THE BOSTON BEER COMPANY INC

Team 15- Lavanya Lipika, Yuqi Zhang, Adam Ungar, Sultan Adebayo
Memo
Growth forecasts for the craft-brewing industry

According to the case, analysts’ growth forecast for the craft brewing segment were positive. They
supported it by analyzing existing companies in this industry. Long-term growth estimated by analysts
was 32.5%, which seems to be high. Also, market growth forecasted equals 38.8%. Thus, the growth in
the craft brewing industry expected by the market and analysts may not be feasible. Competition is fierce
in such markets. As years will pass, more competitors would enter which would result in price reductions,
slightly lower margins.

Our analysis leads to an estimated IPO price for BBC of $29 per share. And by using the information of the
three craft brewers we estimated the size and the growth rate of the market to be $213M and 38.02%
respectively. ( Slide 1 and 2)

Porter’s five-forces influences industry competition and profitability. When we analyze these five forces,
the Craft-brewing industry seems to be an unattractive market. According to these five forces, the barrier
to entry is low; bargaining power of suppliers, Industry rivalry and threat of substitutes are high. But if the
company knows its strengths and weakness, it can create better strategies to overcome its weakness and
to develop a differentiated product for the customers. This could lead it to achieve higher profitability
than other competitive markets.

Our findings from five-forces are as follows (Slide 3)-

Barriers to Entry- Potentially low if companies follow the lead of BBC and Pete’s Brewing Company and
contract their brewing to prevent the need to build a new plant and lower capital costs. Consumer buying
behavior also plays a great role in this as they get attracted by differentiated products.

Bargaining Power of supplies- Can be very high because suppliers know that craft brewery will become
dependent on their specific hops or barley. Profitability might decrease if suppliers increase prices. In
contrast, given product differentiation, if a brewery is unhappy with the price or production methods,
they have the option to switch to another supplier/producer. This could mean that the profitability of this
segment remains high.

Industry Rivalry- High. Overall beer market growth rate registered a meager 0.1% annually from 1989 to
1994. The overall percentage of Speciality beer in the Beer industry is 1.4% in 1994. Craft brewing segment
had grown rapidly over the last five years( 40% per year). Thus, the potential for high future competition
decreases potential profits in the future.

The threat of Substitutes- Substitutes can be from different industry as well and not necessarily from the
same industry. Thus, down the line, if there is any change in consumer behavior, buying habits, consumers
can shift to other drinks from beer such as hard liquor or healthy drinks. Thus the threat of substitutes is
high.

Bargaining power of buyers- Buyer power is low due to the high margins of the craft sector and stagnant
sales of domestic beers, so distributors want to carry these products, so this increases potential
profitability. Distributors may not see the difference between offering a craft and domestic beer and may
choose to carry domestics because of the influence of these companies.