Case Study of Redhook Ale Brewery's Growth and Sustainability
Recognizing the Business Opportunity
Following the end of the prohibition era leading into the 1970’s, the American brewing industry structure was changing and a surge of microbreweries began. Popularity had risen in the imported beer market as well, where consumers were creating a larger demand for higher-quality brews. However, cost of shipping and product freshness appeared to be the two barriers for any beer company to face when retaining the full value of these foreign products in demand. Despite these two challenges, there was still an opportunity created for regional microbreweries to cater to their consumers’ needs. By offering speciality products and answering to the tasteful desires of their regional market, microbreweries changed the brewing industry.
After recognizing the trend of microbreweries and popularity of imported beer in the United States, as well as the fact that local per-capita consumption of draft beer was the highest it had ever been in the country, Paul Shipman and Gordon Bowker decided there was a real opportunity for success here. The promising growth in the national import beer market exemplified an attractiveness for entry into the American brewing industry. During this time of change in the industry also made it attractive and presented an opportune point to enter the market with a low number of microbreweries to compete with despite rapidly growing numbers. Then comes the question, would their products not only please their potential customers, but create enough demand to be durable in the marketplace?
Seeing as they planned to target import-drinkers and commitment to producing quality brew that not only competed with foreign brands but surpassed them in quality and fresh flavor, the demand could be created and be durable enough to exist. Once they establish themselves as a player, even just in their regional market, with more growth and the right resources to expand, the business then could be anchored. After observing these trends, identifying the problems of cost of imports and freshness and coming up with alternatives and solutions to that, and realizing there was real gap in the market place they could fill with their own high- quality flavorful brews, Redhook Ale began.
Feasibility Analysis
Redhook Ale used their first beer they produced as their “concept test” to see if they could develop any following and please customers. Blackhook Porter was their first beer introduced quickly grew popular amongst their local customers and quite the following. This was one of their first indicators that they were on the right track, they had located a desired product and direction to go in to capture market value. Most of their business began to stem from their local market around Seattle. They already identified regional competitors such as Anchor Steam and Sierra Nevada, smaller niche microbreweries, and even contract brewers like Sam Adams. After quickly developing an attractive an loyal customer base, this produced confidence and results to support the fact there was market attractiveness for their quality brews.
Where they planned to capture their share of value in the market was sticking to the imported beer loving consumers and produce fresh brews with more full-bodied flavor than any of their competitors were creating. Keeping the integrity and appreciation for their local community and location, Redhook also saw it financial stable to begin begin their business venture in the city of Seattle. It offered convenience and the resources to begin producing their brews after raising $350, 000 in equity from local investors for equipment and working capital for operations. They had a conservative financial strategy, even from the beginning, which focused on maintaining flexibility for growth purposed and ability to act on business opportunities as they presented themselves to the company. They quickly came to the realization after initial experience in business, that if they were to continue, they needed a larger production facility to meet demands.
Business Model
The company core strategy is initially state in the case as: “Redhook was committed to producing fresh brews with a more full-bodied flavor than its competitors had. To produce this more full-bodied flavor, all Redhook ales were brewed in accordance with the Reinheitsgebot, a German purity law that mandated just four ingredients: malted barley, hops, yeast, and water”. They made it a point in sticking to their targeted consumers and company mission for creating high quality and flavorful brews, because this is what they felt set them apart from their competitors in their regional niche market, and industry as whole.
Redhook Ale Brewery’s value chain analysis begins first with inbound logistics. After establishing their target market and interpreting the changing brewing industry trends, they focused on what equipment and materials they would need to begin production. To attain supreme quality and bold flavors that satisfied their consumers, they established the need for state-of-the-art brewing equipment. This was crucial for their initial success and take off in establishing their competitive advantage and brand recognition. With the need to meet growing demands, the company moved locations while keeping their integrity for the city of Seattle and local resources.
Moving to operations and outbound logistics, with their growing production volumes as the business began to take off, they implemented a sophisticated computer system designed to track deposits, keg floats, ingredient inventories, and other specialized brewed functions to help manage the growth and overall operations. Because they were focused on their local market, they only needed to depend on their own distribution team, which was only 4 people, to handle all their local deliveries which in turn saved them costs, and proved their top-quality service for its retail licensees. The company management team did not feel the need spend valuable company funds on advertising, instead the marketing-mix consisted of point-of-purchase displays and publicity, especially word of mouth marketing.
With their strong ties to the local city community, this proved to be useful and valuable and they developed a positive local image. The Seattle and Puget area was the focus of their marketing, as over 35 % of their revenue was achieved from a 50-square mile radius around the area. The remaining percentage of sales came from the Northwest in Washington and slowly expanding as they planned to in their distribution network of Alaska, Oregon, Idaho, California, Colorado and Montana. The service they ultimately provided was top notch, just like their beer quality.
The corporate culture was extended through their personal local service deliveries and relationships established and maintained in their distribution networks. Management made this a point of emphasis and something they took pride in as individuals and as a company and was reflected in their products and their promising ability to penetrate the market. Redhook Ale Brewery made a point in each partnership/relationship they made with companies they worked alongside. For deliveries outside of their local market that their own distribution team handled, Redhook only worked with top end and trusted distribution companies to handle their deliveries. The company’s CFO, David Mickelson, established and maintained a healthy and beneficial relationship with the U. S. Bank of Washington after securing a favorable loan from them for the company.
