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Final PDF to printer CASE 07 Lagunitas Brewing Company, Inc.— 2013 Armand Gilinsky, Jr. Sonoma State University Jack Eldredge, Shawn Purcell, and Clark Rupp III Steve Bowden MBA Students at Sonoma State University University of Waikato I’d been digging getting drunk at the famous Marin Brewing Co. pub and thought the “gear” of brewing was pretty sexy looking. For me, cool and functional “stuff” has always been sexy. Like a nice reverb unit, or a great speaker, or a vintage guitar—and brewing “stuff” fit right in. I went down to the local homebrew supply shop and got the standard 5-gallon plastic pail, a strainer, the hop packets, and the malt syrup, everything you needed. —Tony Magee, Founder and CEO, Lagunitas Brewing Company O n August 1, 2013, Tony Magee, the founder and CEO of Lagunitas Brewing Company (LBC), stood in Chicago, Illinois, 2,100 miles away from the current brewery in Petaluma, California. He had chosen to build his second brewery, providing him the capacity to meet current and expected future demand of his LBC brand. The new brewery, which would immediately allow LBC to increase its production of beer and quadruple capacity, was scheduled to open in early 2014. However, as Magee visualized his future in Chicago, he couldn’t help but wonder what the future held and if expansion was the right move. How was LBC to manage and maintain control of its expansion? If demand projections were off, did LBC have enough capacity or too much? Did LBC have the financial resources to withstand more competition or another recession? Nevertheless, LBC’s chief marketing officer, Ron Lindenbusch, showed high levels of confidence and held lofty expectations for the Chicago operation: We are building an identical brewery to the one that we have built in Petaluma; the equipment is exactly the same. One way we are controlling costs is by not having the typical frills and thrills of other breweries: tho20598_case07_C91-C100.indd 91 We don’t install fancy copper pipes or stone on the platforms around the tanks, it’s not necessary. The Chicago brewery will be all enclosed with a tasting room suspended above the brewery floor, so that visitors can take in all the wonder that is beer making. We want our customers to feel connected to our products and felt that by putting them in the front row, to really see the production process, we could start to build deep-rooted connections for the Lagunitas brand. U.S. BREWING INDUSTRY The United States and brewing have been inexorably linked since the founding of the American colonies. In 1607, the first shipment of English ales arrived and by 1612 the first New World brewery was established in New Amsterdam. By the mid-1800s, German immigrants founded many of the breweries that built the foundation of the U.S. brewing industry, including Anheuser-Busch, Coors, Miller, and Schlitz. In 1865, American breweries produced 3.66 million barrels (bbl; 1 barrel 5 31 U.S. gallons) of alcoholic beverages. The Prohibition movements started within the states during 1880–1919 and sought to ban the sale of alcohol. Local Prohibition laws prompted Copyright © 2014 by Armand Gilinsky. All rights reserved. 9/19/14 8:31 AM Final PDF to printer PART 2 C-92 Cases in Crafting and Executing Strategy consolidation within the industry. With the passage of the Webb-Kenyon Act in 1914, the U.S. Congress put 1,568 businesses out of brewing operations. After Prohibition was repealed in 1933 by the ratification of the Twenty-First Amendment, the number of domestic breweries climbed to approximately 700 in just five years (Exhibit 1). The latter half of the 20th century saw largescale breweries exiting the market, as they could not produce sufficient volumes at low-enough costs amid growing competition. There was a need to produce and market beers on a national scale, which increased capital requirements, forcing the more inefficient producers out of the market. The brewers that survived did so mainly by remaining small and regional, like Anchor Brewing located in San Francisco. Federal legislation changed again in 1976, allowing smaller, independent brewers to sell their creations onsite. Responding to changes in consumer tastes, these new brewers began producing darker and fuller-flavored beverages like ales, porters, stouts, and dark lagers. Conditions in the U.S. beer market were challenging from 1981 to 1994, with a growth rate of only 1 percent. In contrast, the 1980s were a decade of pioneering in the craft-brewing segment (Exhibit 2) and were followed by high growth during the 1990s. Annual volume growth was 35 percent in 1991 and continued to grow every year until reaching a high of 58 percent in 1995. From 1997 to 2003, the