CASE

South Delaware Coors, Inc.

Larry Brownlow was just beginning to realize the problem was more complex than he thought. The problem was giving direction to Manson and Associates regarding which research should be completed by February 20,2000, to determine market potential of a Coors beer distributorship for a two-county area in southern Delaware. With data from this research, Larry would be able to estimate the feasibility of such an operation before the March 5 application deadline. Larry knew his decision on whether or not to apply for the distributorship was the most important career choice heshadiever faced.

LARRY BROWNLOW
Larry was just completing his MBA and, from his standpoint, the Coors announcement of expansion into Delaware could hardly have been better timed. He had long ago decided that the best opportunities and rewards were in smaller, self-owned businesses and not in the jungles of corporate giants. Because of a family tragedy some three years ago, Larry found himself in a position to consider small business opportunities such as the Coors distributorship. Over $500,000 was held in trust for Larry, to be dispersed when he reached age 30. Until then, Larry and his family lived on an annual trust income of about $40,000. It was on this income that Larry decided to leave his sales engineering job and return to graduate school for his MBA. The decision to complete a graduate program and operate his own business had been easy to make. While he could avoid such challenges, find an "easy" job, and live comfortably using his investment income, Larry knew such a life would not be to his liking. Working with people and the challenge of making it on his own, Larry thought, were far more preferable than enduring a boring job and taking an early retirement. Larry would be 30 in July, about the time that money would be needed to start the business. In the meantime, he had access to about $15,000 for feasibility research. While there certainly were other places to spend the money, Larry and his wife agreed the distributorship opportunity could not be overlooked.

COORS, INC.
Coors' history dated back to 1873, when Adolph Coors built a small brewery in Golden, Colorado. Since then, the brewery had prospered and become the fourthlargest seller of beer in the country. Coors' operating philosophy could lie summed up as "hard work, saving money, devotion to the quality of the product, caring about the

This case was written by Professor James E. Nelson, University of Colorado at Boulder. It is intended for use as a basis for class discussion rather than to illustrate either effective or ineffective administrative decision making. Some data are disguised. Used with permission.

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environment, and giving people something to believe in." Company operation is consistent with this philosophy. Headquarters and most production facilities are still located in Golden, Colorado, with a new Shenandoah, Virginia, facility aiding in nationwide distribution. Coors is still family operated and controlled. The company had issued its first public stock, $ 127 million worth of nonvoting shares, in 1975. The issue was enthusiastically received by the financial community despite its being offered during a recession. Coors' unwillingness to compromise on the high quality of its product is well known both to its suppliers and to its consuming public. Coors beer requires constant , refrigeration to maintain this quality, and wholesalers' facilities are closely controlled *"to ensure proper temperatures are maintained. Wholesalers are also required to install and use aluminum can recycling equipment. Coors was one of the first breweries in - the industry to recycle its cans. Larry was aware of Coors' popularity with many consumers in adjacent states. Most beer consumers considered Coors beer to be a high quality, standard beer, having a light, zesty taste and similar to standard beers from Budweiser or Miller. However, Coors' corporate management was seen by some consumers to hold antiunion beliefs (because of a labor disagreement at the brewery some time ago). A few other consumers perceived the brewery to be somewhat insensitive to minority issues, primarily unemployment and distribution. The result of these attitudesplus other aspects of consumer behaviormeant that Coors' sales in Delaware would depend greatly on efforts of the two wholesalers planned for the state.

MANSON RESEARCH PROPOSAL

Because of the press of his studies, Larry had contacted Manson and Associates in early January for their assistance. The firm was a Wilmington-based general research supplier that had conducted other feasibility studies in the South Atlantic region. *Manson was well known for the quality of its work, particularly with respect to computer modeling. The firm had developed special expertise in modeling such things as population and employment levels for cities, counties, and other units of area for periods of up to 10 years into the future. Larry had met John Rome, senior research analyst for Manson, and discussed the Coors opportunity and appropriate research extensively in the January meeting. Rome promised a formal research proposal (Exhibit 1 on pages 130 and 131) for the project that Larry now held in his hand. It certainly was extensive, Larry thought, and reflected the professionalism he expected. Now came the hard partchoosing the more relevant research from the proposalbecause he certainly couldn't afford to pay for it all. Rome had suggested a meeting for Friday, giving Larry only two more days to decide. Larry was at first overwhelmed. All the research would certainly be useful. He was sure he needed estimates of sales and costs in a form allowing managerial analysis, but what data in what form? Knowledge of competing operations' experience, retailer support, and consumer acceptance also seemed important for feasibility analysis. For example, "what if consumers were excited about Coors and retailers indifferent or the other way around? Finally, several of the studies would provide information that could be useful in later months of operation in the areas of promotion and pricing, for example. The problem now appeared more difficult than before! It would have been nice, Larry thought, to have had some time to perform part of the suggested research himself. However, there just was too much in the way of class assignments and other matters to allow him that luxury. Besides, using Manson and Associates would give him research results from an unbiased source.

