Cold Harbor Brewery Case
William, Susan, and Conrad sat around the small kitchen table. It was three oíclock in the morning and the three had been discussing, sometimes shouting at each other, what should be done to reverse Cold Harbor Breweryís declining sales for several hours. While it was evident that each of the family members cared greatly for the family brewery, each has their own ideas as to what would help Cold Harbor to regain its position as the regionís leading brewery. After several meetings they have not been able to come to an agreement on how to help the ailing company. If something was not done soon Cold Harbor would either be forced to close its doors or perhaps be sold to one of the larger national brewers that was looking for a small regional brewery.
Cold Harborís History
The Cold Harbor Brewery is a regional brewery located in New Hampshire. Cold Harbor started brewing high quality beers right after World War II by Adam Samuelson. Major Samuelson was stationed in Britain during World War II and became accustomed to great tasting beers and ails produced by British and Irish Breweries. When he got home he decided that he would bring the unique taste of British beers to America. Samuelson offered to sponsor a young Irish brewer he had befriended and the two became business partners.
The beer drinking population was thirsty for the product. The 18th Amendment that outlawed the production and distribution of alcoholic beverages was never popular with the general population. After the law was repealed by the 21st Amendment breweries scrambled to begin to satisfy consumersí thirst. Under the firm guidance of Adam Samuelson, Cold Harbor quickly grew by catering to a market spread across the northeastern states. During its peak Cold Harbor produced just over16,000 barrels of their products per year. Cold Harborís products were especially popular among the bars and pubs that catered to working class immigrants who longed for the taste of beers from home.
Shortly after Cold Harbor became successful, the young brewer grew increasingly home sick. Samuelson worked hard to learn what his friend could teach about crafting fine ails and beers. One day his friend told Samuelson that he was "every bit as good as me at the craft of brewing". Samuelson bought his business partnerís half of the brewery and said goodbye to his friend.
Today, Cold Harbor distributes its products to a loyal customer base through a traditional chain of distributors and wholesalers who ultimately make the product available to retailers. Over half of Cold Harborís sales are directly through tavern, restaurants, and other eating establishments. Cold Harborís main products are a larger and a hearty stout with some seasonal brews that are distributed both in kegs and in returnable bottles. Throughout the years Cold Harbor has been able to keep up with the changing tastes of its customers. When micro-brewed products became popular in the late 1980s, Cold Harbor saw an increase in sales helped in part by its creative packaging. Customers, thirsty to try micro-brew products, were drawn to Cold Harbors packaging. This until recently has helped keep their products on the highly competitive shelves of some national retail chains that are located in their distribution area.
When Adam Samuelson announced his retirement in 1995, William, his eldest son, was seen by most everyone as in line to take over the family brewing business. Williamís two siblings, Susan and Conrad, also play an important role in the business and serve on the board of directors along with William and the elder Samuelson. After a heated debate at the last board of directorís meeting, Mr. Samuelson stood up and pounded his fist on the table. He strongly expressed his dissatisfaction with his three children and told them that if they could not come up with a plan to save the business, he would sell Cold Harbor to someone who could. With a tear in his eye, he stormed out of the meeting leaving his children sitting there speechless for several minutes.
History Brewing Industry
Beer and Ale in the U.S. dates back to the pilgrims. It was an essential part of their diet as it was considered healthier than water, which was often unsafe. Hearty ales sustained the pilgrims during the harsh winter months, as food stocks became low. As the New World became colonized breweries and taverns sprung-up serving their patrons these hearty brews. These taverns became social centers for the working and upper classes alike.
Today, brewing is a $50 billion industry in the United States. During 1998 taxes were paid on 179.5 million barrels of malt beverages. This was an increase of 1.1% over 1997. Beer imports for 1998 were over 16.3 million barrels, an increased of 14% over 1997.
History Craft-brewing Industry
Forty-nine states and the District of Columbia have either partially or entirely legalized brewpubs as of 1998. Montana is the only state not to legalize brewpubs. As of 1998, the craft-brewing segment of the brewing was $3 billion or six percent of the overall brewing industry. Table 1 provides some craft-brewing industry definitions. The graft brewing industry in the United States is rapidly growing. During 1998 183 (138 brewpubs and 45 microbreweries) new breweries opened. As of 1998 there were 37 regional specialty breweries, 433 microbreweries, and 910 brewpubs in the United States.