craft-brewing-segment growth declined to under 5 percent annually. Independent breweries and local brewers saw the beer-drinking clientele gravitate toward their styles of production, and, as a result, from 2004 to 2008 annual volume growth rates held steady, ranging from 6 to 12 percent. Craft brewers represented 6.5 percent of U.S. beer sales in 2012 and grew 15 percent in volume in that year. In 1980, there were 8 craft breweries, and the number grew to 2,360 breweries by 2013, according to the Brewers Association (Exhibit 3). COMPANY HISTORY Founding (1992–1997) In the early 1990s, Magee began home brewing in his Lagunitas, California, kitchen as a hobby. During the first five years of brewing, Magee worked as a printing salesman to earn his living. He confessed, “[I] wanted out of printing very badly.” By early 1993, Magee’s wife “evicted him from the kitchen.” He then rented a small space in the back of Richard’s Grocery Store, in the small town of Forest Knolls, California. He expanded the operation by installing a three-tier brewing system and purchasing an all-electric plug-n-play cargo container. Despite no longer brewing in the town of Lagunitas, all the permits and legal documents were under the “Lagunitas” name and Magee thought the name was cool and catchy, so he kept it. Growth in the Number of U.S. Breweries, 1887–2012 EXHIBIT 1 2,500 2,403 1,179 1,500 1,000 703 89 500 0 (June 2012) 2,011 2,000 (1887) Number of Breweries 125-Year Brewery Count (1887–2012) (Prohibition) 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Year Source: Brewers Association, tho20598_case07_C91-C100.indd 92 11/4/14 11:46 AM Final PDF to printer CASE 07 EXHIBIT 2 Lagunitas Brewing Company, Inc.—2013 C-93 Market Segments The craft beer industry is defined by six distinct markets: brewpubs, microbreweries, regional craft breweries, and contract brewing companies. Microbrewery: A brewery that produces less than 15,000 barrels of beer per year with 75% or more of its beer sold off-site. Microbreweries sell to the public by one or more of the following methods: the traditional three-tier system (brewer to wholesaler to retailer to consumer); the two-tier system (brewer acting as wholesaler to retailer to consumer); and, directly to the consumer through carry-outs and/or on-site tap-room or restaurant sales. Brewpub: A restaurant-brewery that sells 25% or more of its beer on site. The beer is brewed primarily for sale in the restaurant and bar. The beer is often dispensed directly from the brewery’s storage tanks. Where allowed by law, brewpubs often sell beer “to go” and/or distribute to off-site accounts. Note: BA re-categorizes a company as a microbrewery if its off-site (distributed) beer sales exceed 75%. Contract Brewing Company: A business that hires another brewery to produce its beer. It can also be a brewery that hires another brewery to produce additional beer. The contract brewing company handles marketing, sales, and distribution of its beer, while generally leaving the brewing and packaging to its producer-brewery (which, confusingly, is also sometimes referred to as a contract brewery). Regional Brewery: A brewery with an annual beer production of between 15,000 and 6,000,000 barrels. Regional Craft Brewery: An independent regional brewery who has either an all malt flagship or has at least 50% of its volume in either all malt beers or in beers which use adjuncts to enhance rather than lighten flavor. Large Brewery: A brewery with an annual beer production over 6,000,000 barrels. Source: Brewers Association, EXHIBIT 3 Number of U.S. Breweries and Volume Produced, 2012 U.S. Breweries in Operation Brewpubs Microbreweries Regional craft breweries Total U.S. craft breweries Large noncraft breweries Other noncraft breweries Total U.S. breweries Quantity Volume (bbl) 1,124 1,139 97 2,360 23 33 2,416 870,371 1,905,212 10,237,632 227,702 Source: Brewers Association, From the beginning, Magee had a clear idea of how he would make money in the beer business: I would do it the way another great San Francisco brewery did it: wholesale. The margins would be thin, but I would do all the work myself and whatever crumbs were left over, I’d feast on them. I was only planning on producing unfiltered draught beer and to market it as a “private label” product to the 20 or so bars and restaurants in San Francisco and in the tourism heavy West Marin coastal area where I lived. I would brew, filter, keg, sell, deliver, and service it all solo. tho20598_case07_C91-C100.indd 93 By 1994, the brewing operation of Lagunitas overwhelmed the capacity of the small grocery store’s septic system. Magee was forced to quickly relocate to Petaluma, California. Once LBC moved into an 8,500-square-foot location in Petaluma, Magee purchased a 14-barrel brew system and the company’s first bottling line. With production of sixpacks of beer starting in 1995, the bottling line was easy to justify to Magee: “The current 20 ounce bottles were easy to hand-fill. But a $2,500 bottling line for 12 ounce bottles would allow $1 million in product.” 