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CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING

EXHIBIT 1

Manson and Associates Research Proposal

January 16,2000 Mr. Larry Brownlow 1198 West Lamar Chester, PA 12345 Dear Larry: It was a pleasure meeting you last week and discussing your business and research interests in Coors wholesaling. From further thought and discussion with my colleagues, the Coors wholesaling opportunity appears even more attractive than when we met. Appearances can be deceiving, as you know, and I fully agree some formal research is needed before you make an application. Research that we recommend would proceed in two distinct stages and is described below: ' f~ * Stage One Research, Based on Secondary Data and Manson Computer Models: Study A: National and Delaware Per Capita Beer Consumption for 1998-2002. Description: Per capita annual consumption of beer for the total population and population age 21 and over in gallons is provided. Source". Various publications, Manson computer model Cost: $1,000 Population Estimates for 1996-2006 for Two Delaware Counties in Market Area. Description: Annual estimates of total population and-population age 21 and over are provided for the period 1996-2006. Source: U.S. Bureau of Census, Sales Management Annual Survey of Buying Power, Manson computer model Cosf. $1,500 Coors Market Share Estimates for 2000-2005Description: Coors market share for the two-county market area based on total gallons consumed is estimated for each year in the period 2000-2005. This data will be projected from Coors' nationwide experience. Source: Various publications. Manson computer model Cosf. $2,000 Estimates Liquor and Beer Licenses for the Market Area, 2000-2005Description: Projections of the number of on-premise sale operations and offpremise sale operations is provided. Source: Delaware Department of Revenue, Manson computer model Cost: $1,000 Beer Taxes Paid by Delaware Wholesalers for 1997 and 1998 in Market Area. Description: Beer taxes paid by each of the six presently operating competing beer wholesalers are provided. This can be converted to gallons sold by applying the state gallonage tax rate ($.06 per gallon).^. Source: Delaware Department of Revenue Cost. $200 Financial Statement Summary of Wine, Liquor, and Beer Wholesalers for 1999. Description: Composite balance sheets, income statements, anel relevant measures of performance provided for 510 similar wholesaling operations in the United States. Source: Robert Morris Associates Annual Statement Studies, 2000 ed. Cosf. $49.50
v

Study B:

Study C:

Study D:

Study E:

Study F:

(continued)

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1 (Continued)

EXHIBIT

Stage Two Research, Based on Primary Data: Study G: Consumer Study Description: Study G involves focus group interviews and a mail questionnaire to determine consumers'past experience, acceptance, and intention to buy Coors beer. Three focus group interviews would be conducted in the two counties in the market area. From these data, a questionnaire would be developed and sent to 300 adult residents in the market area, utilizing direct questions and a semantic differential scale to measure attitudes toward Coors beer, competing beers, and an ideal beer. Source: Manson and Associates Cost: $6,000 Retailer Study Description: Group interviews would be conducted with six potential retailers of Coors beer in one county in the market area to determine their past beer sales and experience and their intention to stock and sell Coors. From these data, a personal interview questionnaire would be developed and executed at all appropriate retailers in the market area to determine similar data. Source: Manson and Associates Cost: $4,800 Survey of Retail and Wholesale Beer Prices Description: In-store interviews with a representative sample of 50 retailers in the market area to estimate retail and wholesale prices for Budweiser, Miller Lite, Miller, Busch, Bud Light, Old Milwaukee, and Michelob. Source: Manson and Associates Cost. $2,000

"*

Study H:

Study I:

Examples of the form of final report tables are attached [Exhibit 2, pages 132-136]. This should give you a better idea of the data you will receive. As you can see, the research is extensive and> I might add, not cheap. However, the research "as outlined will supply you with sufficient information to make an estimate of the feasibility of a Coors distributorship, the investment for which is substantial. I have scheduled 9:00 A.M. next Friday as a time to meet with you to discuss the proposal in more detail. Time is short, but we firmly feel the study can be completed by February 20,2000. If you need more information in the meantime, please feel free to call. Sincerely, John Rome Senior Research Analyst

INVESTING AND OPERATING DATA

Larry was not completely in the dark regarding investment and operating data for the distributorship. In the past two weeks he 'had^ visited two beer wholesalers in his hometown of Chester, Pennsylvania, who handled Anheuser-Busch and Miller beer, to get a feel for their operation and marketing experience. It would have been nice to interview a Coors wholesaler, but Coors management had strictly informed all of their distributors to provide no information to prospective applicants.

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CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING

EXHIBIT 2 Examples of Final Research Report Tables Table A National and Delaware Resident Annual Beer Consumption Per Capita, 1998-2002 (Gallons) U.S. Consumption Delaware Consumption Based on Based on Based on Based on Entire Population Entire Population 'Population over Age 21 Population over Age 21

Year 1998
1999 2000 2001 2002

. - - ' ' . -

-*

Source-: Study A,

TableB Population Estimates for 1996-2006 for the Two Delaware Counties in Market Area Entire Population County Kent Sussex County Kent Sussex
Source: Study B.

1996

1998

2000

2002

2004

2006

1996

Population Age 21 and Over 1998 2000 2002

2004

2006

Table C Coors Market Share Estimates for 2000-2005 Year Market Share (%)
20 00

2001
20 02 20 03 20 04 20 05 Source: Study C.

(continued)

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(Con tinned)

EXHIBIT 2

Table D ; V Liquor and Beer License Estimates for Market Area for 2000-2005 Type of License 2OO2 20OO 2001 2004 2O03 2005
Alf beverages Rfctaii beer and wine Off-premise beer only Veterans beer and liquor 4 "fraternal Resort beer and liquor Source: Study D.

Table E Delaware Beer Taxes Paid by Beer Wholesalers in the Market Area, 1997 and 1998 Wholesaler 1997 Tax Paid ($) 1998 Tax Paid ($)
A B C D E F
Source: Study E. Nate. Delaware beer tax is $0.06 cents per gallon.

TableF Financial Statement Summary for 510 Wholesalers of Wine, Liquor, and Beer in Fiscal Year 1999 Assets Percentage
Gash and equivalents Accounts and notes receivable, net Inventory All other current Total current Fixed assets, net Intangibles, net All other noncurrent total
100.0

(continued)

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CHAPTER 4 OPPORTUNITY ANALYSIS, MARKET SEGMENTATION, AND MARKET TARGETING

EXHIBIT 2

(Continued) Table F (Continued)

Liabilities Notes payable, short-term Current maturity long-term debt Accounts and notes payable, trade Accrued expenses All other current Total current Long-term debt All other noncurrent Net worth Total liabilities and net worth Income Data Net sales Cost of sales Gross profit Operating expenses Operating profit All other expenses, net Profit before taxes Ratios Quick Current Debt/worth Sales/receivables Cost sales/inventory Percentage profit before taxes, based on total assets

Percentage

Interpretation of Statement Studies Figures: RMA recommends that Statement Studies data be regarded only as general guidelines and not as absolute industry norms. There are several reasons why the data may not be fully representative of a given industry: 1. The financial statements used in the Statement Studies are not selected by any random or statistically reliable method. RMA member banks voluntarily submit the raw data they have available each year, with these being the only constraints; (a) The fiscal year-ends of the companies reported may not be from April 1 through June 29, and (b) their total assets must be less than $100 million. 2. Many companies have varied product lines; however, the Statement Studies categorize them by their primary product Standard Industrial Classification (SIQ number only. 3. Some of our industry samples are rather small in relation to the total number of firms in a given industry. A relatively small sample can increase the chances that some of our composites do not fully represent an industry. 4. There is the chance that an extreme statement can be present in a sample, causing a disproportionate influence on the industry composite. This is particularly true in a relativel/'small sample. 5. Companies within the same industry may differ in their method of operations, which in turn can directly influence their financial statements. Since they are included in our sample, too, these statements can significantly affect our composite calculations. 6. Other considerations that can result in variations among different companies engagedin the same general line of business are different labor markets, geographical location, different accounting methods, quality of products handled, sources and methods of financing, and terms 66sale. For these reasons, RMA does not recommend that Statement Studies figures be considered as absolute normsfor a given industry. Rather, the figures should be used only as general guidelines and in addition to the other methods of financial analysis. RMA makes no claim as to the representativeness of the figures printed in this book. Source: Study F (Robert Morris Associates, 2000).

