Background
It was February 20, 2006, in the New River coal region of West Virginia. Chris Prangel, a recent MBA graduate, had returned home a year earlier to manage the marketing operations of the Mountain Man Beer Company (MMBC), a family-owned business he stood to inherit in five years, when his father, Oscar Prangel, the president and owner, retired. Mountain Man brewed one beer, Mountain Man Lager, also known as “West Virginia’s beer.” Due to changes in beer drinkers’ preferences, the company was now experiencing declining sales for the first time in the company’s history. In response, Chris wanted to launch Mountain Man Light, a “light beer” formulation of Mountain Man Lager, in the hope of attracting younger drinkers to the brand
Decision Problem
For the first time in the company’s history, it experienced a 2% decline in revenue as a result of an aging demographic and change in preference of customers. Chris Prangel, the marketing manager wants to decide whether to launch Mountain man Light (MMI) or not.
Objective
Sustainability of MMBC.
Alternatives
- To introduce Mountain Man Light.
- To not introduce Mountain Man Light.
Criteria
- Impact on Mountain man brewing company brand.
- Impact on Mountain man brewing company revenue.
- Cannibalization effect.
- Breakeven/Payback.
- Gross profit.
Analysis
Cost Analysis
- 2005 Sales revenue for MMBC = $50,440,000
- 2005 Sales volume for MMBC = 520,000
- Market price per barrel of MMI = $50,440,000/520,000 = $97 per barrel
- Cost price of Mountain man Lager (MML) = $66.93
- Cost price of Mountain Man Light (MMI) = $71.63 ($66.93 + $4.89)
- Contribution for Mountain man Lager = $97 – $66.93 = $30.07
- Contribution for Mountain Man Light = $97 – $71.62 = $25.38
Revenue of Mountain Man Light
| Market price per barrel of MMI | $97 |
| Profit per barrel | $97 – $71.62 = $25.38 |
| Advertising cost | $750,000 |
| Annual incremental SG&A cost | $900,000 |
| Total advertising investment (2007) | $2,550,000 |
Breakeven Calculation for Mountain Man Light
- Total advertising investment (2006)= $1,650,000
- Total breakeven volume =1,650,000/25.38 = 65,011.8 barrels (# of barrels to recover advertising cost and SG&A)
- Total breakeven revenue = 65,011.8 x $97 = $9,776,679.8
Revenue Forecast for Mountain Man Larger (MML) Beer
| Year | ($) 2005 | ($) 2006 | ($) 2007 | ($) 2008 | ($) 2009 | ($) 2010 |
| MML Revenue | 50,440,000 | 49,431,200 | 48,442,576 | 47,473,724 | 46,524,250 | 45,593,765 |
| MML Sales in quatity | 520,000 | 509,600 | 499,408 | 489,420 | 479,631 | 470,039 |
| MML contribution | 15,636,400 | 15,323,672 | 15,017,199 | 14,716,855 | 14,422,517 | 14,134,067 |
Revenue Forecast for Mountain Man Light Beer
| Year | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
| Light beer consumption in barrels (East central region) | 18,744,303 | 19,494,075 | 20,273,838 | 21,084,792 | 21,928,183 | 22,805,311 |
| MMI annual growth rate 4% | 4% | 4% | 4% | 4% | 4% | |
| MMI estimated sales in barrels (0.25% of base Market share) | $48,735 | $101,369 | $158,136 | $219,282 | $285,066 | |
| MMI Revenue (at $97 per barrel) | $4,727,313 | $9,832,811 | $15,339,186 | $21,270,338 | $27,651,439 | |
| MMI Contribution | $1,236,899 | $2,572,750 | $4,013,490 | $5,565,373 | $7,234,985 |
Cannibalization effect on Mountain Man Lager
| Year | ($) 2005 | ($) 2006 | ($) 2007 | ($) 2008 | ($) 2009 | ($) 2010 |
| Larger 5% decrease (No. of barrels) | 520,000 | 494,000 | 469,300 | 445,835 | 423,543 | 402,366 |
| Larger 20% decrease (No. of barrels) | 520,000 | 416,000 | 332,800 | 266,240 | 212,992 | 170,394 |
| Larger revenue @5% decrease | 50,440,000 | 47,918,000 | 45,522,100 | 43,245,995 | 41,083,695 | 39,029,510 |
| Larger revenue @20% decrease | 50,440,000 | 40,352,000 | 32,281,600 | 25,825,280 | 20,660,224 | 16,528,179 |
Based on analysis
- MMI contributes ($25.38) lower than MML ($30.00).
- However, in 2 years (2007), MMI will begin to breakeven and contribute to MMBC.
Analysis result based on criteria
| To not introduce MM light | To introduce MM light | |
| Impact on MMBC brand | Neutral | Neutral |
| Impact on MMBC revenues | Annual decline | Annual Increase |
| Cannibalization effect | Neutral | Negative |
| Break even/payback | Yes | |
| Gross profit | Decline | Increase |
Decision
For MMBC sustainability, mountains man light should be launched. Based on projections, MMI covers investment cost and becomes profitable from 2007.
Recommendation
MMBC Should:
- Maintain the quality of mountain man Larger to mitigate cannibalization effect.
- Work towards increasing the market share of MMI
- Engage in product awareness for MMI especially amongst youth.
- Make MMI easily available in both on-premise (to access youth) and off-premise locations.
