Red Hook Ale

Red Hook Ale - 30 ’ Redhook Ale Brewery Stephen E. Bamdt...

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Unformatted text preview: 30 ’ Redhook Ale Brewery Stephen E. Bamdt P aul Shipman, Chief Executive Officer of Redhook Ale Brewery, knew that he needed to reevaluate his strategy and its execution: Redhook’s rapid growth had ended shortly after ’ .it invested in a major increase in production capacity; Operating at about 50% of production capacity, the company-suffered a net loss in 1997'that continued into 1998. Redhook brewed only specialty beer, referred to as craft beer. Craft beer is a more flavor— ful, fuller bodied premium beer, follows traditional old world brewing methods, and uses high—quality materials. The company started as a microbrewery but grew continually and reached national status by the end of 1996. Shipman, one of Redhook’s founders, had guided the company from a small player in one city to a leading position as a national competitor and aimed at dominating the craft beer segment-of the domestic beer industry. The company’s three small—batch breweries, two in the Pacific Northwest and one in the Northeast, had a combined design capacity of 575,000 barrels (each containing 31 gallons) per year of Redhook branded beer to tap a growing market for craft beer. However, growth'in the craft beer market attracted attention, and competition grew from other microbreweries, brewpubs, regional specialty brewers, and from large mass-market brewers .'- With increased COmpetition, 1996 saw the beginning of a downturn with a reduction in sales and profitability. ' Company History Redhook was started in 1981 by Paul Shipman, with additional investment and assistance from Jerry Jones and Gordon Bowker. Shipman, 45, with an undergraduate degree in English from Bucknell and an MBA from the University of Virginia, had worked as a marketing ana— lyst for Chateau Ste. Michelle winery prior to starting up Redhook. Earlier, he had spent a year in Europe where he was introduced to high quality beer. Jerry Jones was an executive and consultant in the field of ski resort management. Gordon Bowker was also the founder of Starbucks Coffee Company and served Redhook as Vice President, Treasurer, and Secretary. Shipman started Redhook with a belief that US. consumers would respond well to a qual- ity European—style beer made with the best equipment and using the finest ingredients. The company’s initial brewing operations were carried out in a converted transmission shop in Seattle. The company did not have a bottling line and all beer that was brewed was packaged in This case Was prepared by Professor Stephen E. Barndt of Pacific Lutheran University. This case was edited for SMBP— 9th Edition. Copyright © 1998 and 2000 by Stephen E. Barndt. This case was published in the Business Case Journal Summer 1998,Vol. 1, No. 1, pp. 53—69. Reprinted by permission. 30-1 ‘ SECTlON C INDUSTRY NINE: BEVERAGE/FOOD 15.5 gallon kegs. First year production totaled 1,000 barrels and was sold to local taverns and restaurants for on—premises consumption. , Sales and production grew gradually through the mid 1980s. 'Redhook sold through its own distribution group and independent beer distributors. The first major increase in pro— duction occurred in 1989 when Redhook replaced its first brewery with a larger capacity, state-..- . of—the—art brewery located in a converted electric trolley barn in Seattle. In 1993, the company acquired land east of Seattle in the town of Woodinville where it constructed a much larger . brewery. The Woodinville brewery came on line in September 1994, with an initial capacity of 60,000 barrels per year. Sales remained primarily in the state of Washington but ranged throughOut the Pacific Northwest and California. Redhook consummated a long-term distribution agreement with Anheuser—Busch, the largest brewery in the United States, late in 1994. Opening the way for nationwide sales, the agreement enabled Redhook to market its products via Anheuser—Busch distributors seeking increased volume through a broader product line. As a result, Redhook was selling its beer in 48 states in 1998. ' Redhook constructed a new brewery near Portsmouth, New Hampshire, to better serve the eastern United States and lower transportation costs. The Portsmouth brewery came on line in late 1996 with an initial capacity of 100,000 barrels per year. To finance its rapid growth,lRedhook sold a 25% equity interest to AnheuserrBusch and, in 1995, sold 2,193,492‘ shares of stock in an initial'puzblic offering to end the year with 7,683,492 shares outstanding. . The Brewing Industry The U.S. brewing industry was both highly competitive and highly regulated. Several large and many small brewers competed for the $29 billion wholesale market using brand name, distri- bution _channel, or taste to attract consumers. The market consisted of three distinct segments—«national, imported, and craft beeps—each characterized by its own predominant marketing strategy;~Brewers participating in each of the segments were subject to various gov» ' ernment requiremengs in such areas as taxation; product safety, quality, and disclosure; and environmental protection. S ,V: -vq‘.._.