Mountain Man Brewing Company

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lager beer. Introducing a new beer that they don’t perceive as being a MMBC quality beer can change their perspective on the entire company and MMBC could potentially lose consumers and their brand loyalty. In addition, a new brew would require significant costs in terms of production and advertising. This could be a catastrophic move if their Mountain Man Light does not catch on considering competitors in the light beer market have deeper pockets. And finally a new light beer could have the potential to cannibalize sales of their current lager thereby reducing their revenues without a balance from the light beer sales.

D. Quantitative Evaluation

For the established Lager Beer, the variable costs (VC) was reported to be $66.93 per barrel. To implement a new Light Beer, the VC would then increase by $4.69 per barrel, for a total of $71.62 per barrel. Since the retail price of barrel would be the same for either the Lager or the Light, the contribution margin for the Light beer would come out to be $25.38. If we assume a 2% revenue loss from the Lager sales as well as a 5% cannibalization rate, we can calculate the breakeven value to be 37,962 barrels over two years. If we make the same 2% revenue loss assumption but instead assume a 20% cannibalization rate, the breakeven value would then be 64,638 barrels over two years. To obtain this breakeven value, MMBC would need to capture a 0.10% market share in 2006 followed by a 0.09% market share in 2007 if we assumed the 5% cannibalization rate. If we assume the 20% cannibalization rate, MMBC would need to capture a 0.17% market share in 2006, and a 0.16% market share in 2007. It is reasonable to predict at least a 5% cannibalization rate as MMBC will surely lose sales of the Lager to sales of the Light beer. By calculating the worst case scenario with a 20% cannibalization with the best possible scenario with a 5% cannibalization, MMBC has a value range they can use to help analyze if introducing a Light beer is possible. See Appendix 1 for an explanation of these calculations.

E. Recommendation

After evaluation, MMBC should launch Mountain Man Light. Even if assuming the worst case scenario with 20% cannibalization rate, MMBC needs only to capture about 0.17% of the market share in the light beers to breakeven, which is well below their target range of 0.25-0.50% they estimate they will occupy. It’s also important as their aging consumer base is dwindling down, they need to make a push into the young adult segment of the beer market. Light beer sales are projected to grow steadily into the future so it is important for MMBC to enter into this market sooner, as to bring brand awareness to this young adult market segment that has not yet declared brand loyalty. For Chris Prangal, the answer is simple – Yes, MMBC needs to introduce a new light beer to remain competitive in the beer market and ensure future profitability for the company.

Appendix 1

Variable Cost Mountain Man Lager = $66.93 per barrel

Variable Cost Mountain Man Light = $71.62 per barrel ($66.93 + $4.69 reported increase in VC)

Price Per Barrel = Sales Revenue / Sales Volume

= ($50,440,000 / 520,000) = $97

Contribution Margin Lager = $97 - $66.93 = $30.07 per barrel

Contribution Margin Light = $97 - $71.62 = $25.38 per barrel

Contribution Margin Difference = $25.38 - $30.07 = ($4.69) per barrel

Light Beer Growth on East Coast (4% Growth Per Year)

2005 – 18,744,303 Barrels

2006 – 19,494,076 Barrels

2007 – 20,273,839 Barrels