Business case that proposes a strategy for a U.S. based Wine manufacturer to enter in the Craft Beer Industry. The presentation also includes the highlight of US Alcoholic Beverage Industry and Customer appeal in the Beer Market.

1. The Maver ck
Craft Beer Industry (U.S.)
Business Case - Expansion Strategy
Team
Members
Aditya Khare aditya.kh14@iimshillong.in
Peeush Goel peeush14@iimshillong.in
Sandeep Sharma sandeep.s14@iimshillong.in

2. Valuation of BeerCo
$ 2574.00 mn
1.22%
7.63%
-1.83%-1.34%
2.48%
Super Premium
Craft
Sub-PremiumPremium
Import
CAGR (2014-19)
17%
34%
49%
Market Share - 2019
Wine Spirits Beer
Executive Summary 2
Strategy & Tactics
• As per changing tastes of
consumer and looking at
growth figures, beer
segment is to be explored
• Specifically craft beer
market is explored for
increasing productivity
Selecting Mode of Entry
• Entering into the completely
new beer market with no
relevant prior knowledge, we
explore acquisition of a local
US player
• The valuation of the acquired
company is to be done to
come at a purchase price
Situation Analysis
Our current wine market is stagnating and
revenue figures are going down
Objectives & Goals
To bolster growth, diversification
is being sought to enter into
beer market
Action Programs – Post Acquisition
• Profitability of Lager beer product
line to be enhanced
• Own facility to manufacture cans
proves to be beneficial in long run
to reduce packaging cost
5.6
4.5
7.2
4.1
2.5
3.4
4.7
1.3
5.75.4
3.8
2.5
3.73.5
0.91.1
1.8
3.2
1.8 2
1.2
Percentage Growth of Table Wine
Consumption
Percentage gain/loss by year
• This new market (to us) is
explored in detail from
both quantitative and
qualitative perspectives
• New opportunities of
growth within the same
wine segment is explored
Lager
14.8
%
Ale
32.5
%
Stout
32
%
75.00
175.48
299.10
443.69
607.21
787.76
125.00
182.42
269.41
339.51
435.95
536.26
2014 2015 2016 2017 2018 2019
Cumulative Discounted
Expense (Million USD)
Supplier Own Facility
Operating Margin

3. Craft Wine; Increase
profitability
1.220%
7.632%
2.475%
-1.344% -1.829%
-4%
-2%
0%
2%
4%
6%
8%
10%
0
2000
4000
6000
8000
10000
12000
14000
Super
Premium
Craft Import Premium Sub-Premium
CAGR
RevenueMillionUS$
BEER MARKET GROWTH
Revenue 2014 Revenue 2019 Percentage CAGR
4.14%
6.24%
0.52%
0%
1%
2%
3%
4%
5%
6%
7%
0
5000
10000
15000
20000
25000
30000
35000
40000
Wine Spirits Beer
CAGR
RevenueMillionUS$
US ALCOHOLIC BEVERAGE MARKET
SIZE BY CATEGORY
2014 2019 Growth per year
2010 2011 2012 2013 2014
5% 5.7% 6.5% 7.8% 11%
Volume share of Craft Brewers
Craft Brewers Volume Growth
(Total US Beer Market up 0.5% in 2014)
West 3 %
Midwest 5 %
Northeast 5 %
South 4%
Dark Beer Volume Sales Growth 2014-2019
Small Brewing companies
employed approximately
115,469 people in 2014 (4.3%
increase from 2013)
Reason for drop in wine sales:
•Economic conditions
•No direct visit to winery in past year
•Online purchases low because no satisfaction of buying
from the store and confusion about shipping laws
Craft Beer has maximum customer attractiveness
•Variety in taste
•Higher alcohol content
•Considered healthier than other beer
50% of alcoholic industry market is beer – Opportunity cost for BevCo
Requires
Diversification
Plausible
Market
Craft Beer segment can be explored
besides continuing in existing segmentRecommendation
1,412 Brewpubs
(10% increase over 2013)
1,871 Microbreweries
(10% increase over 2013)
135 Regional Craft Breweries
(10% increase over 2013)
3Alcoholic Beverage Industry