9/19/14 8:31 AM Final PDF to printer C-94 PART 2 Cases in Crafting and Executing Strategy Over the next three years, LBC grew production from 600 barrels to nearly 10,000 barrels annually by adding tanks and fermenters, one at a time. As Magee recalled: At some point—in June of 1994—it all got to be too much, and while the little brewery was just beginning to carry its own weight financially, selling only the private-label draft beer, I needed to hire some help. This single decision to increase the brewery’s daily “burn-rate,” and the resultant need for increased sales volume to support the first payroll position, was the beginning of what I can only describe as 12 crazy years of being chased down the street by a rabid pack of wild dogs. Even with incredible growth, financing remained an issue, as no bank believed in the craft beer movement or in Magee: There is too much work and too many good customers for you to do a good job by yourself, so you hire one guy, and your daily cost of operation goes up. Now you need to sell more beer to pay for this change, which you can, so you do. To make this extra tasty brew you need to buy more ingredients, which you can, so you do. Unless you sell the beer COD, you will probably need to pay for these ingredients before you get to collect for the beer the ingredients will become, which means you need a little more cash. It’s all about the “time of arrival” of the money to your checking account. Your little brewery is a little profitable, but you are growing quickly and the “time of arrival” of money thing is getting harder to manage because you seem to need more than the little bit of money that you are generating in profits if you are going to pay your bills on time—so you need a little more money to put into the bank account to cover the checks that are clearing the account faster and faster. But you have a day job and you just put your paychecks in the brewery because things seem to be going so well. So you grow a little bit more, you pay for materials— and now salary—before you collect for the brew you’re delivering, and you are a little profitable, but actual cash somehow remains scarce. Suddenly, you realize that you need another fermenter and a few more kegs because you are growing and you are starting to short customers’ orders, so you buy another fermenter, which also takes more money than you are making. Maybe you have a bank that will lend you money, but in 1996, I didn’t. Bootstrapping (1997–2007) In 1997, the craft beer industry hit hard times. Financing dried up and many breweries folded. Magee remembered those difficult years: tho20598_case07_C91-C100.indd 94 I counted 23 serious brands that had recently been important brewers and were now gone from the market. There was beer running in the streets. Distributors started getting tired of all the brands, retailers were just numb, beer fans were more than a little bowled over. But, it was also a good time to be buying used equipment for the same reasons. As many breweries were closing or stagnating, LBC was thriving and growing fast (Exhibit 4). In 1998, Magee leased a 17,000-square-foot facility across the street from the original 14-barrel brew house in Petaluma. The new facility was built with growth in mind. The 30-barrel brew house was composed of cheaply procured used equipment from casualties of the industry downturn, specifically Wisconsin Brewing Co. and Napa Ale Works. While the old plant was slowly phased out, the new one was similarly phased in. Magee fondly remembered moving day: When we had the new place mostly ready, we had a big moving party of 1,200 or so of our best friends, and after a 10 beer tasting and some live music while getting loaded at the old plant, a loud horn blew and everybody grabbed anything they could carry that was not nailed down and we all literally marched over to the new McDowell plant in a massive parade led by a mime, a guy on stilts, a purple bear, and a tragic little civil war style marching band. The new facility required large amounts of new capital, and Magee sought private equity to provide the financing: Eventually, when I had to move the brewery into a larger space, buy bigger brewing stuff, and do a bunch of building renovations, I needed to raise money. I got it from some old friends, and from some new friends, and in 1998, I traded about half ownership of the brewery for $650,000. At that time, I couldn’t borrow it from anywhere, so I had to raise it by selling stock. In 2000, increased debt and overhead expenses pushed LBC to pursue faster growth. The next several years were used to “clean up” production with efficiency purchases, such as a new bottling line that did not waste as much beer and a new highspeed centrifuge separator. Both strategies paid for themselves by getting more beer to the consumer without additional inputs. By the end of 2007, production was reaching maximum capacity again. 