¢muuau1‘l—Wflgm‘—a -,\. - anal-am A ' ' um m nun—“mud...r-‘uwwl—umm-u—owkflo-u-‘F JhfixgyfingfifgmuA‘:a;,f,1v:.-jvl‘:¢u NATIONAL BEERS ‘ The national beer segment was the largestby far and exhibited the highest degree of consoli- dation in the industry. The five largest brewers——Anheuser—Busch, Inc., Miller Brewing Company, Adolph Coors, Stroh Brewery, and Pabst-w—accounted for 93%r0f all the domestic beer sold in the United States in 1996.1 Anheuser-Busch was theleader with a 49%market share followed by Miller with 22%, and Coors with 10%. Competitors in this segment brewed large batches in breweries designed for high volume production. Beers brewed for the mass market substituted more com, rice, and other ingredi- ents in place of barley; they were pasteurized to lengthen shelf life, but were considered less flavorful than imported or craft beers. High volume, efficient production, and inexpensive raw- materials resulted in low product cost. The national brewers’ branded products were widely distributed. They favored extensive advertising to capture national recognition in some cases and regional recognition in others. Advertising media used included network TV, spot TV, spot radio, magazines, or sponsored events such as sports spectaculars. IMPORTED BEERS Imported beer played a relatively minor role in the total U.S. market with a 7.4% market share. Competitors in this segment distributed their products widely and catered to consumers who g desired a more flavorful beer.2 Bars, restaurants, and retailers selling bottled goods often car- t CASE THIRTY REDHOOK ALE BREWERY : ried one or more imported brands such as Becks, Corona, Heineken, Labatts, Moosehead, Guinness, and San Miguel. The majority of beers. imported-into the US. were bottled in Mexico, Europe, and Canada‘. Extent of advertising'varied from importer to importer but was generally intensive using such media as radio spots, print, and outdoor signage.‘ CRAFT BEERS Craft beer, with 2.9% of the beer market; was the newest growth segment of the industry.3 During the 19803 and 19905, ever increasing numbers of craft brewers both created and filled a demand for distinctive flavorful beers, using high-quality ingredients brewed with European-style recipes. Some craft beers featured flavors of fruit, honey, spices, oatmeal, Cof— fee, pumpkin, or other additives; _ The market was increasingly fragmented withi,306 craft brewers across the nation as of January 1998, up from 1,042, 803, and 540 at the end of 1996, 1995, and 1994, respectively.4 While the number of firms was continuing to grow, the craft beer market had reached a time in its development where total demand had ceased'to grow at double—digit rates. After grb'wth in demand of about 50% in 1994 and 1995, 1996 saw 225% growth, and, in 1997, total sales only increased 5%. ' - . There were four categories of brewers producing craft beer.Microbreweriesproduced less than 15,000 barrels per year and served limited markets, usually through independent distrib— utors and direct sales. Brewpubs were the smallest volume producers, usually brewing 2,500 barrels or less per year for consumption in the pub. Regional specialty brewers produced over 15,000 barrels per year and distributed through independent distributors both locally and in one or more regional markets. Contract brewers developed beer recipes and contracted with larger national or regional breweries, e.g., Strohs and Pittsburgh Brewing, for the actual brew- ing. Contract brewers usually marketed their branded beers regionally or nationally using independent distributors and their own advertising and promotion. In 1997, LIB-brewers each prbduced over 10,000 barrels of craft beer. Five contract brewers led by Boston Beer and Pete’s Brewing Company each produced 15,000 or more barrels. Twenty—five regional specialty brewers produced at least 15,000 barrels. Anbther 10 micro— brewies each produced betWeen 10,000 and 15,000 barrels. Boston Beer Company, Pete’s Brewing Company, Sierra Nevada Brewing Company, Redhook Ale BreWery, Pyramid Brewing Company, and Widmer Brewing Company all topped 100,000 barrels in 1997.6 The relative craft beer market shares among the top 10 craft brewers in 1996 are presented in Exhibit 1. Eilfifiit 1 ‘ fimBrmer Market Shares ' Source: Adapted from Sarah Theodore, “Domestic Specialty Suffers Growing Pains in ’97,” Beverage Industry, January 1993, pp. 9—18. L « SECTIONC INDUSTRY NINE: BEVERAGE/FOOD THE MARKET FOR BEER Adult per—capita consumption of beer declined from the early 1980s to about 30 gallons in 1997 as federal beer taxes were doubled, blue—collar jobs declined, health and fitness became fashion— able, and the population aged.7 This per—capita decline was offset by growth in the total adult population so total U.S. beer sales were relatively constant at between 185 and 190 million barrels per year. However, major