4. The top four considerations when choosing a beer
• Taste
• Price
• Style of beer
• Brewery that produces the beer
Craft beer features
• Experimentation with seasonal and local tastes
• It’s a lot like savoring a fine wine while absorbing information and the story behind it
• It is soon developing from a drinking choice to a lifestyle choice
• Making a cult of its own and letting people market on their behalf
• Innovation, collaboration, risk taking, beer tasting events
After Considering Synergies
In millions of USD Individual Total After Synergy
Revenue 4460 4683.00
COGS 2849 2692.31
SG&A 853.6 806.65
Operating Income 757.4 1184.043
Operating Margin 17% 23%
Synergy Benefit 426.64
Our existing vide distribution channel will bolster the craft beer market
of BeerCo
Brand name of BevCo, known around 100 countries, will add to the
brand value of BeerCo and aid in increased sales
Strong marketing skills and funding of Bev Co combined with a good and
innovative product line such as craft beer is a match made in heaven
Local customer base of BeerCo will get added and we can market our
wines also to this section
Local supplier of BeerCo will supply products that can be used in our
wine segment as well to improve local winery profitability
Innovative technology teams of two firms combined together may work
wonders for both the wine and beer segment markets
Attractiveness of Alcoholic Beverage Segment
Competition*
Investment
Needed*
Margin# Market
Growth#
Cumulative
Score
Wine 2 1 3 2 2
Spirits 2 2 2 3 2.2
Beer
(Overall)
1 2 1 1 1.3
Super
Premium
2 2 2 1 1.8
Craft 3 2 3 3 2.7
Import 2 2 2 1 1.8
Premium 1 2 1 1 1.3
Sub Premium 1 2 1 1 1.3
Factor 0.2 0.3 0.3 0.2
*Assumptions: Low 1, Medium 2, High 3, Factors
# Assumptions: Low 3, Medium 2, High 1, Factors
Consumer
Survey
4Beer Market Appeal and Synergies
Operational Synergies

5. 2014 Company Financials USD
In Billions of USD BeerCo
Revenue 1.11B
COGS 669M
SG&A 201M
EBITDA 260M
Operating Income 235M
Operating Margin% 21.3%
Industry Average 20.0%
Lager
2013
(mn $)
2014
(mn $)
2015
(mn $)
2016
(mn $)
2017
(mn $)
2018
(mn $)
2019
(mn $)
Revenue 625.00 719.00 863.00 1061.49 1326.86 1697.06 2209.57
COGS 400.00 460.00 552.00 679.14 848.93 1085.78 1413.69
SG&A 125.00 150.00 195.00 224.53 280.67 358.97 467.38
Operating
Income
100.00 109.00 116.00 157.81 197.27 252.30 328.50
Operating
Margin%
16.00% 15.16% 13.44% 14.87% 14.87% 14.87% 14.87%
Ale
2013
(mn $)
2014
(mn $)
2015
(mn $)
2016
(mn $)
2017
(mn $)
2018
(mn $)
2019
(mn $)
Revenue 208.00 228.00 250.80 263.34 276.51 284.80 287.65
COGS 113.00 124.00 136.33 143.14 150.30 154.81 156.36
SG&A 30.00 30.00 33.00 34.65 36.38 37.47 37.85
Operating
Income
65.00 74.00 81.47 85.55 89.83 92.52 93.45
Operating
Margin%
31.25% 32.46% 32.49% 32.49% 32.49% 32.49% 32.49%
Stout
2013
(mn $)
2014
(mn $)
2015
(mn $)
2016
(mn $)
2017
(mn $)
2018
(mn $)
2019
(mn $)
Revenue 150.00 158.00 173.00 185.11 194.37 206.22 218.18
COGS 81.00 85.00 94.00 100.04 105.04 111.45 117.92
SG&A 23.00 21.00 23.00 25.87 27.16 28.82 30.49
Operating
Income
46.00 52.00 56.00 59.20 62.16 65.96 69.78
Operating
Margin%
30.67% 32.91% 32.37% 31.98% 31.98% 31.98% 31.98%
Revenue Growth Rate
Lager Ale Stout
2013 15% 10% 5%
2014 20% 15% 10%
2015 22% 10% 8%
2016 23% 5% 7%
2017 25% 5% 5%
2018 27.9% 3.0% 6.1%
2019 30.2% 1.0% 5.8%
2018-19 growth rate is assumed
through linear regression
Percentage sales method has been
used to forecast the COGS and SG&A
Assumptions
Lager
14.8%
Ale
32.5
%
Stout
32 %
Profitability
5BeerCo Product Line Profitability

