Boston Beer HBS Case

Topics: Stock market, Stock, Leverage Pages: 11 (1528 words) Published: January 25, 2015


--------------------------------------------------Question 1--------------------------------------------------- Boston Beer, in response to consumers’ preference changes to more flavorful and bitter tasting brews, was founded in 1894. Boston Beer implements a “quality at any cost” strategy with a strong emphasis on product differentiation and implementing quality ingredients into its products. For instance, Boston Beer was the first company to employ a stamped freshness date on its bottles and ingredients are imported from around the world. Additionally, Boston Beer relies heavily on contract brewing to gain competitive advantages. Boston Beer’s contract brewing strategy results in lower overhead and transportation costs, as well as greater manufacturing flexibility. The expenses Boston Beer saves through contract brewing allows for an increased marketing budget and intensive sales force, which is greatly important for differentiating products in a saturated market. Boston Beer’s strategy appears to be paying off; from 1990 to 1995, its geometric average sales growth and gross margin were 40.4% and 54.4%, respectively. However, Boston Beer is less efficient that some of its competitors; its operating margin of 6.7% is nearly four times lower than Redhook Ale Brewing Company—but its margin is greater than Pete’s Brewing Company. --------------------------------------------------Question 2--------------------------------------------------- Benefits of an IPO

Access to public capital markets will provide Boston Beer with a continual source of equity funds to expand sales while maintaining a low leverage ratio. The IPO will provide an exit strategy for the company’s current investors. The additional equity will allow for debt to be refinanced at preferable interest rates. The publicity from the IPO offering will benefit the company with marketing and sales, particularly in new markets where they do not currently have brand recognition.

Disadvantages of an IPO
The company will face underwriting costs associated with the IPO. A failed IPO could be costly both in financial assets and in firm reputation. Complying with regulatory reporting  standards will create additional costs that are not present in a private company. Incorporating the company may have negative tax implications for the current owners. Current shareholders who do not exit during the IPO will face severe dilution. Management control will decrease because of fiduciary duties to shareholders. This could conflict with the company’s product quality processes and result in a shift toward a short-term earnings focus. Conclusion

Although their contract brewing model reduces expected capital expenditures, their labor and marketing intensive sales strategy will require substantial spending to expand into new markets.To meet projected growth, external funds will be needed. Raising these funds entirely from debt would create an unacceptable level of debt for a still growing company; thus equity funding is the preferred option. The company has reached a maturity point where equity can more easily and cheaply raised in public capital markets rather than through venture or private equity firms. Additionally, publicity from the IPO will help with brand recognition in new markets. Given the recent success of competitor IPOs and Boston Beer’s profit margin and growth potential, the risk of a failed IPO is minimal, and most current shareholders intend to sell shares in the IPO reducing dilution concerns. Boston Beer should proceed with the IPO. --------------------------------------------Question 3-5 (Exhibit 3)------------------------------------------ 1995 Pro Forma Net Sales:      All pro forma sales rely upon the assumption that net sales as of September 30, 1995 represent 75% of expected year-end revenue. Because the firm’s IPO will most likely have a more positive impact on Q4 sales than this estimate projects, if anything, the prices generated by our models are...
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