Douglas Leavitt Matthew Lubman John Palys April 16, 2005 Coors Brewing Company Table of Contents Executive Summary...........................................................................3 Company History ...............................................................................4 Financial Analysis..............................................................................6 Competitive Analysis .......................................................................12 Industry ................................................................................................ 12 Entry ..................................................................................................... 14 Buyer and Supplier Power ..................................................................... 14 Substitutes and Complements ............................................................... 16 Key Issues.......................................................................................18 Conclusion.......................................................................................22 References ......................................................................................23 2 SageGroup, LLP Coors Brewing Company Executive Summary Coors Brewing Company is the third largest domestic beer producer. Headquartered in Golden, CO, Coors produces a variety of beers including its cornerstone brand Coors Light. While Coors has been doing well, the company needs to improve its presence in the premium beer market by leveraging its distribution network to increase the availability of beers brewed by newly-acquired Molson. It also needs to restructure its advertising, moving away from hyping how its beers are “cold from birth” and focusing on targeting its chosen demographic of younger drinkers. This would also allow the company to redesign its distribution networks in such a way as to get its margins in line with those of its competitors. Making these strategic changes would really help Molson-Coors compete with Anheuser-Busch and SAB-Miller in the US market. 3 SageGroup, LLP Coors Brewing Company Company History Coors Brewing Company produces, packages, and distributes a variety of alcoholic beverages including its signature brand Coors original and its best seller Coors Light. Other notable brands include Keystone Light, Molson, and Carling. As the primary subsidiary of the Adolph Coors Company, Coors is the third largest brewer in the United States and controls approximately 11-12% of the domestic market. Coors Brewing Company was founded in 1873 by a German immigrant, Adolph Coors, just outside of Golden, Colorado. Adolph contributed only $2,000 of the original $20,000 investment, but his primary contribution was his extensive brewing background. Learning as an apprentice in Europe, Adolph dreamed of operating a brewery of his own once he reached the United States. “The Golden Brewery” saw immediate success and Adolph Coors bought out his only partner Jacob Schueler in 1880, giving Mr. Coors full ownership and control. Coors Brewing Company still continued to grow. By 1890, the brewery sold 17,600 barrels. Due to poor and expensive transportation, distribution was limited to a small region in the Western United States. The company saw sales grow each successive year until prohibition became law in Colorado in 1916. The company managed to survive this difficult time for the brewing industry by producing malted milk and other food products. There were 1,568 brewers in the U.S. before prohibition and only 750 reopened when prohibition ended in 1933. Coors was fortunate enough to endure and reached sales of 136,000 barrels throughout 11 western states in its first full year of post-prohibition operation. Coors grew further during the 1930’s without any major setbacks until rationing of beer was introduced during World War 2. Although government rationing was common, the beer industry occupied special significance 4 SageGroup, LLP Coors Brewing Company because of it was consumed by soldiers and used to boost morale. Half of Coors’ sales went to the government during the wartime years. The alcohol content of Coors products was also cut from 4.6% to only 3.2% during the war. When the war ended in 1945, Coors’ total sales were at 300,000 barrels, but the post-war period proved to be a time of rapid growth for the company. By 1955, sales had increased to 1 million barrels, and Coors was gaining recognition as a national brand. Around the same time, Coors introduced the first all-aluminum two-piece can manufacturing center. Moreover, Coors introduced a recycling program, giving out one penny per can donated. Coors’ success reached new levels in the late 1970’s and early 1980’s. In 1978, Coors introduced Coors Light. The popular