6. Increased Cost
Low
inventory
turnover
rate
Trained
professionals
required
Lagers
require
ageing
time
Production capacity can be increased by reducing this lagering time, thus
achieving higher economies of scale
This can be done by not storing the inventory any single day more than
required the lagering time
The time can be reduced by warming the beer between fermentation
and lagering, usually from about 50° to 70°
Increasing the contact between yeast and the compounds they are
modifying can reduce lagering times by using non-flocculent yeast
The most modern way is a combination of centrifuge and pasteurization
which results in continuous lagering and reduces lagering time drastically
PROS CONS
Comparable
Company
Method
1) Easy to use and market
oriented
2) Various ratios can be used
as per company position
1) No two companies are perfectly
alike, so valuation ratios are often
an inexact match
2) A lot of companies data are
required to eliminate individual
company risk
Discounted
Cash Flow
Method
1) Not affected by non-
economic factors or
temporary market
conditions
2) Effective for companies
having constant earnings
1) Very sensitive to its input
variables
2) Requires forecasting of future
performance which is very
subjective
Precedent
Transaction
Method
1) Previous transaction has
validated the valuation
2) Precedent transaction are
easy analysis to perform
1) Easily influenced by temporary
market conditions
2) May include synergy assumptions
& control premium which may
not be applicable to new
transaction
Valuation Methods
Precedent Transaction Method has already been validated
by previous transactions
Transaction data available for Similar companies in the
alcoholic beverage industry
6Lager Profitability Enhancement

7. Excluded Park Ave. transaction for calculation of average
since size of deal is very less
Market conditions have not changed since the recent M&A
activities
All M&A activities are assumed to have occurred in same
geography as BeerCO
EBITDA multiple is more prevalent in the industry for
M&A valuation, hence acquisition price of BeerCo as
USD 2574.00 million is recommended
Trans.
EBITDA
Multiple
Average
(9.90)
BeerCo
EBITDA
Million USD
(260)
2574.00
Million
USD
Transac. Rev
Multiple
Average
(1.65)
BeerCo
Revenue
million USD
(1110)
1831.50
Million
USD
Va l u a t i o n o f B e e r C o
Other Factors Affecting Valuation
Assumptions
Company
Branding
• In Alcoholic
beverage
industry,
branding
matters a lot
as it decides
the strength
of customer
relationship
with the
company
Management &
Management
Policies
• A good
management
can do
wonders with
the company
& how
strategic they
are with their
policies
Value of
Franchises,
Licenses &
Intangible Assets
• For a beer
company,
getting license
and franchise
hold a lot of
importance
Government
Policies
• For beer
industry,
political
factors affect
the future
growth of the
company as
any change in
government
policies would
make a big
difference
7Valuation of BeerCo

8. 63% of beer consumers prefer beer
produced by small independent
breweries versus large, mainstream
ones. But they do order in large
quantities.
Cans a better choice as compared to
glass bottles
Lighter, easy to carry, convenience
Keep the local brand of BeerCo and do
not industrialize it
And produce in large quantities in the
brewery
Post acquisition, try not to remove
any particular type of craft beer
Brand loyalty towards craft beer:
Technomic study shows that local
restaurant orders comprise of 50%
regular favorite craft beer and only
22% trying a new craft beer
Operating culture of the two firms to either complement
each other or be same, and try to resolve the interferences
Integrating the acquired business in existing
operations
Managing the new resource allocation techniques
to be employed to both businesses as one or
separately
Proper project management and change
management
Shared services approach may be employed
Important Factors Research Points Recommendations
Beer drinking consumer is located at:
• 95% of people say they bring and enjoy
beer at picnics or BBQs
• 76% said they bring and drink beer while
relaxing at a pool, lake or by the ocean
• 9% of people are enjoying a beer outside
almost every day
• 55% only do that once or twice a month
Pre
Acquisition
Consideration
Post
Acquisition
Consideration
8Acquisition Contemplation

9. Own Facility for Manufacturing Cans
Parameters 2014 2015 2016 2017 2018 2019
Qty (mn) 500 700 900 1100 1300 1500
Variable Cost (mn)
($0.05/Can)
25.00 35.00 45.00 55.00 65.00 75.00
Cap. Ex. for current
year
100.00 25.00 50.00 25.00 50.00 50.00
Total Expense (mn) 125.00 60.00 95.00 80.00 115.00 125.00
Discounted Expense for
current year (mn)
125.00 57.42 86.99 70.10 96.43 100.31
Cumulative discounted
expense (mn)
125.00 182.42 269.41 339.51 435.95 536.26
Existing Supplier of Cans
Parameters 2014 2015 2016 2017 2018 2019
Qty (mn) 500 700 900 1100 1300 1500
Variable Cost (mn)
($0.15/Can)
75.00 105.00 135.00 165.00 195.00 225.00
Cap. Ex. for current
year
0.00 0.00 0.00 0.00 0.00 0.00
Total Expense (mn) 75.00 105.00 135.00 165.00 195.00 225.00
Discounted Expense for
current year (mn)
75.00 100.48 123.62 144.59 163.52 180.55
Cumulative Discounted
expense (mn)
75.00 175.48 299.10 443.69 607.21 787.76
*Assumption: Cost of capital taken as 4.5% (constant during 2014-19) as can is used for packaging of Lager beer only
• Cumulative discounted expense is lesser for own facility from
2016 onwards and is more profitable henceforth
• Profitable after 900th unit (approximately)
Setting up own facility for can packaging
Project Recommendations
• Green signal for the acquisition of BeerCo valued at 2.56
billion USD
• Focus our strengths for the highly profitable craft beer
(CAGR: 7.63%) in this segment
• Initial CapEx in setting up our own can plant for packaging
can be recovered by 2016 and would be profitable
afterwards
• Taking BeerCo in international market
• Explore new segments within wine industry itself (where
we have knowledge): Craft wines and wine services**
**Craft wines and wine services are considerably untapped markets as of now​
9Beer Cans – Make or Buy