While overall beer consumption has been fairly flat over the last five years, total craft brewery production has grown at 30% to 40% per year. Twenty-one of the top fifty craft-brewing companies grew by ten percent or more in 1998. Long Trail Brewing (VT), Brooklyn Brewery (NY), Otter Creek Brewing Company (VT), and Magic Hat Brewery (VT) are among these breweries grew by 18%, 11%, 19%, and 32% respectively. The brewing company on the eastern seaboard that experienced greater growth was Frederick Brewing Company of Maryland, who experienced an increase of 81%.
The U.S. craft-brewing industry has enjoyed an unusually high survival rate. On average two out of three new business in the United States go out of business within the first five years. During 1998 only one in five brew pubs and one in four microbreweries went out of business. This is due in part by a strong U.S. economy and a busy population that eats out an average of three times per month.
The Private Label Products Industry
Private label products (PLP) are a $43.3 billion industry. "One in every five items sold every day in U.S. supermarkets, drug chains and mass merchandisers is private label product (PLMA, 1999.) The main distribution channels for private label products or store brands are supermarkets, drug chains, and mass merchandisers. Sales of PLPs are quoted both in dollars and in unit sales. Since PLPs are less expensive many prefer to track sales by unit sales.
Beer and ale products make up perhaps the smallest portion of the edible grocery category for grocery stores. In 1998 private label beer and ale accounted for a dollar share of .03% and a unit share of .04% of all the beer and ale sold in the United States. For a comparison private label soda and canned juices make up 6.77% and 17.29% respectively of their markets. Drug chains sell even less private label beer and ale (.01% in dollar share and .01% in unit share). Mass merchandisers reported no sales of store brand beer and ale products.
Cyclical Instabilities of the Brewing Industry
Like the soft beverage industry, the beer industry is seasonal by nature. Consumers purchase more beer during the hot summer months. This leads to not only fluctuations in factory orders and production, but also the potential for stock outs at the both the retail and distributor levels. Since the summer season is shorter in for the northeast, Cold Harbor wants to ensure that they can meet the increased demand during this busy season. Because Cold Harbor is a small brewery, its resources are pushed to their limits during this time. While everyone is expected to pitch in during these busy times, overtime pay can become a problem and erode the extra income. Additionally, the machinery on the production line tends to breakdown more often when it becomes stress from continuous use.
Since the brewery must begin beer production before the summer season, over stocks can be a problem if the northeast experiences a prolonged winter. Stock outs can also become a big problem if the company fails to correctly predict when the summer season is extended by warm days known as "Indian Summer" by New Englanders and cuts production too early. These warm days are celebrated will barbecues, hiking, and other outdoor activities by those who want to hang on to the very last vestige of summer.
Cold Harbor distributes its products either directly the customer for special orders (custom label brews) or through one of several distributors. Beer is packaged either in kegs that must be returned or in bottles that are packed in cardboard boxes stacked on special pallets. Distributors are slow to return the kegs and pallets, often leaving Cold Harbor short. Cold Harbor has unsuccessfully tried to charge a deposit, but the distributors refuse to pay this, sometimes threatening to drop their line from their distribution.
Cold Harborís relative small size makes it a secondary player for its distributors. William has been pushing Cold Harbor to select one or two distributors who would give them the exposure that he thinks the company deserves.
Williamís Proposal: Move into Private Label Manufacturing
William has been pushing private label manufacturing as a solution to Cold Harborís problems. Over the past several years, Cold Harbor has started to brew and bottle beer that chains are marketing under their own label. While this strategy has diversified the end customer base for Cold Harbor, it has led to production problems. As more private label customers come on board, Cold Harbor is finding that it is running smaller and smaller production lots and has to make shipments with less than full lots. Art and production costs for the various labels being put on essentially the same beer are becoming significant since each new customer wants a custom look. Even the issue of getting shipping pallets from Cold Harborís factory returned from wholesale and distribution sites is becoming an important cost issue that is eating into ever slimmer profit margins. Appendix I breaks down the cost of private label brewing.