differences existed among the 3 segments. Since 1995, sales of national brands declined about 5%, popular brands declined 9%; imported beer sales increased 25% to ‘ 14 million barrels; and craft beer sales increased 32% to 5.2 million barrels.8 Taste, demand for greater variety, and a “trading-up phenomenon” were offered as reasons for the continuing growth in demand for craft and imported beer.9 While craft beer sales were expected to continue growing, the rate of growth was expected to be lower as the market matured, and importers used larger advertising budgets and marketing skills to increase their share. :- A national survey found that beer consumers who drank craft beer were more likely to be young (less than 45 years of age), to be college educated, and to have above—average incomes (greater than $50,000)» Greater numbers of men than women were drawn to craft beer, although a greater share of beer—drinking women had an interest in craft beers than did beer~drinking men. Craft beer drinkers also tended to drink more than the average drinker. However, 80% of those who drank craft beer consumed less craft beer than other types of beenm'ln addition, there were regional differences in craft beer consumption. Craft beer was most popular in the West, followed by the Northeast and Midwest. While craft beer was most popular in the upscale segment of the population, it had seen increasing popular~ ity in middle-income households. This increased acceptance was reflected in a study that showed 19% of surveyed adults had tried craft beer in 1996, up from 13% a year earlier.11 COMPETITIVE PRACTICES Imported and craft beers were aimed at beer drinkers who sought prestige products and who desired superior flavor. However, a high level of substitutability existed among the three classes of beer. Consequently, national brand, import, and craft beer companies competed and attempted to get the beer drinking populace to switch to their types of beer and thus increase _ their market share. Imported and craft beers competed head to head since both were at the premium price, distinctive flavor end of the beer spectrum. The national brewers used extensive advertising, often through costly mass media. However, they faced the threat of restrictions on what, how, and where they could advertise as a result of political and news media concerns that drinking was harmful. They developed and relied on wide distribution through networks of wholesale distributors. These distribu- tors sought to saturate the market by placing their products in bars, restaurants, grocery stores, convenience stores, and other outlets. They provided regularly scheduled deliveries withsecured and stocked shelf space and rotated retailers’ inventory to insure freshness. Imported beers, with a much smaller market share, used selective targeted advertising and relied more on their distributors to push their higher margin product through on~site con- sumption and consumer retail channels. Distribution was the key for craft brewers as well, but actual methods of distribution varied depending on size of the company. For example, brew— pubs selling only for consumption in their own establishments, relied on creating a pleasant“ atmosphere, complementary foods, and the idea that the pub itself was something special. Many of the microbreWeries, regional specialty brewars, and contract brewers also had their own pubs and attempted to create a local identity using similar methods. Smaller microbrew- eries often distributed only kegged beer to local restaurants and bars and’tried to instill a local a pride in their premium beers. Larger microbreweries usually sold both kegged and bottled products by using independent distributors in a broader local or regional area. Across all craft brewers, the split between packaged (bottled) and draft (kegged) beer was 72 to 28%.12 CASE THIRTY REDHOOK ALE BREWERY Microbrewery advertising and promotion were limited and most often took the form of displays in drinking establishments; giveaways such as glasses, mugs, and coasters; and spon— sorship of concerts, festivals, or seasonal events. Most regional specialty breWers and contract brewers used the same distribution and promotion strategy as the large microbreweries. Boston Beer and Pete’s Brewing Company became the first exceptions when they introduced local TV advertising. Growth of the craft beer market was noted by the large national breWers and they entered the craft segment with their own specialty beer products. Anheuser—BuSCh sought to have 60%“ of the craft beer market by 200513” while Miller’s objective was 25% by 2000.14 Anheuser— Busch, Adolph Coors, Miller, and Strth all set up specialty units with separate staff to manage " their new brands.15 By the end of 1996, Miller and Strohs each had acquired control or an interest in two microbreWeries,..while Coors had one. Anheuser-Busch had a 25% interest in Redhook and distribution alliances with both Redhook and Widmer Brewing. Brand names offered by the majors included Augsburger, Blue