9/19/14 8:31 AM Final PDF to printer CASE 07 EXHIBIT 4 Lagunitas Brewing Company, Inc.—2013 Lagunitas Brewing Company: Capacity, Revenues, and Profits, 1992–2013 Period Year Petaluma Maximum Annual Capacity (bbl) Sales Revenue (000s of US$) Founding 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 n/a n/a n/a 3,420 5,420 8,420 10,420 14,420 17,420 19,420 23,420 24,420 26,420 32,420 37,420 43,420 57,420 72,420 101,420 165,420 235,420 400,420 n/a n/a n/a 513 813 1,263 1,615 2,278 2,787 3,165 3,888 4,151 4,544 5,674 6,600 9,500 12,900 17,100 24,600 39,700 59,000 105,000 Bootstrapping Evolution Expansion C-95 Net Profit (000s of US$) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 270 400 503 804 595 563 1,500 1,737 3,107 8,500 Source: Lagunitas Brewing Company, private communication. Exceeding Capacity (2008–2010) In 2008, Magee purchased an automated 80-barrel brew house manufactured in Germany by Rolec, a company renowned for quality brewing products. The new equipment allowed for significant growth. With the installation complete, Magee told local newspapers that it would take 10 years to reach maximum production and that after reaching that level he would be “happy to stop growing for a while.” At that time, LBC’s beer was distributed in 35 states. Four trucks a week shipped beer to Manhattan and five trucks a week to Chicago. According to Magee, “If you look at Highway 80 going across the country, it’s literally a pipeline of Lagunitas [beer] being transported all the time.” Two years later, LBC was quickly approaching the brew house’s maximum production level, running tho20598_case07_C91-C100.indd 95 the plant “flat out to keep up with orders.” The expansion that was supposed to last 10 years lasted only two. In March 2010, amid an annual growth rate of 46 percent, Magee announced an additional new 250-barrel automated brew house, which would allow for annual capacity of over 150,000 barrels, at a cost of $9.2 million. Magee recalled: It was like making decisions on the back of a galloping horse, without quite enough information to know exactly what your next step has to be. . . . [There was] tremendous growth, from day to day, there was no such thing as standard operating procedure, it was scary, you look around, there was something new every day. National Expansion (2011–2013) After unprecedented 60 percent growth in the first two quarters of 2011, Magee revised his initial demand 9/19/14 8:31 AM Final PDF to printer C-96 PART 2 Cases in Crafting and Executing Strategy estimates and increased annual capacity to just under 200,000 barrels in Petaluma. With a total cost just over $14 million, Magee revised his expansion predictions and said, “I can see us growing three to four times in size in the next five to ten years.” In 2012 and 2013, LBC expanded again to nearly 230,000 and 400,000 barrels annual capacity, respectively. While the Petaluma brewery continued its expansion with a new building and bottling line (now at 130,000 square feet), LBC began planning a second brewery. The planning included brewery designs, capacity requirements, brewing processes, and ways to finance the expansion. The location choice of Chicago was a natural one: Chicago, home to some 8 million people, represented the largest LBC market outside Northern California. A Chicago brewery gave LBC easier access to its Midwest and East Coast customers and suppliers by taking advantage of Chicago’s distribution lines. For example, Magee claimed that $1.5 million per year was spent to truck beer bottles from a glassmaker in Oklahoma to Petaluma and, after filling them up, back across the country to the Midwest and East Coast. Additionally, Lindenbusch was optimistic that LBC would be considered a hometown beer by Chicagoans: “Lagunitas has deep connections to Chicago. Tony is originally from Chicago and still has family living there. Tony loves Chicago and Chicago loves Tony.” Securing financing for the new 300,000-squarefoot brewery and its initial operating costs was a top priority for Magee. He knew he couldn’t finance this expansion phase in the same way he had in Petaluma, that is, borrowing from friends and family and taking second mortgages. In the early days, LBC was paying 1.5 percent on receivables and 10 to 