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Coors Case Study

Coors Case Study

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Published by John Aldridge Chew

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Published by: John Aldridge Chew on Feb 01, 2012
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Coors Case Study: Regional Economies of Scale
www.csinvesting.wordpress.comStudying/Teaching/Investing Page 1
Before we discuss how Coors lost its regional economies of scale in 1975 as it went national by 1985, weshould realize another lesson this case demonstrates:
not all growth is profitable
. Growth requiresinvestment, not all investment earns its required return, and thus, growth can destroy value.Furthermore, Coors was an entrant lacking economies of scale going
into the regions dominatedby a huge competitor Anheuser-Busch (
Coors Case Study
What is the nature of the business?
Brewing beer is a business about
Beer is bulky, heavy and expensive to ship.The cost of transportation from one location, which was not a problem when Coors was a regional firm,increased as Coors distribution territory expanded. Anheuser Busch (
), with eleven breweriesaround the country, had shorter distances to travel from brewery to wholesaler and thus, lowerdistribution costs. The requirements of non-pasteurization increased distribution costs for Coors.
Anheuser-Busch and Coors income statements 1977 and 19851977 AB Coors
Sales in $mil 1.68 bil. 0.532 bil.Sales/barrel $46 $41.56
COGS/barrel $36.61 $28.98
Advertising costs/barrel 1.99 1.09
SGA/barrel 2.79 2.97
Oper. Inc. /Barrel $4.62 $8.52
Regional % shareMountain
37%Pacific 24%
Sales in $mil $5.26 bil. 1.08 bilSales/barrel $77.35 $73.40
COGS/barrel $51.82 $49.46
Advertising costs/barrel $6.93 $11.22
15% !!
SGA/barrel $7.22 $6.39
Oper. Inc. /Barrel $11.38 $6.33
Regional % share
Almost a 50% 20%Pacific drop in share 13%
Distribution widens, profits shrink
.Regional economies of scale in the beer business are strong. Advertising costs tend to be
fixed on aregional
basis. There are small discounts to the national advertiser (10%) but they do not compensate
Coors Case Study: Regional Economies of Scale
www.csinvesting.wordpress.comStudying/Teaching/Investing Page 2
for the difference in advertising costs per barrel between a brewer with a 20 percent local market shareand one with an 8 percent local share.Note the huge increase in advertising costs for Coors to go national and--without the density of distribution unlike its major competitor (AB)--the advertising was less effective. Operating incomedropped by more than 50%. All of Coors financial metrics declined in 1985 relative to 1975 except forCOGS. Meanwhile, Anheuser-Busch was gaining market share and increasing its profits per barrel
asign of increasing economies of scale.
Though with no guarantees, Coors should have retreated back to its dominant regional footprint of 1975which consisted of 11 states versus the 44 states it was operating in during 1985. Institutionalimperative and ego might have blinded Coors management from admitting a costly mistake. Thecompany would have had to sell off and write-off assets acquired during its national roll-out, but thethere was a chance to improve profitability for shareholders.Coors nation-wide advertising increased 5xs per barrel and costs to distribute per barrel rose about 30%per barrel. The rise in costs to move from a regional brewer in the Pacific/Rocky Mountain statesdestroyed its local economies of scale, dropping its operating profit by more than 50%.Coors could not match the scale and local dominance of the giant in the industry, Anheuser-Busch. Butwith s strong regional position, Coors would have been better able to defend itself against AB. Coorsbeer sold in the region for less than Budweiser, and it could have met any effort by AB to win customersby lowering prices, offering other promotions, and advertising heavily in the Mountain and Pacificstates.. If AB persisted, Coors could have contracted with some wholesalers in the Mid-west to sell Coorsat a discount. Coors still had hard-to-get mystique, and a price war with Bud on Bud
s home marketwould have cost Coors much less than AB.
See a further discussion of Coors by a Value Investor, Burgundy Asset Management(Canada)
Video of Burgundy Asset Management
Molson shareholder hits out over Coors deal
A major Molson stakeholder has urged shareholders to vote against a merger with Adolph Coors

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