Moon, Celis, Elk Mountain, George Killian, Icehouse, J. W Dundee, I. I. Wainwright, Jacob Leinenkugel, Michael Shea’s, Red Dog, Red River Valley, and Red Wolf. In most cases the brands were marketed under a name other than thew-controlling company’s name, e. g., Northern Plains Brewing (Strohs), Plank Road BreWery (Miller), and Blue Moon Brewing Company (Coors). In 1995 Anheuser-Busch alone had seven craft—type beers that sold 650,000 barrels.16 In addition, in 1996, Anheuser-Busch initi- ated a program to increaseits exclusive distributor force from 40% of the total Anheuser— Busch distributors to. 70%. This would reduce the incidence of competitors benefiting from the services of Anheuser-Busch distributors. While Anheuser—Busch could not use punitive l measures because they could be considered to be in restraint of trade, it could encourage "its distributors to voluntarily carry Anheuser—Busch products, including Redhook, exclusively. Incentives Were provided to reward this exclusive distribution. Some speculated that eventu— ally pressures would be placed on distributors to cause them to volunteer.” Miller and Coors also appeared to be interested in getting their distributors to devote more effort on their own spetialty beers and less on microbrewery beers.18 In addition to pressures from major national brewers on their distributors to reduce product lines to a narrower spectrum of selected brands, the sheer number of craft and other brands in the United States overwhelmed distributors. With about 4,500 brands and ever increasing numbers of craft brewers seeking to add their brands to the market, distributors... began to cull less popular brandsland restrict themselves to the higher volume brands for which they could reasonably expect to secure shelf space. . Growth was a widely sought goal among craft brewers. The large contract and regional spe- cialty brewers were moving toward national distribution. By 1996, Boston Beer had already reached all 50 states and Redhook sold in 47 states, Pete’s in 40 states, and Pyramid Brewing in 27 states. A number of microbreweries were operating more than one brewery and several brewpubs hadstarted chains. Starting in 1995, seven of the largest craft brewers went public or announced a public offering to raise funds for growth; these included Boston Beer, Brandevor Enterprises, Pyramid Breweries, Pete’s Brewing, Portland Brewing Company, Redhook, and Widmer Brewing. Redhook’s Objective and Business Strategy Redhook had set an objective to be the leading craft brewer through market development into unserved regions of the nation and continued market penetration once established in a V region. The company articulated a business strategy in its 1995 annual report and prospectus with six key elements: 1. Production of high—quality craft beers 2. Control of production in company~owned breweries SECTION c INDUSTRY NINE: BEVERAGE/FOOD 3. Operation of regibnal brewing facilities 4. Production economies through technologically advanced equipment 5. Strategic distribution alliance with Anheuser~Busch 6. Promotion of products within local markets19 Products and Production Distribution Redhook did not pasteurize its craft beers: Not pasteurizing ensured that the flavor was not degraded, but it reduced shelf life to about three months. I In 1997, Redhook produced nine different branded products and from time to time pro- duced small batches of experimental brews that it test marketed under its Redhook Blueline label. These products were brewed and packaged in both kegs and bottles at its own operating breweries. The Fremont brewery in Seattle had a capacity of 75,000 barrels per years-The brew— ery was installed in an old trolley car barn under a lease with an option to buy. The company also owned and leased adjacent properties for kegging, warehousing, and other uses. This brewery was temporarily closed early in 1998. The Woodinville, Washington, brewery, con- structed on 22 acres owned by the company, started with a capacity of 60,000 barrels, reached 170,000 barrels in 1995, and 250,000 in 1996. The Portsmouth, New Hampshire,-brewery con- structed on 23 acres of subleased land started with a capacity of 100,000 barrels to’ be ‘ increased in stages to 250,000. Portsmouth was chosen as a site because of its central location in a large market and the high cost of transporting kegged and bottled beer from the Northwest. Only the highest quality malts, grains, hops, and other ingredients were purchased from a few regular suppliers at competitive prices. Alternative sources were available, if needed. The ingredients were processed in state—of—the-art automated brewing equipment designed in Europe for efficient production of small batches. The bottling line was fully integrated and automated with fast changeover capability. . As a producer of premium craft beers, Redhook emphasized quality in product formula— tion, brewing, and bottling. Each brewery had its own laboratory for testing product quality. In addition, the Woodinville brewery served as the focal point