14 percent on equipment. This made it difficult for LBC to acquire bank loans or further investors. Before 1995, LBC had been bleeding cash and showed little profits. Once the debts were all paid, LBC was flush with cash. This made its Chicago endeavor an attractive opportunity for banks and investors, as the investors saw the brewery was growing. The company secured $17.5 million in funding in 2011 and purchased a plot of land inside the city limits of Chicago. While the cost to do business was much higher inside the city limits, LBC felt it was more valuable to be officially located within the historic city. While other well-known breweries had sought tax advantages for placing their new tho20598_case07_C91-C100.indd 96 breweries inside certain states, Magee had been adamant about profitable beer companies not taking advantage of these types of tax deals. Setting up the Chicago brewery identically to the one in Petaluma was crucial to Magee. Everything from the water and physical brewery to the culture inside—all of it had to be the same. LBC set and reset the Chicago annual capacity from 150,000 barrels to 250,000 as the planning continued. Eventually the 300,000-square-foot Chicago facility would support a 500,000-barrel annual operation. A brewery’s capacity (i.e., “bottleneck”) was determined by the number of fermenters on site. In Chicago, each fermenter produced 750 barrels per batch, with a turnover rate of about 20 times per year. Jeremy Marshall, the head brewer, was to be stationed in Chicago during the early days of operation, because, according to Lindenbusch, “the beer recipes are so solid, the first batch is usually good, and just needs a bit of tweaking from Jeremy.” The plan was for Marshall to travel back and forth between Petaluma and Chicago, being responsible for both. The beers in production would be the same at both locations, and according to Magee, “A customer should not be able to distinguish between batches brewed in Chicago versus Petaluma.” Lindenbusch commented in July 2013: One of the reasons we chose Chicago was the water supply. Chicago has very similar water to that in Petaluma. Water is the lifeblood of beer making and really affects the flavor profile. So choosing the right water was important in our decision to select Chicago. We don’t want the customer to have a different tasting beer depending on where it was brewed. Both Petaluma and Chicago have no minerals in their water so all we have to do in order to get the correct pH balance, is to add in some gypsum. This really helps in guaranteeing continuity in our beers. During that growth period, LBC added key people from major corporations and placed them in upper-management roles to help guide the expansion. Much like a traditional corporation, LBC employed a CEO, CFO, COO, VP of marketing, VP of sales, and VP of packaging. Most of the executive team had been with LBC for over 10 years and expressed little interest in early retirement. Most of these executives were in their 50s and empathized with Magee when he said, “I’ll die while still on payroll.” By 2012, LBC had grown from 13 salespeople to 56 and had added six regional sales managers. As LBC began to increase its national exposure, the need 9/19/14 8:31 AM Final PDF to printer CASE 07 Lagunitas Brewing Company, Inc.—2013 to support its sales team on the ground became paramount. Leon Sharyon, LBC’s chief financial officer, explained: We realized that we needed a CRM (customer relationship management software) to specifically deal with our needs, so we went out and hired an IT director. Then I called up the Dean of the Computer Science program at Sonoma State (University) and asked him to send me his best three students to work on a project for me. They did so well we offered the students jobs and they have built us a great tool that our sales team uses every day. The impact of arming our sales team with the proper tools as they go into bars, restaurants and events has really helped. MISSION AND VALUES In July 2013, Lindenbusch explained how LBC wanted to be viewed: We want to be known as an American brewery with American owners and American employees. Our vision is to be known more as an American beer like Bud. We don’t want the label of craft or microbrew placed upon us. The craft definition is becoming blurred by various tax and trade association guideline changes. We don’t feel we fit the craft mold. Lagunitas is more about getting our beer to as many people as possible. LBC believed that with profitability came responsibility to not only maintain high brewing standards but also support the communities that supported them. This “pay it forward” attitude typically involved helping charities raise money through LBC donations. But rather than