BOSTON

BEER CASE STUDY

Haarish Niranj
Moritz Kroth
Aniket Kaushik

Business analysis

First, focus on the business, leaving aside finance issues as much as possible.

1) Briefly describe Boston Beers strategy. Is Boston Beer successful in executing it? Assess
Boston Beers performance from 1990 to 1995. Report key performance indicators
whenever possible.

Unique to Boston Beers products are the delicate monitoring of brewing process, ingredient
selection as well as brewing methods. This leads into the quality standard aspects of the
companys strategy. Following extensive testing for individual batches, the company was also
vested in freshness dating of the beers.

Bostons strategy also involved contractual brewing, by which it contracted four third-party
breweries according to location. These procured the raw materials provided and ensured
extensive quality control was in place. Special discounts beyond volume created incentives for
the contractors, while lowering overhead and capital for Boston beer. Alongside, the company
implemented a unique educational approach in its marketing channels. Significantly, the
company invested 40% of its revenues in sales and marketing. By means of its strategy the
company has stayed competitive throughout the years, which is why going public is a viable
option.

Boston Beer successfully monitored and realized changing customer tastes during the 1980s
which led to a significant growth phase at the time. The following decade started with an
impressive CAGR averaging 57% between the years of 1990 and 1994. At this point, its flagship
product Samuel Adams contributed to 63% of sales. The brew was wide acclaimed through its
Best beer titles throughout the period and triumph at the World Beer Championships. These
outcomes are particularly impressive taking the stagnating industry as a whole, during this time.

Financial analysis

Now, turn to financial aspects.

2) Do you recommend that Boston Beer goes public through an IPO? Discuss the pros and cons
of an IPO.

Boston Beer Company poses a promising future with its increasing growth rate and the market
expansion of the craft brew segment. Furthermore, seconded by the following reasons,

Shifting consumer trend towards premium craft beer

Excess cash and a low Debt-to-equity ratio
Projected segment growth to a 5% by 2003, as predicted by analysts

Advantages of an IPO

Enhances liquidity with exposure to the capital market

Allows private investors to benefit from its growth rate

Facilitates investment of new capital

Enables the firm to expand beyond its sustainable growth rate

Creates a brand image and value to the firm

Aids expansion into new markets

Disadvantages of an IPO

Cost of reporting and documentation to the SEC and other regulatory boards, banks, investors
are high.

The firm needs to allocate sufficient resources to monitor filing and adherence to regulations.

Increased obligations to investors

3) Perform a discounted cash flow analysis of the company as of January 1, 1996. Make the
following assumptions: Net sales growth is 30% in every year from 1996 to 2000; it is 25% in
2001; 20% in 2002; 15% in 2003; 10% in 2004; 7.5% in 2005; and 5% in 2006. Costs of sales go
down gradually from 47.4% of net sales in 1996 to 45% in 2001 and remains at 45% afterwards.
(Here: costs of sales include depreciation, as in the case.) Selling, Administrative and General
Expenses are 47% of net sales in 1996 and remain at 47% of net sales forever. Depreciation is
1.25% of net sales. The marginal tax rate is 41%. Net working capital is 10% of net sales, and the
sum of net PP&E and net other assets is 4% of net sales. Assume that Boston Beer has a target
leverage ratio D/(D+E) of 5% and, at this leverage ratio, an equity beta of 1.1. The market risk
premium is 5%. If you need to make additional assumptions, please state them clearly. What is
Boston Beers equity value per share resulting from this valuation?

Share price - $ 5.3 (Refer Appendix.1)

4) Perform another discounted cash flow analysis under a different set of assumptions. Make
the same assumptions as in the first scenario in question 3 except for: Assume that Boston
Beers net sales growth rate is 30% in every year until 2005; it is 25% in 2006; 20% in 2007; 15%
in 2008; 10% in 2009; and 5% in 2010 and 2011. What is Boston Beers equity value per share
resulting from your valuation?

Share price - $ 26.54 (Refer Appendix.2)

5) Perform yet another discounted cash flow analysis under a different set of assumptions.
Make the same assumptions as in the first scenario in question 3 except for: Assume that
Boston Beers net sales growth rate is 30% in 1996; 20% in 1997; 10% in 1998; 7.5% in 1999;
and 5% in every year from 2000 to 2006. What is Boston Beers equity value per share resulting
from this valuation?

Share price - $ 2.42 (Refer Appendix.3)

Decision Time!

6) Which of the three scenarios in questions 3, 4, and 5 is the most realistic in your opinion?
Why? What is your best estimate of Boston Beers equity value per share?
 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Q3 30% 30% 30% 30% 30% 25% 20% 15% 10% 7.50% 5%

Q4 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 25% 20% 15% 10% 5% 5%

Q5 30% 20% 10% 7.50% 5% 5% 5% 5% 5% 5% 5%

The difference between the scenarios analyzed are based on the projected sales growth of BBC
in the upcoming years. We have the following information regarding industrial data. The Craft
beer segment had been growing at an annual rate of 40% over the past five years. The growth
potential had led to a competition of over 600 specialty beer companies venture into this
segment.

Even though the domestic beer industry is valued at $50 billion and expected to witness small
growth rates, the craft beer segment is predicted to increase from 1.4% of the overall domestic
beer industry ($0.7 billion) to 5% in 2000 ($2.5 billion) at a CAGR of 40%.

Evaluating industry standards and comps makes Q3 a best estimate of BBCs potential growth.

PETE'S BREWING COMPANY REDHOOK ALE BREWERY BOSTON

BEER CO

Year Ended 9 Months Year Ended 9 Months
Ending Ending

31-Dec-93 31-Dec-94 30-Sep-95 31-Dec-93 31-Dec-94 30-Sep-95 30-Sep-95

RETURN ON EQUITY
PROFIT BEFORE 1.07% 1.67% 3.50% 27.80% 22.20% 18.00% 27%
(A)
TAXES/NET SALES
X NET SALES/AVERAGE 5.70 6.83 4.44 0.77 0.55 0.30 0.81
ASSETS
X AVERAGE 6.74 6.21 6.24 1.50 1.29 1.19 1.45
ASSETS/AVERAGE
(B)
EQUITY
= ROE (PRE-TAX) 41.11% 70.83% 96.97% 31.97% 15.62% 6.44% 32%

MARGINS
GROSS PROFIT/NET 46.85% 45.20% 49.65% 46.34% 41.82% 34.35% 45.74%
SALES
SGA/NET SALES 45.50% 43.20% 42.80% 17.42% 18.76% 17.59% 47%%
OPERATING 1.36% 1.96% 3.85% 28.92% 23.06% 16.76% 31.42%
PROFIT/NET SALES

 Appendix.1

WACC PC (FCF) $(6,276)

Debt 1950 Equity 37,050

Terminal Value $109,842

D/V 0.050 E/V 0.95

Tax Rate 41% Equity Beta 1.1 Firm Value $103,566

T-Bill Rate 6.26%

MRP 5% LT Debt $1,950

Re 11.8% Equity Value $101,616
Rd 11.83%
Share Value $5.3
WACC 11.52%

Appendix.2 Appendix.3

PC (FCF) $20,617.76 PC (FCF) $6,342

Terminal Value $490,508.87 Terminal Value $42,045

Firm Value $511,126.63 Firm Value $48,387

LT Debt $1,950.00 LT Debt $1,950

Equity Value $509,176.63 Equity Value $46,437

Share Value $26.54 Share Value $2.42