BUS497A California State Adolph Coors in Brewing Industry Case Analysis The following questions should be answered as completely as possible in your analys

BUS497A California State Adolph Coors in Brewing Industry Case Analysis The following questions should be answered as completely as possible in your analysis:

Why did Coors’s competitive position in the U.S. brewing industry deteriorate between the mid-1970s and the mid-1980s?
What must Coors do to improve its future prospects?

Submit a paper that is a maximum of three pages of text, single-sided, no less than 11-point font, double-spaced, with one-inch margins all around, plus any pages of exhibits.

You should create at least one diagram or exhibit that helps enlighten or support your answers, and include it in your report. Any exhibits/diagrams can be attached BEYOND the basic three-page text portion of your report, and exhibits/diagrams also can ignore the rest of the formatting requirements that otherwise apply to the three-page text portion.

The only materials you may use in completing your report are: (a) your textbook, (b) the Coors case study that is part of your case packet for this class, and (c) any notes you have taken in this class. NO OTHER OUTSIDE MATERIALS CAN BE USED.

The analysis MUST BE PROPERLY CITED and MUST HAVE A WORK CITED page. For the exclusive use of T. Altawari, 2019.
Harvard Business School
9-388-014
Rev. June 23, 1992
Adolph Coors in the Brewing Industry
“Rarely in Adolph Coors Company’s 113-year history has there been a year with as many
success stories as 1985.” Coors’s annual report for 1985 went on to cite records set by the
company’s Brewing Division. In a year when domestic beer consumption was flat, Coors’s beer
volume had jumped by 13% to a new high of 14.7 million barrels. And its revenues from beer had
topped $1 billion for the first time in the company’s history.
The Brewing Division accounted for 84% of Coors’s revenues in 1985, and over 100% of
its operating income. Although Coors had diversified into several businesses, including porcelain,
food products, biotechnology, oil and gas, and health systems, Chairman Bill Coors acknowledged
that for the foreseeable future, the company’s fortunes were tied to brewing.
The strategy of the Brewing Division had changed drastically over the 1975-1985 period.
The changes continued: in a decision that the company billed as “the most significant event of
1985 and perhaps our history,” Coors announced plans to build its second brewery in Virginia’s
Shenandoah Valley.
The first section of this case describes competition in the U.S. brewing industry and its
structural consequences. The next two sections describe Coors’s position within the industry, and
the plans that it had announced for its second brewery.
Competition in the U.S. Brewing Industry
In 1985, Americans spent $38 billion to buy 183 million barrels of beer.1 Of their
expenditure, 12% was applied to taxes, 42% to retailers’ margins, 12% to wholesalers’ margins, and
the remainder to beer at (net) wholesale prices. Domestic producers supplied 96% of the market
at an average wholesale price of $67 per barrel. The rest of this section describes the ways in
which the major U.S. brewers made and sold beer, and the industry structure that had resulted.
Professor Pankaj Ghemawat prepared this case as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
Copyright © 1987 by the President and Fellows of Harvard College. To order copies, call (617) 495-6117 or write the
Publishing Division, Harvard Business School, Boston, MA 02163. No part of this publication may be reproduced, stored
in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
1. One barrel contains enough beer to fill 331 12-ounce bottles or cans.
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Adolph Coors in the Brewing Industry
Procurement
Raw materials cost major brewers over half their net revenues. Agricultural inputs
accounted for a quarter or a fifth of total raw material costs, and packaging inputs for the
remainder. The key agricultural inputs were malt (germinated and dried barley), a starchy cereal
such as rice or corn, hops and yeast. Large, relatively efficient markets existed for all these
commodities. A brewer with a single, efficiently sized plant—about 3% of the U.S. market in
1985—could buy them on the best terms available.
Packaging inputs included cans, bottles and kegs. In 1945, 3% of the beer produced in
the United States had been canned, 61% bottled, and 36% kegged; by 1985, these proportions had
shifted to 57%, 30% and 13% respectively. Cans had been promoted by steel and aluminum
manufacturers, bottles had proved relatively overweight, and sales of kegs had dwindled as
Americans drank more and more of their beer at home.