extol its virtuous side, LBC preferred to focus its PR efforts on highlighting the fund-raising group’s mission. As Lindenbusch saw it, Lagunitas and music went hand in hand: Our marketing efforts primarily revolve around music, in some way or another, whether it’s a festival or concert. Sponsoring bands that are hitting the road is one of our next ventures. It will be called “Fueled by Lagunitas,” and we basically donate beer and gas. Often we deal with LiveNation for concerts and intend to participate more in various capacities with college radio, PBS and music festivals. Recently we added our mini amp (amphitheater) at our Petaluma brewery and host concerts and benefits of all types. And we have live music that goes on in our tasting room four nights a week. Our motivation is to help music and the arts. However, as LBC became a larger player in the craft beer segment, it encountered considerable competition from other craft brewers. Lindenbusch insisted tho20598_case07_C91-C100.indd 97 C-97 that LBC was now blocked from participating in certain music festivals. Other brewers had already secured exclusive distribution rights to certain events, which stifled the organic expansion and word-of-mouth strategy that LBC had been following since its inception. COMPETITION As LBC left its small startup roots, it set its eyes on the big domestic competitors, like MillerCoors and Anheuser-Busch. As the craft-brewing segment matured, major American brewers had started to offer similar craft brew–like products such as BlueMoon (MillerCoors) and Shock Top (AnheuserBusch). Additionally, some craft brewers, such as Sam Adams (Boston Brewing Co.), chose to be contract-brewed by the big American brewers. In 2013 LBC occupied the 6th spot in the rankings of domestic craft brewers (Exhibit 5), and the 13th spot for overall U.S. brewers (Exhibit 6). There were over 100 distributors that sold LBC nationwide and in a few foreign countries. LBC expected further expansion internationally in the next few years. Besides competing with the big American brewers, LBC continued to compete with existing and new craft brewers that entered the market. In addition to the more than 2,400 breweries that existed in the United States, an estimated 1,500 new breweries were under construction in 2013, according to the Brewers Association. California had the greatest number of craft breweries with 312 but was only midrange in breweries per capita (Exhibit 7). According to Lindenbusch, LBC considered itself “the low-end of the high-end beers (in terms of popularity), such as Corona, Heineken, Sierra Nevada, and a tier above Anchor and Stone.” While flavorful beer was one aspect of a successful company, capacity and distribution were other keys. Similar to LBC, many of the craft brewers were expanding operations to fulfill the growing craft beer demand. Sierra Nevada and New Belgium Brewing Co., both major craft brewers, planned to open second breweries in North Carolina. MARKETING AND DISTRIBUTION Lagunitas had built a successful and identifiable brand with little traditional articulation or consistent messaging. The brand was developed, predominantly 9/19/14 8:31 AM Final PDF to printer C-98 EXHIBIT 5 Rank 1 2 3 4 5 6 PART 2 Cases in Crafting and Executing Strategy Top U.S. Craft-Brewing Companies (based on 2012 beer sales volume) U.S. Craft Brewing Company City State Boston Beer Co. Sierra Nevada Brewing Co. New Belgium Brewing Co. The Gambrinus Co.* Deschutes Brewery Lagunitas Brewing Co. Boston Chico Fort Collins San Antonio Bend Petaluma MA CA CO TX OR CA Barrels Sold 2,100,000 966,000 765,000 n/a 255,000 244,000 *Includes BridgePort, Shiner, Trumer, Tappeto Volant, and Pete’s Wicked brands. Source: Brewers Association, EXHIBIT 6 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 Top Overall U.S. Brewing Companies (based on 2012 beer sales volume) U.S. Overall Brewing Company City State Anheuser-Busch Inc. (a) MillerCoors (b) Pabst Brewing Co. (c) D. G. Yuengling and Son Inc. Boston Beer Co. (d) North American Breweries (e) Sierra Nevada Brewing Co. New Belgium Brewing Co. Craft Brew Alliance, Inc. (f) The Gambrinus Co. (g) Minhas Craft Brewery (h) Deschutes Brewery Lagunitas Brewing Co. St. Louis Chicago Los Angeles Pottsville Boston Rochester Chico Fort Collins Portland San Antonio Monroe Bend Petaluma MO IL CA PA MA NY CA CO OR TX WI OR CA (a) Includes Bass, Beck’s, Bud Light, Budweiser, Busch, Goose Island, Landshark, Michelob, Rolling Rock, Shock Top, and Wild Blue brands— does not include partially owned Coastal, Craft Brew Alliance, Fordham, Kona, Old Dominion, Omission, Red Hook, and Coastal, Fordham, and Craft Brew Alliance brands; (b) includes A.C. Golden, Batch 19, Blue Moon, Colorado