The Feasibility of Putting up a Wholesale Beer Distribution Business - Essay Example

Case South Delaware Coors, Inc. Executive Summary The case of South Delaware Coors, Inc. is a study on the feasibility of putting up a wholesale beer distribution business. Larry Brownlow is a prospective entrepreneur who is contemplating applying for the contract to run the wholesale marketing arm of Coors that will serve two counties, Kent and Sussex. He is thinking of availing of information from Manson and Associates, at a cost of $15,000. The study shall make use of information provided by Manson to determine if the proposed project is feasible and will have a possibility of success, given its various constraints. From the data in Tables A, B, C, E, F, and I, sufficient information was obtained to forecast revenue and cost for the business and for the Coors wholesale business being contemplated. Analysis of the initial customer, the industry demand, projections in market share, investments and costs, including a break-even analysis were conducted. The study concludes that Larry should take the opportunity to apply for the contract, and should not spend more than about $6,800 in availing of information from Manson. Problem Statement The principal problem which this analysis addresses is whether or not Larry Brownlow should apply for the Coors wholesale distributorship for a two-county area in Southern Delaware. The determining criteria for this is will be the fixed and variable cost study and the break-even analysis at the end of discussion, but also considered are the targeted customers, industry demand, market share, investments, and costs incurred. The secondary problem is to determine which research would be source from Manson and Associates to support a decision for the market potential of a Coors beer wholesale distributorship, but at the same time minimize the cost of acquiring this information. Analysis50 Customer Analysis The customers to which Coors is expected to cater are individuals at least 21 years old or older, because of the laws preventing minors from being served or sold alcohol to. Industry Demand The industry demand is arrived at through the per capita approach and the taxes paid approach. The per capita approach involves the calculation of overall consumption in the industry, based on the historical data on the consumption per person and the growth of the target segment of the population that consumes the product. In Table 1 below are shown the US and Delaware per capita (i.e. per head or per person) consumption, while Table 2 shows the growth of the population in the two counties which comprise the market area. By multiplying the rate of consumption per person in Table 1 with the corresponding number of persons estimated in Table 2, then the result (in Table 3) is the estimated total consumption in units. This describes the total industry demand for the product. For those tables which do not have figures for the pertinent years, such as Table 1, the compound annual growth rate is calculated for the data present, and this trend is extended to those years for which data is not present. From the results in Table 3, the demand based on the population over 21 is growing at a 13% rate in Sussex and a 7% rate in Kent, using the per capita approach. Table 1 Table 2 Table 3 Beer Taxes Approach Tables 4 and 5 below show the alternative beer taxes paid approach, where the number of units sold by each company (A to F) is calculated based on the specific tax imposed per unit. Table 4 only has two years’ data, thus the growth rate between them was calculated and presumed to be extended over the next years, to 2006. The number of units are taken to be the consumption rate for those years. Table 4 The two approaches differ in that the beer tax approach derives its data from the suppliers while the per capita approach calculates the consumption from the demand side. The advantage of using the beer tax approach over the per capita approach is that the units calculated are the actual units released in the market by the producers, and the tax is an amount certain and verifiable from the government. The advantage of the per capita approach is that it determines the consumption, and not the release of the product which might not after all be entirely consumed, but remain stagnant in outlets. Using per capita consumption data allows the analyst to study factors that influence the trend of consumption based on the demographics of the market and the taste and preferences of the consumer. Table 5 Table 6 below shows the forecasts arrived at using both approaches. In this case, the forecasts closely approximate each other. Table 6 Market Share Projections Coors market share estimates are shown in Table C of the case study. For the six years from 2000 to 2005, the percentage market share of Coors is estimated at a near-constant average of 8.8%. This indicates that given the rising demand in the market, Coors is able to maintain a pace of growth proportional to that of the market. The implication is that as for the purposes of estimation into the future, the 8.8% market share may be assumed to persist to the future as a proportion of the industry demand. Thus, forecast for consumption of Coors may be calculated. Investments The investments of an entrepreneur are comprised of all the assets, or resources, of the business. Larry calculates the fixed assets he needs at the start of the business at $800,000, but to run the business other assets are needed such as cash, accounts receivable, inventory, and so forth. In Table F of the case study, the percentage distribution of assets is provided. Since fixed assets are 24.1% of total assets, the dividing $800,000 by 24.1% yields the total asset, which is the total investment. Total assets in this case amount to $3.32 million, shown in Table 7. Table 7 The foregoing balance sheet was created from the ratios to total assets supplied by Table F. The total assets were calculated from the given fixed assets, which led to the specification of the other assets. From these and the other income data and ratios supplied by Table F, the costs and revenues shall be calculated. Costs and revenues Table I from the case study presented the wholesale and retail six-pack prices, and it specifies that the wholesale gallon price is about 1.77 times the 6-pack price. From this ratio, the per gallon wholesale prices were computed for each brand and shown in Table 8. It is assumed that Coors, in the absence of other data, would follow the average prices and costs of those of its competitors, thus the means are calculated for these statistics. Table 8 shows the unit price of sales, while Table 9 shows the unit variable costs of the product. The unit costs were computed using the ratio of cost of sales to total sales, shown in the income data in Table F as 77.1 per cent. Table 8 Table 9 From the two preceding tables, the unit price and the unit cost are averaged over the seven brands, and the average will be used for the purpose of the calculations in this case. On Table 10 below is Coors Consumption Estimate, derived from applying Coors’ market share proportion on the Industry-wide consumption estimate. Table 10 Multiplying Coors’ consumption estimate in thousands of gallons by the mean unit price and mean unit cost earlier specified for wholesale gallon sales, and using the ratio of operating expenses to net sales found in Table F, the following projected income statement is derived. Table 11 According to the profit forecast for 2006, shown in the table above, cost of sales is $3,140,880, and net profit for the first year of operations is $105,920. The positive gain tends to lead to the conclusion that the business will be viable. Break-even point calculation According to the case, fixed costs were calculated at $90,000, and salaries were $160,000, for a total fixed cost of $250,000. However, looking at the forecasted income statement for 2006, forecasted operating expense was calculated at $826,980 which is a much higher operating cost figure for Coors. In the interest of greater conservatism, since this is a forecast, the higher fixed cost figure, proxied by operating expense at $826,980, will be used in the BE calculation. At break-even, total contribution margin equals fixed costs. Contribution margin per unit is the difference between price and unit cost – in this case $5.59 less $4.31, or $1.28. In this case, the break-even point would be found by taking the product of the operating expenses $826,980, by the unit contribution margin, $1.28, or 646,079 gallons. Since the projected Coors consumption for 2007 is well beyond this number (729 thousand for beer tax approach, and 740 thousand for the per capita approach for those 21 and over), it is safe to say that projected volume of sales will exceed break-even point, and the business will be operating with a comfortable profit margin. It is assumed that market share of Coors, calculated at a constant 8.8% for 2003 to 2005, shall remain at this level for 2006. Studies Used: Table A – Study A - $1,000.00 Table B – Study B - 1,500.00 Table C – Study C - 2,000.00 Table E – Study E - 200.00 Table F – Study F - 49.50 Table I – Study I - 2,000.00 Total - $6,749.50 The foregoing studies are those which would be useful to Larry, and he would save about $8,250 out of his budgeted $15,000 for research if he limited the studies he purchased to those listed above. Recommendation20 Read More