BUSINESS STRATEGYAdolph Coors, Case Study

Coors Success Strategy in the mid 1970s

In the mid 1970s, Adolph Coors Company was highly successful. It was posting steady volume gains for the last two decades and also managed to gain a 16% Return on Sales at the peak level.

A detailed analysis of the Coors Value Chain helps to understand the Strategies which helped them to score over the competition

Mar

gin

Margin

Inbound Logistics Operations Outbound Logistics Marketing

Human Resource Development

Finance

Research & Development

Procurement

Coors Success Strategy in the mid 1970s

Procurement Strategies• Raw materials accounted for 50%-60% of total revenue• Large, relatively efficient markets existed for all agricultural comodities• Brewer with Single Efficiency sized plant could buy agricultural inputs at the best terms• Packaging Costs formed the major chunk in the Raw Material Costs. Trend in the industry for

Major players as a result was on Backward Integration to reduce Packaging Cost• Farmer Contracts allowed Coors to make its own Agricultural Inputs• Coors produced almost 69% canned beers compared to Industry average of 57%• Coors had pioneered the first two-piece all aluminum can. Sourcing of the same done from a

captive-can making unit• First brewer to start can recycling process• It produced virtually all glass bottles required by means of acquisition of Glass Bottling unit• Also made most of the labels & secondary packaging• Maximum production equipments manufactured in-house compared to industry standard of

capital equipment purchase• Focus on being self-sufficient in energy

Coors Success Strategy in the mid 1970s

Operations Strategies

• Coors Brewing Division had built its USP due to its emphasis on Quality.

• It used “Pure Rocky Mountain Spring Water” as its only ingredient. These came from 60 springs on Company owned land

• It used a brewing process which was unique to the Industry. Compared to the Industry Average of 20-30 days fermenting, Coors fermentation process was of 70 days.

• This minimized the use of additives

• Unlike major brewers, Coors did not pasteurize the beer, as it claimed that intense heat harmed the taste of the beer

• Production Costs were lower than industry standards due to focus on brewing single kind of beer, fast paced packaging lines and operating largest brewery in the world.

• Economies of scale was utilized to the fullest

• Capacity utilization hovered in the 90% range compared to Industry average of 80%

• Cost per barrel of $29 was second only to Heileman, in spite of the claims of using the most expensive raw materials

Coors Success Strategy in the mid 1970s

Inbound & Outbound Logistics Strategies

• Coors managed their distribution channel very closely. Distributors had very little power when negotiating with Coors

• Due to the unpastuarized nature of the beer, it had to be distributed and stored in warehouses in refrigerated manner

• Wholesalers had to keep the beers chilled and abide by strict “freshness policy”

• Coors received hundreds of applications from potential distributors for a single distribution franchise. High upfront investment by distributors (for abiding to the “freshness policy”) resulted in very high switching costs that kept the distributors loyal

• Over two-third of the distributors carried no other brands other than Coors.

• The company shipped 74% of its beer in refrigerated rail cars and the remainder in trucks

• The company’s in-house transport unit hauled nearly half of the truck shipments which is a higher proportion than at other major brewers

• Coors focused only on the 11 western states stretched from California to Texas. This helped it to gain 21.2% market share in their region

Coors Success Strategy in the mid 1970s

Marketing Strategies

• In an environment, where brewers marketed their beers through advertising, segmentation and packaging, right upto the 1977, Coors mainly offered two established products and their marketing strategy had been to focus on the several Unique Points of Differences that its product had, compared to the competition

• Coors had traditionally relied on its beer to market itself by virtue of its “drinkability”. Coors beer was supposed to derive its superior drinkability from “Rocky Mountain Spring Water” and other choice ingredients

• It had a unique brewing process which no other brewers provided

• With their beer perceived as a natural and high quality product, Coors was able to price it relatively high to the customers in comparison to the competition

• Though the distribution network median distance of 800 miles was higher than the industry standard of 300-400 miles, the economies of scale offered by high volume production combined with premium pricing, offered significant contribution margin for the per unit sales

• A mystique was created around the company’s only brand with strong associations from the greatest hollywood actors also helped in the image building of the brand.

Coors performance relative to Industry

Anheuser-Busch Miller Stroh-Schlitz Heileman Coors Pabst

1977 1985 1977 1985 1977 1985 1977 1985 1977 1985 1977 1985

Barrels Sold (Millions) 37

68

24

37

28

23

6

16

13

15

16

9

Net Revenue (Million $) 1,684

5,260

1,110

2,591

1,123

1,592

216

860

532

1,079

583

490

COGS (Million $) 1,340

3,524

666

1,555

878

955

152

617

371

727

486

294

Advertising (Million $) 73

471

60

300

65

150

13

103

14

165

27

Other SG&A (Million $) 102

491

278

600

109

487

27

74

38

94

32

15

Operating Income(Million $)

169

774

106

136

69

25

67

109

93

38

Market Share (%) 23

36

15

20

17

13

4

9

8

8

10

5

Total Capacity (Millions Barrels)

74

44

25

26

16

11

Capacity Utilization (%) 85

84

96

62

92

81

Operating Profit Margin(%) 10.04 14.71 9.55 5.25 6.14 0.00 11.57 7.79 20.49 8.62 6.52 0.00

Financial data of Coors v /s Competition

Coors performance relative to Industry

The Market Share of Coors was 7.92% in 1977 & 7.89% in 1985 compared to others.

Coors performance relative to Industry….Contd

The Capacity Utilization of Coors was one of the Highest.

Coors performance relative to Industry….Contd

The operating margin % of Coors was 8.62% in 1985.

The operating Margin %age of Coors was 20.49% which was the highest in the Industry in 1977.

Coors performance relative to Industry….Contd

The Net Revenue and the Operating Income for 1977 & 1985.

Coors performance relative to Industry….Contd

The COGS, Advertising & SG&A expenses of Coors as compared with the Industry.

Summary of Coors performance relative to Industry

• Though there was a steady rise in Sales, the Operating Income showed a steady decline.

• This was predominantly due to continuously rise in Advertising and Other overheads.

• Even the Return on Assets showed a significant decline.

• Expansion to other regions of US also did not seem to have helped the company to grow.

• Too much of forward and backward integration with no increase in production capacity did not help the company either.

• In spite of steep increase in distribution network and also expansion in more regions of US, the market share stayed unchanged all across the 20 years. This was mainly due to competitors eating up Coor’s market share, specially Anheuser-Busch and Miller.

So to conclude, Coors was not able to leverage its strong value chain and in the process, could not grow as well as its competitors did. However , beyond 1985, it appears to have started turning around the company by critically addressing the weaker sections of the value chain.