Since World War II, beer prices had declined in real terms, and input costs had come to
account for a thicker slice of them: up from 35% in 1945 to the 50-60% range by 1985. In
response, major brewers had integrated backward. The most recent, and perhaps most costly, bout
of integration had focused on cans, whose prices had risen sharply in the mid-1970s after the
removal of price controls. In 1985, major brewers made some—but not all—of the cans they
required. An efficient canmaking facility cost $40-$50 million and produced one billion cans per
year. Independent canmakers had experienced significant excess capacity throughout the 1980s.
Production
Production costs, split more or less equally between direct labor and other cost
components, accounted for about a quarter of major brewers’ net revenues. Production involved
two steps, brewing and packaging. In brewing, the agricultural inputs were mixed with water,
fermented, and aged. Beer that was meant to be bottled or canned was also usually pasteurized
so that it could last unrefrigerated for up to six months. Smaller brewers had traditionally
pasteurized less of their beer; they sold more of it as draft, packaged in kegs. The major postwar
innovation in brewing had been a fermentation process that cut the aging time of beer from 30
days to just 20. Since aging cellars were often production bottlenecks, this “stretched” brewing
capacity by 20%-30%, beginning in the late 1960s.
In packaging, containers were filled with beer, labelled, and (in the case of cans and
bottles) packed together. Scale economies in packaging had increased since World War II, for
two reasons. First, newer vintages of filling lines—especially lines for canning and bottling—were
faster and more efficient. Second, package sizes had proliferated; because of changeover costs,
this increased the importance of run length.
As a result, the minimal efficient production scale for an integrated brewery (a brewing
and packaging facility) had increased from 100,000 barrels per year in 1950 to 1 million barrels
by 1960, 2 million barrels by 1970, and had approximated 4-5 million barrels since the mid-1970s.
In 1985, a 5-million-barrel brewery cost $250-$300 million. Capital costs underlay much of the
effect of increasing or decreasing production scale; according to one source, they displayed a 75%
scale slope. In other words, doubling brewery scale would cut unit capital costs by 25%; halving
it would increase unit capital costs by 33%. Breweries could be expanded if they had been built
with that possibility in mind.
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Adolph Coors in the Brewing Industry
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The brewing industry’s capacity utilization had hovered in the 60% range in the 1950s
because of stagnant demand. It increased in the 1960s and early 1970s as demand rose rapidly:
the large brewers, particularly Anheuser-Busch and Schlitz, added relatively large breweries and
sold them out quickly; many smaller breweries were closed. The industry’s capacity utilization
peaked in the mid-1970s at close to 90%. In the late 1970s, capacity surged despite stagnant
demand. Miller’s expansions were the most aggressive, but the other national brewers also moved
to tap economies of scale. For instance, only four out of Anheuser-Busch’s ten breweries
exceeded four million barrels apiece in 1977; by 1985, all eleven of its breweries cleared that
hurdle. Capacity utilization dropped toward 80% and stayed at that level throughout the 1980s.
In 1984, excess capacity in the East forced Miller to take a $280 million pretax write-off on a
nearly completed 10-million-barrel brewery in Ohio that it had intended to open in 1982.
Exhibit 1 depicts changes in breweries’ actual capacities since the late 1950s, and Exhibit
2 summarizes the production configurations of the major U.S. brewers in 1985. By that time, all
of them except Coors operated several breweries apiece. Multiplant configurations reduced the
risk of catastrophic shutdowns due to strikes, fires or explosions, permitted centralized production
of low-volume packages (which increased run lengths), and let brewers absorb the output
repercussions of a large new brewery over several existing ones.
Distribution
Beer made its way from producers to consumers via wholesalers and retailers. There were
two broad categories of retail outlets for beer: on-premise and off-premise. On-premise outlets
such as bars or restaurants carried a limited number of brands of beer, and averaged margins of
190% in 1985. Bars, in particular, sold more than their share of dark, local draft beers. State and
federal laws prevented brewers from operating on-premise outlets except at their breweries. Offpremise outlets included supermarkets, and grocery, convenience and liquor stores. They carried
a much broader selection of brands and averaged margins of 21% in 1985. Since 1945, offpremise outlets’ share of beer volume had increased from 42% to 67%.
Smaller brewers had traditionally distributed their beer directly in their local markets, with
a particular emphasis on selling kegged draft beer to on-premise outlets. But less than 5% of
major U.S. brewers’ volume went direct. They tended to rely, instead, on independent wholesalers
who purchased the beer, stored it at their warehouses, and sold and delivered it to retail accounts.