for quality, monitoring all brew— eries’ production and product quality control. In 1994, Redhook formed a distributionalliance with 'Anheuser—Busch.20 The alliance was to run for 20 years but could be terminated after 10 years under certain conditions. Under the alliance, Anheuser-Busch invested in Redhook, gaining a 25% stake in the company’s equity, and made its nationwide network of some 700 wholesale distributors (44% of the nation’s wholesalers) available for distribution of Redhook products. Redhook retained full control" overproductin and marketing. Anheuser—Busch distributors in the U.S. and Mexico partici— pating in the-alliance were to be given exclusive distribution rights in their territories. Distribution agreements with Redhook’s current distributors remained in effect until they expired, at which time Anheuser-Busch distributors could take over. When an Anheuser‘ Busch distributor for an area declined to carry Redhook products, Redhook could use a non; alliance distributor." In accordance with the agreement, Redhook sold its beer to Anheuser—Busch and-‘ shipped the beer tothe latter’s distribution centers.sAnheuser-Busch distributors therf’ ordered from and paid Anheuser-Busch for the Redhook beer they received for retail distribl CASE THIRTY REDHOOK ALE BREWERY ution. While Anheuser—Busch was paid a per—barrel'fee for use of the distribution netwotk,_ Redhook believed that the added cost was more than offset by efficiencies in shipping, billing, and paperwork. In addition, distributor acceptance of Redhook and its products‘ was good. ' The Redhook and Anheuser~Busch alliance was controversial. Critics found fault with the alliance, citing the belief that it would heat up the fight for shelf space and wondering if small brewers could remain independent once they became dependent on a large brewer. Jim Koch, CEO of Boston Beer Company, referred to Redhook as Budhook (a takeoff from Anheuser— Busch’s Budweiser brand) after the alliance. He implied his views concerning the threat of national brewers gaining control over craft brewers in the statement: In the long run, the bigr brewers would like to dominate this part of the beer business the way they do every oth er part—why shouldn’t they? Anheuser—Busch has stated they want to control half the beer industry. Microbreweries are naive to think that doesn’t mean half the microbrew business.” An even stronger statement came from another executive who said “as soon as they put you into their distribution network, they control your inventory, pricing, and own you lock, stock, and barrel.”22 Others believed that major brewers entry into the craft beer market benefited the indus— try because they increased awareness of—craft beer. Pete Slosberg of Pete’s Brewing Company reflected this view in his statement: ‘ I believe any vehicle that will introduce more Americans to difi‘erent beers, even if it’s not our brand is a good thing. It lets drinkers know there is an alternative.23 l Marketing and Sales Redhook’s marketing strategy emphasized distribution and didn’t rely on costly media advertis— ing. The company focused its efforts on distributor training, retailer education and support, and spread of word—of—mouth awareness through various consumer promotions, Redhook coached its distributors, Worked with distributor salespeople to get greater attention for Redhook prod— ucts during their sales calls, and, in cooperation with the distributors, offered incentives for the salespeople to develop new accounts. The 44 member (as of March 1, 1998) sales and marketing staffz‘1 conducted a number of other education and promotion programs such as 1. Distributor Tours 2. Community Gatherings 3. Marketing On—Site 4. Price Discounting 5. Company—Owned Pubs 6. Visitor Tours 7. Homepage DISTRlBUTOB TOURS Redhook offered distributors tours of the breweries, conducted on—site sales training, and pro— vided sales support. The latter included providing point—of—sale materials; assistance in ' designing grocery store displays, stacking, and merchandising inventory; and company sales representative contact with restaurant and grocery buyers. In addition, Redhook often helped distributors in new markets by hiring a local sales representative prior to first distribution to help generate product awareness. SECTION C INDUSTRY NINE: BEVERAGE/FOOD COMMUNITY GATHERINGS Redhook sponsored and participated in local community gatherings such as craft beer festi— vals, food events, sporting events, and music and other entertainment programs. MARKETING ON—SITE The company promoted its products on—premises at pubs and restaurants. This included pro- viding samples of Redhook products, consumer and retailer education, tap handles, neon signs, banners, coasters, table tents, and glassware. In addition, limited quantities of the com— pany’s Blueline label products were placed in selected establishments, providing consumers the chance to try something different and exclusive. PRICE DISCOUNTING Redhook selettively discounted prices to distributors and, through