Native, Coors, Keystone, Killian’s, Leinenkugel’s, Miller, and Tenth & Blake brands; (c) includes Pabst, Schlitz and 28 other brand families; (d) includes Alchemy & Science and Sam Adams brands; (e) includes Dundee, Genesee, Labatt Lime, Magic Hat, and Pyramid brands; (f) includes Kona, Omission, Red Hook, and Coastal, Fordham, and Craft Brew Alliance brands; (g) includes BridgePort, Shiner, Trumer, Tappeto Volant, and Pete’s Wicked brands; (h) includes Mountain Crest and 10 other brand families. Source: Brewers Association, from Magee’s personality, through catchy and quirky labels with simple typeface and interesting copy. LBC found an industry niche and continued to lead the craft industry by producing strong-flavored tho20598_case07_C91-C100.indd 98 and high-alcohol-content beers that failed to be categorized in traditional categories. Lagunitas’ marketing methodology lacked traditional media promotions, minimal-pricing incentives, 9/19/14 8:31 AM Final PDF to printer CASE 07 EXHIBIT 7 Lagunitas Brewing Company, Inc.—2013 C-99 Capita per Craft Brewery by State (select states), 2012 Capita per Craft Brewery Rank State 1 2 3 4 5 6 7 8 9 10 20 35 39 42 44 51 Vermont Oregon Montana Alaska Colorado Maine Wyoming Washington Idaho Wisconsin California Illinois New York Texas Florida Mississippi Total Craft Breweries Capita per Craft Brewery 25 140 36 22 151 37 15 158 29 83 316 67 88 84 57 3 25,030 27,365 27,484 32,283 33,306 35,902 37,575 42,560 54,055 68,518 117,892 191,502 220,206 299,352 329,848 989,099 Source: Brewers Association, and push marketing techniques. Magee described his hesitation to categorize his brand: This is a delicate thing to talk about because I don’t want to limit the possible interpretations of what Lagunitas is in your minds or in our own. Having started this ball rolling down the alley, I have never been certain where it would land and there have been more than enough interesting and unforeseeable inputs over the years. If I said we are irreverent does that preclude our being traditional? Is saying that we are funny ruling out our displaying gravitas? If you say we’re extreme should people infer that we’re challenging to have in the fridge? If I said that our labels are literate, could you infer that we’re pretentious . . . ? Like Joseph Campbell’s Hero with a Thousand Faces, I’ve always liked the idea of a brand that is equal parts legend, material, and myth, and always a mirror—a chimerical presence, where everyone that apprehends it sees something in it that is unique to their own point of view. The company had found a promotional niche for itself by “giving away beer and making friends,” according to Lindenbusch. For example, in 2012 LBC donated 11,212 cases of beer to festivals and events, and in 2013 it had already donated 10,045 cases by July. Magee was telling a story, through the label artwork and the taste and quality of the beer. tho20598_case07_C91-C100.indd 99 The artwork on the bottle matched the art that went into brewing any batch of Lagunitas. LBC realized its “secret” was still in the quality of its beers, as Lindenbusch noted: Our labels have personality, humor, intelligence, and art. They are similar to a J. Peterman catalogue, describing a lifestyle rather than a product. However, a consumer may buy our beer for the artwork or story on the bottle, but it is what is inside that keeps them coming back. Word of mouth and quality products had been the backbone of LBC’s marketing. As the craft brew market expanded, LBC had witnessed revenue growth of 46 percent in 2010 and 60 percent in the first two quarters of 2011. Its major markets at that time were California, Colorado, Texas, Florida, New York, and Illinois. LBC’s marketing strategy was quite simple: Continue to be Lagunitas. Magee talked about what he called “the personality of Lagunitas”: We kept the name “Lagunitas” after moving away from that town for a few reasons: it’s a beautiful little word, it’s hard to say, once you said it you’re in, and it looks lovely in type. I work very hard to get personality into the recipes. Not to emulate styles that have gone before us, but I like to think that none of our beers are 9/19/14 8:31 AM Final PDF to printer C-100 PART 2 Cases in Crafting and Executing Strategy today’s version of yesterday’s anything. We are always trying to find new material within those four ingredients: malt, hops, yeast and water that make up beer. I think that independence of thought and independence of spirit show up in the brand. Pricing strategy played an important role in the formation of the brand. From the beginning, LBC realized that how it priced its product would make huge differences in sales and brand image. When the company first started to produce six-packs in 1998, Magee needed