(continued)

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(Continued)

EXHIBIT 2

Table G Consumer Questionnaire Results

Consumed Coors in the past: Attitudes toward Coors: Strongly like Like \ Indifferent/no opinion Dislike Strongly dislike Total Weekly beer consumption: Less than 1 can 1-2 cans 3-4 cans 5-6 cans 7-8 cans 9 cans and over Total Intention to buy Coors: Certainly will Maybe will Not sure Maybe will not Certainly will not Total 100.0 % Yes No %
Yes No

Usually buy beer at: Liquor stores Taverns and bars Supermarkets Corner grocery Total Features considered important when buying beer Taste Brand name Price Store location Advertising Carbonation Other Total 100.0 %

100.0 J&

100.0

100.0

Semantic Differential Scale, Consumers* Extremely Masculine Healthful Cheap Strong Old-fashioned Upper-class Good taste
* Profiles would be provided for Coors, three competing beers, and an ideal beer. Source: Study G.

Very Somewhat

Somewhat Very Extremely Feminine Unhealthful Expensive Weak

New Lower-class Bad taste

(continued)

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EXHIBIT 2

(Continued) Table H Retailer Questionnaire Results Percentage Percentage Beer sales: Budweiser Miller Lite Miller Busch Bud Light Old Milwaukee Michelob Others Total %

Brands of beer carried: Budweiser Miller lite Miller , Busch Bud Light Old Milwaukee Michelob Total

100.0

100.0

Semantic Differential Scale, Retailers" Extremely Masculine Healthful Cheap Strong Old-fashioned Upper-class Good taste Intention to sell Coors: Certainly will Maybe will Not sure Maybe will not Certainly will not Total Very Somewhat Somewhat Very Extremely Feminine Unhealthful Expensive Weak New Lower-class Bad taste

100.0

" Profiles would be provided for Coors, three competing beers, and an ideal beer. Source: Study H.

Table I Retail and Wholesale Prices for Selected Beers in the Market Area Beer Budweiser Miller Lite Miller Busch Bud Light Old Milwaukee Michelob
" Price that the wholesaler sold to retailers. * Price that the retailer sold to consumers. Source: Study I.

Wholesale" Stx-Pack Price (dollars)

Retail* Six-Pack Price (dollars)

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While no specific financial data was discussed, general information had been provided in a cordial fashion because of the noncompetitive nature of Larry's plans. Based on his conversations, Larry had made the following estimates: Inventory Equipment: Delivery trucks Forklift Recycling and miscellaneous equipment Office equipment Total equipment Warehouse Land Total investment $240,000 $150,000 20,000 20,000 10,000 200,000 320,000 40,000 $800,000

A local banker had reviewed Larry's financial capabilities and saw no problem in extending a line of credit on the order of $400,000. Other sources also might loan as much as $400,000 to the business. As a rough estimate of fixed expenses, Larry planned on having four route salespeople, a secretary, and a warehouse manager. Salaries for these people and himself would run about $160,000 annually, plus some form of incentive compensation he had yet to determine. Other fixed or semifixed expenses were estimated as follows: Equipment depreciation Warehouse depreciation Utilities and telephone Insurance Personal property taxes Maintenance and janitorial Miscellaneous $35,000 15,000 12,000
10,000

10,000 5,600 2,400 $90,000

According to the two wholesalers, beer in bottles and cans outsold keg beer by a three-to-one margin. Keg beer prices at the wholesale level were about 45 percent of prices for beer in bottles and cans.

MEETING
The entire matter deserved much thought. Maybe it was a golden opportunity, maybe not. The only thing certain was that research was needed, Manson and Associates was ready, and Larry needed time to think. Today is Tuesday, Larry thoughtonly three days until he and John Rome would get together for direction.