them, retailers. Price dis- counts were a direct response to price cuts by rivals in intensely competitive markets. COMPANY-OWNED PUBS There were three company-owned and operated pubs: Trolleyman Pub at the Fremont brew- ery, Forecaster’s Public House at Woodinville, and Cataqua Public House at Portsmouth. A pleasant atmosphere with scheduled live music, a complete selection of Redhook beers, and a food menu to complement the beers were used as ways of increasing awareness of and identi— fication with Redhook and its beer? In addition, the pubs were used as sources of consumer feedback on its Blueline and other beers. VISITOR TOURS Brewery tours were also used as a means of educating the public about Redhook. Tours took visitors through the brewery, showing key activities in the brewing process. More than 50,000 visitors toured the company’s operating breweries in 1997. HOMEPAGE Redhook provided a homepage on the World Wide Web and offered classes on brewing through a program called Redhook University.25 The homepage contained information about the company, its breweries and brewing process; its products, including Blueline offerings; live music schedules for its pubs; news about company progress; a schedule of events; and brewery tours. Redhook University classes available to the public included subjects such as homebrew— ing, commercial production, brewing science, and brewing history. I Human Resources The company had 210 employees; 69 in production, 44 in marketing and sales, 15 in adminis—: tration, and 82 in pubs, Fifty-seven of these worked part time. The company’s salesfo'rce was large enough to service the nationwide distributor network. ' The executive group consisted of Shipman as President and Chief Executive Officer; Brad Berg, Executive Vice President and Chief Financial Officer; David Mickelson, Executive Vice President and Chief Operating Officer; Pamela Hinkley, Vice President, Sales and Marketing; and Allen Triplett, Vice President, Brewing. Berg, with a bachelor’s degree in accounting from the University of Northern Iowa, had experience as a Partner in the Coopers 8r Lybrand CASE THIRTY REDHOOK ALE BREWERY accounting firm and had served in executive positions in Burlington Resources, Inc., and Holly Residential Properties, Inc. Michelson graduated with a bachelor’s degree in business from the University of Washington. He had served as a loan officer for Barclays Bank PLC and as Controller for Certified Foods, Inc., prior to joining Redhook in 1987. Hinckley joined Redhook in 1988 with a bachelor’s degree in psychology from Suffolk University and several years3 experience in the wine industry, first with Stevenot Winery and later as a wine buyer for a specialty food and wine retailer. Prior to joining Redhook in 1985, Triplett had earned a degree from the University of Wyoming and had studied at the Siebel Institute of Brewing and University of California at Davis. Shipman was considered to be strong in delegation to these executives and encouraged subordinates to develop their own ideas and act on them. His strat- egy specialist, Anthony Grasst, summed it up as follows: You have to be completely independent and willing to do something instinctively rather than by order. Paul believes everybody finds their niche. You either bloom or you die. I t’s an extraordinarily dynamic environment. You have to take risks. His attitude is: Let’s do it.26 The management team worked in an open office where collegiality and collaboration ’ were part of the culture-5taff participation in major decisions was common. Even the hiring process was collegial—"everyone in a department had a say in who was hired. ‘ Ownership 1 Anheuser—BUsch was the largest Redhook stockholder with a 25% equity interest. GE Capital Redhook Investment Corporation owned 9.3% of'the stock while the three original. Co—owners,'Paul Shipman, Jerry Jones, and Gordon Bowker owned 6.4, 3.2, and 2.1%, . respectively. The Board of Directors consisted of Shipman and eight outside directors, ‘ including two Anheuser-Busch representatives. Anheuser—Busch’s investment in Redhook was subject to a standstill agreement until November 16, 2001. Under the standstill, Anheuser-Busch and .its affiliates could not own ' more than 25% of the common stock prior to November 16, 1999 and not more than 30% after that until November 16, 2001.‘Anheuser-Busch could terminate the standstill before November 16, 2001, if another individual or organization acquired or attempted to acquire 25% or more of the company’s common stock before November 16, 1999, or 30% before November 16, 2001. The standstill could also be terminated in the event of a merger or con— solidation agreement between Redhook and a third party. In September 1995, Redhookis board approved a “poison pill" agreement to protect against any unwanted takeover. In the event of an uninvited takeover bid or the acquisition of 20% or more of the common stock in the open market, stockholders, other than the acquirer, could exercise one shareholder right per share held. Each right would allow the holder to buy $240 worth of stock for $120. In the case of a takeover attempt by Anheuser—Busch prior to November 11, 2001, the rights would not be exercisable until Anheuser—Busch bought shares " to exceed the limits specified in the standstill agreement. I Financial Performance Redhook experienced continuous growth in sales through 1996 and income through 1995. Most sales were to distributors although beer, food, and other items sold through the company’s pubs contributed to total sales. Pub sales grew to $3,406,000 in 1997 from $3,?) 