Wholesalers also worked with brewers to open large accounts, secure prime shelf-space, and fund
local promotions. In 1985, wholesalers averaged a 28% margin on their “laid-in” or landed cost.
There were 4,500 independent wholesalers in the United States in 1985. Each wholesaler
had exclusive rights to sell a specific brand within a market usually no larger than a metropolitan
area. Wholesalers often carried more than one brand, and might represent more than one brewer.
In 1985, a market usually had at least two large wholesalers (one for Anheuser-Busch and one for
Miller), one or two other large ones that might carry another major as their lead brewer, and
several smaller ones who carried brands or retail outlets that the larger ones didn’t. AnheuserBusch’s network was the strongest: its 970 wholesalers usually did not carry other brewers’ beer,
simplifying inventory management and delivery. Miller’s wholesalers were about as large, but often
carried 5-12 brands besides Miller’s. The other competitors had had increasing difficulty finding
large wholesalers to carry them as lead brewers. The average pretax return on sales for
wholesalers had fallen from 3.0% in 1981 to 2.1% by 1984.
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Adolph Coors in the Brewing Industry
In 1985, five of the six majors—Coors was the exception—distributed their beer in all 50
states. The five national brewers shipped beer a median distance of 300-400 miles to wholesalers’
warehouses, at an average cost of $1.50-$2.00 per barrel. Wholesalers picked up this cost in name
only; brewers absorbed it, in effect, by adjusting their F.O.B. prices. Median shipping distances
had stayed the same over the past three decades because the national brewers, who had displaced
regional and local competitors, had all moved to multiplant configurations.
Marketing
Exhibit 3 tracks U.S. beer consumption over the 1945-1985 period. Demand grew at less
than a 1% rate over 1945-1960 and 1980-1985; that was also the rate of growth predicted for the
1985-2000 period. Virtually all the volume gains in the postwar period had been registered
between 1960 and 1980. The major reason for the gains was demographic: as baby boomers
reached the legal drinking age, they swelled the number of beer drinkers; volume went up even
more because younger drinkers consumed more beer than older ones. The second important
reason was related to the marketing variables brewers worked with: price and differentiation.
Without controlling for changes in mix, beer prices fell by 30% between 1960 and 1980;
this must have stimulated volume even though the price-elasticity of demand for beer seemed to
be relatively low (between -0.7 and -0.9). Most observers thought that prices fell because of cost
reductions and pressures to fill excess capacity rather than because of conscious predation.
Anheuser-Busch and to a lesser extent, Miller, continued to charge higher-than-average prices.
Brewers used low prices to enter new markets or promote new products, but if they kept them
low, could impair the images of all but downscale “popular” brands. Pabst and Schlitz were often
cited as cautionary examples of companies that had weakened their premium brands by
discounting them.
Brewers differentiated their beers through advertising, segmentation, and packaging.
Advertising increased after the war because of the emergence of TV, rising consumer incomes,
the shift to off-premise consumption, and brewers’ moves to broaden distribution: total advertising
expenditures jumped from $50 million (2.6% of the industry’s gross sales) in 1945 to $255 million
(7.1% of sales) by 1965. Partly because the 1965 expenditures were “overkill,” and partly because
the national rollouts of the major brands had been completed, advertising expenditures drifted
down to $200 million (3.3% of sales) by 1973. But then they skyrocketed again because of a steep
increase by Miller (which had been acquired by Philip Morris in 1969), a delayed but even steeper
response by Anheuser-Busch, and attempts by the next-largest brewers to keep up. In 1980,
advertising expenditures reached $641 million (4.5% of sales); by 1985, they approximated $1,200
million (about 10% of sales; see Exhibit 4). Statistical studies suggested that 90% of the effect
of advertising dissipated within a year.