In a word, with a proliferation of private products, Cold Harbor is starting to loose its economies of scale that came from essentially producing only two productsólager and stout. William is considering countering some of these problems with the private label strategy by investigating partnerships with other regionally based breweries. By partnering with breweries in other regions of the country, the partnership could manufacture for a national client, with each regional brewery producing for and distributing to that clientís retail outlets in its particular region of the country.
Williamís two siblings have somewhat differing visions of the future direction for Cold Harbor. They realize that the future health of the family business depends on their ability to create and push a more profitable vision for the future.
Conrad sees Cold Harborís problem as essentially one of getting a firmer handle on an end customer base and the whole distribution chain. He sees Cold Harbor becoming more involved in direct marketing to customers, seeking to build stronger brand loyalty to their product line. He sees the microbrewery markets as good examples of how this may occur. Under this vision, Cold Harbor might even become aligned in some sort of a partnership with restaurants and taverns who directly distribute for Cold Harbor. Because Cold Harbor will be in closer contact with its customer base, it can create greater customer loyalty as well as tighter inventory management systems and hence predict shifts in customer demand. Conrad has looked into distributor-managed inventory schemes whereby the manufacturer or distributor of a product takes on responsibility for stocking product directly with the retailer. In effect, under these schemes the manufacturer or distributor becomes the owner of inventories held by the retailer and has greater access to competitive information formerly only available to the retailer. Often the distributor can gain access to the retailerís inventory management information systems and hence gain greater information about shifts in end-customer demand.
Susan has yet another vision for the future of Cold Harbor. She agrees with Conrad that the future rests with investing more fully in the distribution chain, but she sees it in a somewhat different light. Susan wants Cold Harbor to become involved in offering a wider line of beverages and snack foods. She believes that by offering products like Cold Harbor root beer, potato chips, and pretzels, the company can increase consumer loyalty as well as profits. These products would be produced for Cold Harbor by their soft drink and snack partners, so Cold Harbor would not have to invest in additional plant and equipment. Susan believes that it would be a win/win situation for all parties involved.
In addition, the addition of these products will aid in building partnerships with regional soft drink and snack manufacturers. This will give Cold Harbor access to wholesale and distribution facilities, overcoming many of the instabilities and inefficiencies with small shipment lots that Williamís scheme entails. By becoming more involved in a greater range of products that Cold Harborís retailers want, the business can gain more control over its distribution chain.
Your Challenge: How to Align the Family Around a Coherent Strategy
You are facing a difficult role in this family-owned business. You became involved when you met and fell in love with Susanís son Michael whom you met in your graduate management program at the Wharton School of Business. In essence you find that you have married into this family business at a critical phase. Both you and Michael are the only children in the third generation that seems interested in becoming involved in the family business. Following your grandfatherís advice you both have been gaining experience by working for other companies.
For the past three years you have been working as a management consultant for the manufacturing group of a major New England consulting firm. You have helped your clients solve problems ranging from production bottlenecks to distribution channel problems. Michael works for the information systems group of the same consulting company. He has deferred to you as his expertise has been in the area of management information systems. While he agrees that Cold Harbor must be able to get more customer data, he realizes that the companyís problems are deeper than information gathering and use market data. He tells you that he will stand with you on your recommendations.
William, Susan, and Conrad, however, will not be easily convinced by these "young guns". The are stubborn folk and perhaps as single-minded as the family patriarch, Adam. As you and Michael discuss and look over this situation, you see strong points in each of the positions advocated by your mother-in-law and uncles-in-law. However, they seem unable to compromise or to draw up a strategy that takes the best points from each other. It seems to you that family dynamic at work is plain old stubbornness coupled with a bit of sibling rivalry.
As you formulate your plan, you wonder if the two of you should take your plan first to Michaelís grandfather to see if he will support it. This, however, is a big risk that may backfire. This idea may earn the both of you the animosity of your husbandís family. In addition, you must be careful not to be seen as an outsider butting into family business. This may hurt your and Michaelís chances of taking over the business when the time comes.