Larry did estimate account for 74.1% of assets in Study F. A revised investment estimate can be found in Exhibit 1. The total investment required is calculated by: $800,000/0.741 = $1,079,622. The total investment is then multiplied by 11.1% for cash determination and 14.8% for accounts receivable determination. Cash = $1,079,622 x .111 = $119,838. Accounts receivable = $1,079,622 x 0.148 = $159,784.
In order to provide for this investment Larry has the opportunity for a $400,000 loan from a bank as well as a $400,000 loan from family and friends. Larry should leverage both of these loan options as well as withdrawing $279,622 from his $500,000 trust. The data provided by Study F may not be entirely valid for this market area. It is not clear what regions the 510 wholesalers conduct business. If this information is all based upon Midwest wholesalers the investment numbers for Larry could be even higher.
Product pricing will be on a gallon basis. The average wholesale price per gallon for both bottles/cans and kegs needs to be determined. To compute the wholesale gallon prices data from Study I, at a cost of $2,000, will be required. The average wholesale price for six-packs of bottles/cans is ($3.29+$3.29+$3.29+$2.57+$3.29+$2.68+$3.68)/7 = $3.16 per-six pack. The wholesale gallon price for bottles/can can be determined by multiplying $3.16 (wholesale six-pack price) by 1.77 (multiplier for wholesale gallon cost), which yields: $5.59 as the wholesale per gallon price for bottles/cans. The wholesale per gallon price needs to be determined for kegs.
The data in the case indicates that kegs are 45% of the wholesale price of bottles/cans so the wholesale per gallon price for kegs is = $5.59×0.45 = $2.52 per gallon. The overall average wholesale price per gallon takes into account that bottles/cans sells at a three to one ratio over kegs. Therefore, the overall average wholesale price per gallon is (0.75 x $5.59) + (0.25 x $2.52) = $4.82 per gallon wholesale. Larry should price his six-packs at least $3.16 each and for each keg, which contains 15.5 gallons, the wholesale price should be at least $39.09. With information from Study I Larry should be able to price his six-packs slightly higher than the minimum of $3.16.
The first costs to be determined are the fixed costs. Larry estimated what he believed his fixed costs would be but neglected to include interest payments, advertising, and travel. The data from Study F, which costs $49.50, will be required to assist in determining Larry’s fixed costs. After all research Larry has $2,250.50 remaining in his research budget. Exhibit 2 provides a revised fixed costs estimate. The loan repayment is broken into two line items. The first is the $400,000 line of credit from the bank with a 15-year term at 7% interest rate. The second is a loan from family and friends of $400,000 with at 15-year term at 5% interest rate. Advertising budget is 1% of the net sales from the projected market share, average gallon price, and demand calculations. (506,733 gallons x $4.82 per gallon) x 0.01 = ~$24,000.
This advertising budget is higher than what other wholesalers are currently spending but in order to let that customers and retailers know Larry is ready for business some advertising needs to be done. Travel has been entered at $10,000 annual expenditure. There will be quarterly visits for Larry to Coors’ headquarters. These trips will include airfare, lodging, and rental car. Variable costs need to be determined. The variable costs incorporated here will be cost of goods sold (COGS) and incentive compensation. From Study F the COGS for the beer wholesale industry are 77.1%. Exhibit 3 shows the table for estimated variable cost. The total COGS = $4.82(.771) + 4.82(0.03) = $3.86 per gallon that includes the $0.06 per gallon beer tax.
Break-even volume and dollar analysis can be calculated. Break-even volume = (total fixed costs)/(unit gallon selling price – unit gallon variable costs). Placing the data into the equation yields break-even volume = 364,400/($4.82-$3.86) = 379,583 gallons is the break-even volume that Larry needs to achieve. The break-even dollar volume is 379,583 x $4.82 = ~$1.83 million dollars. Once the break-even volume is achieved Larry would be making profit for his business since all costs should be paid for in the given year. This should be easily achieved due to the expected market share of 506,733 gallons.
The break-even volume is at 75% of his overall estimated market share and by achieving this market share Larry will have a profit determined by (506,733 gallons – 379,583 gallons x $4.82/gallon) = $612,863 for the year and with the data from Study F the average wholesaler gross profit is 22.9%. In dollars the average wholesaler gross profit is: 506,733 gallons x $4.82 x 0.229 = $559,321 on this level of sales. Larry would be on the high end of the gross profits as compared to his competitors. His gross profit percentage of net sales is $612,863/(506,733 x $4.82) = 25.1% which is 2.2% greater than the average gross profit for wholesalers in this market area. Larry’s net profit, before taxes, would be (506,733 x $4.82 x 0.022) = $53,734.
To help visually see the pros and cons a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis is provided in Exhibit 4. SWOT is a method of identifying and structuring relevant data in order to facilitate the decision making process (Kerin & Petersen, 2013). After analyzing the data and the calculations Larry should invest in the Coors opportunity. Larry, in his first year of business will result in a nice profit and with his larger than average advertising budget he has the opportunity to grow his market share to 13% or better per Wilcox (2001) and his beer industry market share research. 81.2% of consumers in the market area will try the Coors brand so the market demand is good.
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