72,000, $3,347,000, and $1,739,000 in 1996, 1995, and 1994, respectiver Exhibit 2 shows that while profits were up in each year between 1991 and 1995, the profit growth in 1994 and 1995 was less than the increase WM} in net sales and units sold. Profit in 1996 declined despite a 38% increase in sales. A net loss along M, U SECTION 0 Exhibit 2 INDUSTRY NINE: BEVERAGE/FOOD Capacity, Units Sold, Sales Revenue, and Net Income Source: Redhook Ale Brewery, 1 995, 1 996, and I 997 Annual Reports. Bartels change Salas Change Shipped '3 (3%!) ‘ ' 214,500 _ — '_(‘l;5%)_ -- , -__22j4,700-_ ._.. '._42_.0%_ _.1582700. . 6.990% 93,7901. . 2_7_.q%;_;.ff 73,900. ' ' 49.0% _- - 49,500 463% " ' . 34,000 3 - with a decline in sales was incurred in 1997. Redhook attributed the reduced profits to increased" competitionfrom more craft brewers with more brands and price cutting, particularly in the sat— urated western states’ market starting in the second half of 1996. In addition, 1996 and 1997 saw higher costs in establishing national sales and distribution along with the higher depreciation and operating costs associated with the new Portsmouth brewery. The stock market reacted to the company’ 5 growth and profit problems with a reduction in Redhook’s stock price to about $6 ' compared to its initial public offering price of $17 and a high of over $34. Exhibit 3 shows com- parative income statements for the years 1993 through 1997. - The growth and profit slump was continued into 1998. In the first quarter of 1998, Redhook reported a net loss of $715,000. Sales volume declined 4.9% from the 1997 first quar— ter. 0n the other hand, reductions in sales, marketing, and administration resulted in a decline in selling, general, and administrative expenses of 3.8% over first quarter 1997 figures: Exhibit 3 Income Statement: Redhook Ale Brewery (Dollar amounts in thousands, except income per share) .fits}~Euiuinginéé‘fiititr' = " ' ‘ . .' _'1_.ess.ex_ci_s.egtaxes_- News i" " .ijstbfisalég . . ‘CtéisS " t'_ _ . S,’ G, &A diseases“- . _.Operating income " ' (311,1 Interestexpense 378 . . Other income_(exp_ense) ' 93' ', Income befdre taites (31,943): I I Income taxes " _ Z 544 " '_ Income before accounting change ' -'(1-;3919)1i""7 "1 Effect-of change in accounting- - " Netiri'co'ine. ' ' $0,399) Net income per diluted share ' $ (.18) 7 Source: Redhook Ale Brewery. 1996 and I997 Annual Rmnm .__._s_..~fiw...._—-u___._u__._ .__+., .. _. CASE THIRTY REDHOOK ALE BREWERY Prior to the 1995 public offering, Redhook hadbeen largely dependent on the use of debt. to finance growth. After Anheuser-Busch’s 25% investment in Redhook and the company’s initial public offering, use of debt decreased. Exhibit 4 displays leVerage ratios prior to and after Anheuser—‘Busch’s investment and the initial public offering in 1995. Exhibit 5 provides balance sheet data for 1995 through 1997. _ ' At the end of 1997, the company had 7,687,486 shares of common and 1,289,872 shares of convertible redeemable preferred stock outstanding. All of the preferred stock was owned by ‘ Anheuser-Busch" and was credited as though converted to common stock in calculating that company’s share of common stock. Redhook declared an extraordinary dividend of $2.00 per share in 1994' but otherwise had not declared dividends. By late 1996, séveral conditions‘had intensifiedcompetition and price cutting for craft and specialty beers, including imports. First, the number 'of craft brewers had continued to grow rapidly. Second, the major beer Companies; with theirfinancial, marketing, and dis— tribution strengths had gone on the offensive to try to reach a dominant position in spe— cialty beers. Third, importers had wakened to the increased demand for flavorful, high quality beer and had marketed their Well-known brands to consumers who were confused by a myriad of craft beers. Fourth, some regional markets had become saturated and oth- ers Were approaching saturation-.. Under these conditions, some craft brewers-had grown while others had lost sales. Redhook and several other brewers in the saturated Northwest market werexaniong the latter. ' ' ' Knowledgeable people, including Redhook’s Shipman, suggested the craft beer sega ment had entered a shakeout period}? An increase in closures and consolidation among Weaker firms was expected. Other strategic responses to the increased competition toward regional and national distribution. A few, including Boston Beer and Pete’s Brewing Company and several microbreweries