to select a price segment: I had a lot of decisions to make about the new bottled brand, but the heaviest one was what we would charge for it. I looked at some market-info (IRI) reports and saw that the average selling price of most every sixpack brand in the top twenty was $5.99 and some even less. This seemed really, really cheap, but it was the world around us. They all had frontline six-pack prices of $6.99, but they all did every other month promotional prices of $4.99, and so the average fell in the middle. I wanted to make sure that at every opportunity I would aim Lagunitas at participating in the market with only the best brands. That didn’t just mean other craft brewers (although we all fished in the same pond) but also it meant imports. I needed to price similarly and participate in the market similarly. These were huge breweries, but I wanted them to be my peers. We weren’t sophisticated enough to do effective promotional pricing yet but I felt that if we wanted to play with the big boys, I’d have to ante-up. So, we set our everyday price at $5.99 for a six-pack. ECONOMIC DEVELOPMENT ISSUES LBC had always had problems in regard to wastewater. Excessive wastewater was a major reason for moving brewery operations often during the early days. The city of Petaluma explored whether additional industrial wastewater treatment capacity was needed. This wastewater issue directly affected Lagunitas. If LBC continued to grow, its wastewater requirements would proportionately increase. High levels of organic matter in the brewing process caused problems for municipal treatment systems. Breweries commonly pretreated their wastewater to meet municipal standards of biological tho20598_case07_C91-C100.indd 100 oxygen demand (BOD) and total suspended solids (TSS). Even though LBC pretreated its wastewater, it still incurred thousands of dollars in fines from the city of Petaluma. The company also had costs associated with the excess wastewater that it couldn’t release into the sewers. By 2013, LBC was paying $250,000 every month to truck its wastewater 60 miles away into a neighboring municipal district. LBC purchased a nearby plot of land, two lots south of the brewery in Petaluma, to build its own wastewater treatment plant. Petaluma had, to date, shown a willingness to work with Lagunitas when it came to permits and fees. FUTURE CHALLENGES With 2,400 craft breweries and another 1,500 in various stages of development and completion in mid-2013, the U.S. craft beer market appeared to be in the midst of explosive growth in production. The galloping horse that was LBC had been at the forefront of the growth in capacity. But LBC had also evolved beyond the craft origins, with a clear focus on national distribution and an increasing orientation toward taking on the “big boys.” The Petaluma brewery was in a good location from a West Coast distribution standpoint, and the Chicago brewery would be in an excellent location for East Coast distribution. Chicago, one of the major distribution centers in the United States, would allow LBC to harness the city’s distribution network to get products out to consumers more efficiently. Lagunitas expected continued growth for the immediate future, but Magee was all too conscious of the cyclical nature in the craft industry. He admitted that he feared the next “unknowable step.” The fast-paced nature and increased competition in the craft industry segment of the beer industry seemed to all but guarantee difficult times ahead. But looking at LBC’s history, the company was in a good position to weather anything. The Chicago expansion was a key step to being able to break out of the craft beer label and compete on the larger national— and perhaps eventually global—stage. Magee and Lindenbusch expressed hope that the personality of LBC would not get lost in the process. 9/19/14 8:31 AM
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Brewing Industry in the US

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The brewing industry in the United States has been dated back to the beginning of the
American colonies. The inaugural shipment of liquor from England was in 1607. In 1612 in the
New Amsterdam the first New World brewery was opened. What followed next in the 1800 was
the establishment of several breweries by German immigrants which kick started the United
States brewing industry. The industries included Schlitz, Miller, Coors as well as AmheuserBusch. By the year 1865, production in the American brewing sector had escalated to over 3
million barrels of alcoholic brew. The brewing industry was disrupted between the years 1880 to
1919 by the Prohibition movement that was advocating for the ...

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