new drink would eventually become and remains to today as the best seller of the entire company. In 1981, Coors distribution crossed east of the Mississippi for the first time. By 1991, Coors was sold in all 50 states. This was a major milestone for Coors, but it did not mark the end of the company’s attempts to continue its rapid growth. In the early 1990’s Coors expanded into Canada, where the flagship Coors Light brand proved to be extremely popular. In 2002 Coors made a move to broaden its product lines by purchasing a majority stake in Bass, the popular English brewer. This transaction increased sales volume increased by 40%. Coors Brewing Company became the 2nd largest brewer in the United Kingdom and in the top ten of the world. In 2003, they sold 32.7 million barrels. Net sales topped out at 4 billion with a net income of 174.1 million for the firm. Coors’ original plant in Golden, Colorado is the largest single site brewery in the world today. Coors also operates a brewery in Memphis, Tennessee and a packaging plant in Virginia’s Shenandoah Valley. Outside of Golden, Coors owns and is a partner in the largest aluminum can manufacturing plant in the 5 SageGroup, LLP Coors Brewing Company United States. Coors Brewing Company is among the 500 largest publicly traded companies in the U.S. With their global influence, huge capacity, and vertical integration, the future seems bright for Coors. 6 SageGroup, LLP Coors Brewing Company Financial Analysis Adolph Coors Brewing is the third largest brewer within the Unites States. The company produces many different beers including Keystone, Killian’s Irish Red, Aspen Edge, and its most popular beverage, Coors Light. While Coors is an extremely large company, Coors Light is definitely its “franchise” product and it is fair to say that Coors’ fortunes are largely dependant on the performance of its franchise brand. In 2004, Coors Light accounted for ~75% of Coors’ domestic sales and ~50% of its international sales. As a result of this dependence on one product, Coors would be very vulnerable to a serious fall in its earnings if something was to go wrong with Coors Light. Furthermore, since so much of Coors’ product (about 90% of total volume) is produced at its main brewery in Golden, CO, transportation costs are high. Coors is also advertising that its ships all of its products in refrigerated vehicles, further raising costs. This effect will only be multiplied if the current high oil price environment persists, as “reefer” trucks consume much more energy than standard trucks do. The end result is the highest per barrel cost of any major producer in the U.S. This seriously reduces profit margins. Coors management has made it clear that they view their dependence on Coors Light as a problem, as they have been attempting to diversify their revenue streams since the late 19i90s, when they bought the British brewer Carling. Recently, Coors has taken aggressive steps to expand its role as a worldwide beer distributor. Building on the Carling acquisition, Coors has continued to focus on international markets. In 2002 they purchased a majority stake in Bass, another British brewer, but their greatest step yet towards diversifying their revenue streams occurred in 2004 with the announcement of an agreement to merge with Canadian brewing giant Molson. The new company, now called Molson Coors Brewing Company, is the fifth largest brewer in the world. Molson shareholders control 55% of the stock, though the Molson and Coors families have equal voting rights on the 7 SageGroup, LLP Coors Brewing Company board. A quick glance at common financial ratios shows that the new company is generally representative of the industry. TAP BUD Industry Market Cap: 4.44B 37.33B 4.33B Employees: 5,400 31,435 5.40K Rev. Growth (ttm): 7.60% 5.60% 15.80% Revenue (ttm): 4.31B 14.93B 765.20M Gross Margin (ttm): 36.33% 39.85% 38.78% EBITDA (ttm): 614.35M 4.29B 214.90M Oper. Margins (ttm): 8.09% 22.51% 13.32% Net Income (ttm): 196.74M 2.24B 76.68M EPS (ttm): 5.167 2.768 1.33 PE (ttm): 15.16 17.36 22.26 PEG (ttm): 1.56 1.81 1.81 PS (ttm): 1.01 2.35 1.44 Anheuser Busch (BUD) is the behemoth of the beer industry. The company generated more than three times as much revenue as Coors and Molson combined in 2004. With multiple breweries across the United States, Anheuser Busch can capitalize on efficient distribution and market power over its suppliers. They produce the top two selling beers in America, Bud Light and Budweiser. Anheuser also has higher profit margins than Molson Coors, mainly because of its transportation advantage that was discussed earlier. 8 SageGroup, LLP Coors Brewing Company Growth Company Industry1 Market2 12-Month Revenue Growth 7.6% 1.0% 4.3% 12-Month Net Income Growth 12.6% 2.1%