Industry/Competitor Analysis
When looking at the American Brewing Industry during the time of origin for Redhook Ale, it was a mature, yet changing industry. Microbreweries quickly began popping up throughout the country starting in the 1980’s. In 1975, it’s said there was only one microbrewery with slow growth up to 50 by 1985. Then by 1989 there was a surge with 300 established microbreweries with sales growing at an estimated 30-50% per year. With the decline in expensive imported beer sales, this staggering growth for microbreweries only made sense.
Consumers were now able to access quality, European influenced tasting beers in their local regions through these new microbreweries that had popped up. Higher beer taxes projected scares and a decline in in sales, along with health concerns which negatively impacted the industry as a whole. However, Redhook remained optimistic in hopes that alcohol consumers would be more probable to switch to beer than quit drinking all together because of health concerns. Different types of beer performed differently within their industry and market. The market size for lager for example, was “estimated to be greater than ten times the size of the ale market
The size of the high-priced lager market in the Northwest alone was estimated at approximately $145 million and in the premium lager market in California alone was over $1 billion”. This was something to think about for the company as they established themselves in the marketplace. The size of the high-priced lager market in the Northwest alone was estimated at approximately $145 million and in the premium lager market in California alone was over $1 billion. The case does not focus much on Redhook Ale’s competitors and how they stack up against them other than mentioning other regional brewers such as Ancho Steam and Sierra Nevada, niche microbrewer like Grant’s, Hart, and Thousand Oakes, and contract Brewers like Samuel Adams. Instead, it focuses heavily on an evaluation and analysis of the company itself and how it became what it became.
Porter’s Five Forces Summary
The threat of new entrants is moderate to high due to low barriers to entry and on a smaller scale there a low capital requirements to get up and running. Bargaining powers of suppliers is generally low because the ingredients are so basic and easily attainable, however hops is high. Bargaining power of buys is interesting in the sense that wholesalers have little power, retailers have low to moderate power, and consumers have the highest power because there is so much to chose from. This leads into threat of substitutes which is high because beer can easily be substituted with other kinds of alcohol like wine, liquor and non-alcoholic options. Finally, rivalry can be seen as moderate, with low buyer costs to switch brands, high differentiation and numerous competitors.
Initial Business Plan Assessment
Shipman’s initial business plan was to produce brews that could compete with all the well-known imported beer brands from Canada and Europe. Redhook Ale Brewery’s “road map” begins with their mission to produce high quality, full-bodied, and flavorful beers to the imported-beer loving market of consumers. To do this, they would follow the brewing the German brewing process of Reinheitsgebot, only using the ingredients: malted barley, hops, yeast and water. Rather than spend money on advertising, they would rely heavily on point-of-purchase displays and word of mouth spread publicity since their target market was largely in their surrounding region. Distribution within their own local market would be done by the company itself, which was part of their top-quality service guarantee for it’s retail licensees. Part of their delivery guarantee locally was the ensuring it would be delivered within half an hour of a vendors order. Smaller, intimate details such as these is what the company provided and prided themselves on, which would gain them the support and loyal business of their local market and lead to growth. The company and its executives were simple and stuck to their mission and did not plan for major growth and expansion initially. Their strict debt to equity ratio of 1:1 was conservative but it allowed them to act rationally in their business plan and take advantage of new opportunities as they felt comfortable which is crucial in their future plans of expansion and growth.
Ethical and Legal Foundation
In this case for the Redhook Ale Brewery, there was little talk of ethics or legal foundation. Legally, ownership of the company was made up of thirty individuals that held approximately 34, 000 shares. Ethically, it seems the company made it a point to treat everyone like “family” and developed close working relationships from the top down which resulted in a very low turnover rate. New hires were to be approved by everyone in the set department as part of Shipman’s collegial hire process.
Assembly of Management Team
Looking at the management team, first is Paul Shipman. He is the CEO and co-founder along with Gordon Bowker who serves as the secretary and director. Bowker was notable for his entrepreneurship qualities and even founded multiple companies in the Seattle area. Next, there is Pamela Hinkley, who was put in charge of marketing. Allen Triplett, who served as the brewmaster and operations manager. Last, there is David Mickelson, the treasurer and CFO of Redhook Ale Brewery. As mentioned earlier, thirty individuals own all 34, 000 shares of the company. Of those thirty, six owned 65 % of the shares, five of them being on the board of directors. Most of the shareholders in Redhook Ale were from the surrounding primary distribution territory in the Northwest. Redhook had twenty full-time employees, which included their inside delivery/distribution team of four people.
The co-founder and CEO, Paul Shipman prided himself on creating a “family” like environment at work and made his employee’s feel comfortable and valued. When a new employee was hired, the approval of each person within the department was needed in evaluating if that new individual would be a good fit for the company and help them most. The company identified one of it’s principle competitive advantages as having a strong management team, as well as trusting and committed investors. With the patients and support of their investors, Mickelson and Shipman were able to have confidence when making the best business decisions for the company.
New Venture Funding: Initial equity and investments were raised from local investors. The company’s CFO, David Mickelson, was excited about the future production and expansion into prospective areas and worked to put together forecasts and proposals for the proper financing and funding to occur.