10. 10
• https://www.surveymonkey.com/blog/2014/05/01/what-kind-beer-people-like/
• http://www.cnbc.com/2014/11/07/why-those-elitist-millennials-hate-big-beer.html
• http://www.consumeraffairs.com/news/us-beer-drinkers-shifting-to-craft-brands-080614.html
• http://www.winebusiness.com/news/?go=getArticle&dataid=83196
• http://www.telegraph.co.uk/news/shopping-and-consumer-news/11574362/People-rate-wine-better-if-they-
are-told-it-is-expensive.html
• http://palatepress.com/2012/04/wine/craft-wine-what-the-wine-industry-can-learn-from-craft-beer/
• https://www.youtube.com/watch?v=Xh2oDdTHXQU
• www.stern.nyu.edu/~adamodar/pdfiles/papers/synergy.pdf
• http://www.beveragedynamics.com/2015/05/05/retail-service-changing-the-fight-in-beverage-alcohol/
• Euromonitor International - Alcoholic Drinks in the US, Merger& Acquisitions in Alcoholic Drinks
• MarketLine - Alcoholic Drinks & Beer data in US
References

11. Appendix A: Alcoholic Beverage Industry 11
US Beer Market Segmentation
Sales Volume
(Barrels in millions)
Avg. Price per
Bottle ($)
Revenue (Million
USD)
Percentage
Segment 2014 2019 2014 2019E 2014 2019 2014 2019 CAGR
Super
Premium
10 10 0.64 0.68 2035.20 2162.40 6.24% 6.46% 1.220%
Craft 9 12 1.2 1.3 3434.40 4960.80 10.53% 14.82% 7.632%
Import 29 31 0.7 0.74 6455.40 7294.92 19.78% 21.79% 2.475%
Premium 58 53 0.44 0.45 8115.36 7584.30 24.87% 22.65% -1.344%
Sub-
Premium
107 95 0.37 0.38
12589.6
2
11479.8
0
38.58% 34.29% -1.829%
Alcoholic
Beverage
Segment
2014 2019
CAGR
(2014-19)Revenue
($B)
Market
Share
Revenue
($B)
Market
Share
Wine 9.5 16.0% 11.64 17.0% 4.14%
Spirits 17.2 29.0% 23.28 34.0% 6.24%
Beer 32.63 55.0% 33.48 49.0% 0.52%
Total 59.2 100.0% 68.46 100% 2.95%

12. Appendix B: BeerCo Income Statement and Valuation 12
BeerCo Income Statement
2013
(mn $)
2014 2015 2016E 2017E 2018E 2019E
Revenue 983.00 1105.00 1286.80 1509.94 1797.74 2188.08 2715.40
COGS 594.00 669.00 782.33 922.33 1104.27 1352.04 1687.96
SG&A 178.00 201.00 251.00 285.05 344.21 425.26 535.72
Operating
Income
211.00 235.00 253.47 302.56 349.25 410.78 491.73
Operating
Margin%
21.46% 21.27% 19.70% 20.04% 19.43% 18.77% 18.11%
Recent M&A Activity
Target
Acq.
Price
Target's
Segment
Target
Rev. ($M)
Target
EBITDA
($M)
Transac.
Rev
Multiple
Trans.
EBITDA
Multiple
On the Rocks 1,000 Margarita 641 103 1.6 9.8
Craftbev Co. 990
Craft
Beer
510 80 1.9 12.3
Mark North 1,380 Beer 836 159 1.7 8.7
Epic MJ 270
Craft
Beer
156 26 1.7 10.4
Won Winery 130 Wine 96 13 1.4 10.1
Jane Co. 280 Spirits 175 34 1.6 8.1
Average Transaction Multiple 1.65 9.9
BeerCo.
(Million $)
Average
Transaction
Multiple
Valuation
(Million $)
Revenue 1110 1.65 1831.50
EBITDA 260 9.9 2574.00