Intensified advertising helped national brewers in several ways: they could buy space or time
in larger quantities, use media such as network TV and national magazines, achieve critical thresholds
of exposure, and spread the fixed costs of advertising campaigns over more volume. Nevertheless,
a large regional brewer still had a wide choice of effective media: for instance, spot TV, even though
it cost 15%-30% more than network TV, could be tailored to local market conditions. According to
a careful study conducted in the early 1970s, “The cost savings attributable to advertising on a
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Adolph Coors in the Brewing Industry
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nationwide scale [rather than regionally] could hardly amount to more than one percent of. . .
revenues, other things held equal.”2
Segmentation was the second tool used to differentiate beer. Before 1970, there were just
two categories of beer: popular beers which were sold primarily on the basis of price, and premium
beers which didn’t cost more to produce, but were sold primarily on the basis of their images. The
premium segment had gotten off the ground when brewers going national had added price
premiums to their products to offset extra transportation costs. The construction of regionally
dispersed breweries had since eliminated national brewers’ extra transportation costs, but the price
premia remained: they were used, among other things, to fund advertising. Because of increased
advertising by brewers and trading up by customers, popular beers’ share of volume had declined
from 86% in 1947 to 58% by 1970.
Over the 1970-1985 period, the major U.S. brewers introduced even higher-priced brands
and also differentiated beers according to their alcohol content (see Exhibit 5). Over the 19701975 period, popular beers yielded 16 points of share, mainly to premium beers. Between 1975
and 1980, popular beers gave up another 22 points, but this time, light beers, paced by the
premium-priced Lite brand Miller had introduced in 1975, absorbed most of the increase. And
over 1980-1985, premium beers yielded eight share points; light beers registered an equivalent
gain. Superpremium beers, led by Anheuser-Busch’s Michelob brand, had increased their share
from 1% in 1970 to 6% by 1980, but had since receded to 4%.
Major brewers’ brands proliferated as segments multiplied: between 1977 and 1981 alone,
their number increased from 30 to 60. Larger brewers had several advantages in introducing new
brands: their existing brand names provided leverage, they could afford launch costs ($20-$35
million per brand) and maintenance advertising (about $10 million annually per brand), and their
production and distribution capabilities let them quickly ramp up sales. By 1985, a major brewer
typically had a popular, a premium, and a superpremium brand in the regular category, and at
least one brand in the light category. Exhibit 6 tracks the market shares of the six largest brewers’
major brands over the 1977-1985 period.
Packaging was the third way in which beer was differentiated. Brewers had traditionally
bottled or canned their output in 12-ounce containers. That changed in 1972 with Miller’s
introduction of the seven-ounce “pony” bottle, which attracted consumers who drank beer in small
amounts or slowly. As states eased their regulation of package sizes in the 1970s, beer was made
available in 7, 8, 10, 12, 14 16, 24 and 32 ounce containers packed in units of 6, 8, 12 or 24.
Structural Impact
By 1934, a year after the repeal of Prohibition, 700 breweries had reopened in the United
States. A third went out of business before World War II broke out. After the war, consolidation
continued. Six major brewers had since come to account for virtually all domestic shipments:
Exhibits 7-9 supply information on their market shares and operating performance. Only the
uppermost end of the market had resisted consolidation. Several hundred imported brands, which
wholesaled at twice the average price of domestic brands, accounted for 4% of domestic
consumption. And the ultrapremium “boutique” beers offered by domestic microbrewers added
2. F.M. Scherer et al., The Economics of Multi-Plant Operation, Harvard University Press, 1975, p. 248.
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Adolph Coors in the Brewing Industry
up to less than 1% of domestic consumption. In the words of one analyst, imports and boutique
beers might eventually account for “two or three drops in the bucket, rather than just one.”
Most other large industrialized countries had highly concentrated brewing industries as
well. West Germany, the second largest market for beer after the United States, was a striking
exception to this rule.3 The West German market was characterized by long-term contracts
between brewers and retail outlets that guaranteed brewers exclusive supply rights, and by
restrictions on the television advertising of beer. Although industry concentration had increased
significantly in West Germany since the 1960s, mainly because of mergers, the three largest
brewers still accounted for less than 30% of total ouput and approximately 1,300 breweries
continued to operate there. Medium-to-large German brewers dominated the low-price category;
many of the small local brewers, in contrast, operated in the mid-price segment.
The Brewing Division of Adolph Coors
Background
Adolph Coors, Sr., opened the doors of his brewery in Golden, Colorado, in 1873. His
beer company got through Prohibition by making near beer, malted milk, cement and porcelain.
Adolph Coors, Jr., took over in 1929 when his father died. Four year…
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