were exporting beer for sale in foreign nations. Smaller microbreweries that had expanded regionally were, in some cases, retrenching and reconcentrating on their home territories where they were better known and had stronger distribution. Major breWers had added to their lines of specialty beers and were aggres- sively marketing them. Exhibit 4 Redhook Ale Brewery Use of Debt tain conditions. On the other hand, the stock is fully convertible to common and has the same voting rights as corn- rnon. Because of these features, each ratio is calculated in two ways. The first ratio treats preferred stock as a short- term liability (debt) and the second ratio treats it as equity. Sunrise: Redhook Ale Brewery, 1995, 1996, and 1997 Annual Reports. SECTIONC INDUSTRY NiNE:BEVERAGE/FGOD Exhibit 5 Balance Sheet: Redhook Ale Brewery _Yearfindingrnecenihérfij . _ __ 1997 __ current-assets '- - 'Cash' (Br-equivalent) Receivables ' Inventory 7 _ _ 7- . . ,;Tax.receivahle&flther _. , ' ' total current assets" Fixed assets (net) 7 _. Otheras'set's'f_ " - -' '_ 'Total_assets . _ _ Liabififié'saadleqaitY, . - T " entriafimae ' some saw continued growth . the Anheuser—Busch distribu- 3 well positioned to develop new markets, especially the northeast, close to its new brewery in New Hampshire. Earlier, in a 1994 meeting with August Busch III, Shipman was given a rough map of the United State s and asked to “put X’s where you want to build breweries.n29 Shipman was reported to have put five X’s on the map. While only one new brewery had been built by the end of 1996, in an interview with the author Shipman stated I 'm convinced that we are g ' penetration in the East and other parts of the nation the West and, particularly, the Pacific Northwest by rs, introducing new products, and salesmanship 3. In the longer run, growth in international markets, e.g., Japan where Redhook products were being sold through 7—Eleven convenience stores31 Into 1998, Redhook had not deviated from the goals and strategy developed when the industry was in a rapid growth phase in spite of the company’s sales decline and overall poor performance in 1997. The only strategic change was to cut costs by temporarily closing the Fremont brewery, transferring all Western production to the Woodinville brewery. For Paul Shipman, 1998 was a time for reevaluation. Were Redhook’s goals and strategy still valid and, if so, what should be done to implement them in View of the changes in growth and competi- tion affecting the craft beer segment? Es 1. U1 Sarah Theodore, “Domestic Specialty Suffers Growing Pains in 97,” Beverage Industry, January 1998, pp. 9—18. . “Specialty and Microbrewery Report,” Modern Brewery Age, May 18, 1998, pp. 12—17. . Ibid. Lee Moriwaki, “Shakeout brewing,” The Seattle Times, November 3, 1996, pp. F1, 4; David Edgar, “Craft Brewing: Fastest Growth in . the Industry,” The New Brewer, May—June 1995, p. 13; and M. Sharon Baker, “Yakima Brewing Defies Industry,” Puget Sound Business Journal, March 27—April 2, 1998, p. 15. Richard A. Melcher, r‘Those New Brews Have the Blues,” Business Week, March 9, 1998, p. 40. “Specialty and Microbrewery Report,” pp. 12—17. Sarah Theodore, pp. 9—18. Ibicl. Eric Sfiligoj, “Small Wonder,” Beverage World, May 1996, p. 72. John Student, “True Brew,” American Demographics, May 1995, pp. 32—39. John 1?. Robinson, “Microbrews Going Mainstream,” American Demographics, December 1996, pp. 25—26. . Eric Sfiligoj, p. 72. .. . Melanie Wells, “Pete’s Gut-Instinct Marketing Push,” USA Today, October 7, 1996, p. 2B. . Gene Muller, “Message in a Bottle,” The New Brewer, July—August 1995, p. 13. Richard A. Melcher, Sandra Dallas, and David Woodruff, “From the Microbrewers Who Brought You Bud, Coors . . . ,” Business Week, April 24, 1995, pp. 66, 70. .. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. Steve Kaufman, “Microbrewery Stocks Look to Full-Bodied Future,” The News Tribune, April 4, 1996. Maxim Lenderman, “Mind Games,” Beverage World, September 1996, pp. 70, 72, 74. Jerry Kherouch, “Even as A_B Backs Off, Small Brews Still Face Distribution Bottleneck,” Brandweek, September 30, 1996, p. 9. Redhook Ale Brewery 1995 Annual Report. Redhook Ale Brewery, Prospectus, April 16, 1995. Gordon Young, "Attack of the Microbreweries,” <http:// www.metroactive.com/featureslbreweries.html>. ' Gerry Khermouch, “Micros on Majors' Menu at Taste Fest,” Brandweek, October 31, 1994, p. 12. I Gordon Young. Redhook Ale BreWery 1997 Annual Report. Redhook Ale Brewery, <http:llwww.redhook.com>. Leslie Holdcroft, “Going Public :1 Rebirth for Northwest Brewer,” Washington CEO, November 1995, p. 15. Lee Moriwaki, “Forecast Sinks Redhook Stock,” The Seattle Times, December 20, 1996, p. D1. Lee Moriwaki, p. F1, 4. Patricia Sellers, “A Whole New Ball Game In Beer,” Fortune, September 19, 1994, p. 86. Paul Shipman, Personal Interview, May 16, 1997. lbid. ...
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Red Hook Ale - 30 ’ Redhook Ale Brewery Stephen E. Bamdt...

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