History of coors beer cans

1. One barrel contains enough beer to fill 331 12-ounce bottles or cans.

1

Professor Pankaj Ghemawat prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 1987 by the President and Fellows of Harvard College. To order copies, call (617) 495-6117 or write the Publishing Division, Harvard Business School, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Harvard Business School 9-388-014 Rev. June 23, 1992

Adolph Coors in the Brewing Industry

"Rarely in Adolph Coors Company's 113-year history has there been a year with as many success stories as 1985." Coors's annual report for 1985 went on to cite records set by the company's Brewing Division. In a year when domestic beer consumption was flat, Coors's beer volume had jumped by 13% to a new high of 14.7 million barrels. And its revenues from beer had topped $1 billion for the first time in the company's history.

The Brewing Division accounted for 84% of Coors's revenues in 1985, and over 100% of its operating income. Although Coors had diversified into several businesses, including porcelain, food products, biotechnology, oil and gas, and health systems, Chairman Bill Coors acknowledged that for the foreseeable future, the company's fortunes were tied to brewing.

The strategy of the Brewing Division had changed drastically over the 1975-1985 period. The changes continued: in a decision that the company billed as "the most significant event of 1985 and perhaps our history," Coors announced plans to build its second brewery in Virginia's Shenandoah Valley.

The first section of this case describes competition in the U.S. brewing industry and its structural consequences. The next two sections describe Coors's position within the industry, and the plans that it had announced for its second brewery.

Competition in the U.S. Brewing Industry

In 1985, Americans spent $38 billion to buy 183 million barrels of beer. Of their1 expenditure, 12% was applied to taxes, 42% to retailers' margins, 12% to wholesalers' margins, and the remainder to beer at (net) wholesale prices. Domestic producers supplied 96% of the market at an average wholesale price of $67 per barrel. The rest of this section describes the ways in which the major U.S. brewers made and sold beer, and the industry structure that had resulted.

For the exclusive use of N. Sun, 2018.

This document is authorized for use only by Ningyu Sun in Fall, 2018 - BUS 497 - Gorman taught by PHIL GORAN, California State University - Northridge from Aug 2018 to Feb 2019.

388-014 Adolph Coors in the Brewing Industry

2

Procurement

Raw materials cost major brewers over half their net revenues. Agricultural inputs accounted for a quarter or a fifth of total raw material costs, and packaging inputs for the remainder. The key agricultural inputs were malt (germinated and dried barley), a starchy cereal such as rice or corn, hops and yeast. Large, relatively efficient markets existed for all these commodities. A brewer with a single, efficiently sized plant—about 3% of the U.S. market in 1985—could buy them on the best terms available.

Packaging inputs included cans, bottles and kegs. In 1945, 3% of the beer produced in the United States had been canned, 61% bottled, and 36% kegged; by 1985, these proportions had shifted to 57%, 30% and 13% respectively. Cans had been promoted by steel and aluminum manufacturers, bottles had proved relatively overweight, and sales of kegs had dwindled as Americans drank more and more of their beer at home.

Since World War II, beer prices had declined in real terms, and input costs had come to account for a thicker slice of them: up from 35% in 1945 to the 50-60% range by 1985. In response, major brewers had integrated backward. The most recent, and perhaps most costly, bout of integration had focused on cans, whose prices had risen sharply in the mid-1970s after the removal of price controls. In 1985, major brewers made some—but not all—of the cans they required. An efficient canmaking facility cost $40-$50 million and produced one billion cans per year. Independent canmakers had experienced significant excess capacity throughout the 1980s. Production

Production costs, split more or less equally between direct labor and other cost components, accounted for about a quarter of major brewers' net revenues. Production involved two steps, brewing and packaging. In brewing, the agricultural inputs were mixed with water, fermented, and aged. Beer that was meant to be bottled or canned was also usually pasteurized so that it could last unrefrigerated for up to six months. Smaller brewers had traditionally pasteurized less of their beer; they sold more of it as draft, packaged in kegs. The major postwar innovation in brewing had been a fermentation process that cut the aging time of beer from 30 days to just 20. Since aging cellars were often production bottlenecks, this "stretched" brewing capacity by 20%-30%, beginning in the late 1960s.

In packaging, containers were filled with beer, labelled, and (in the case of cans and bottles) packed together. Scale economies in packaging had increased since World War II, for two reasons. First, newer vintages of filling lines—especially lines for canning and bottling—were faster and more efficient. Second, package sizes had proliferated; because of changeover costs, this increased the importance of run length.

As a result, the minimal efficient production scale for an integrated brewery (a brewing and packaging facility) had increased from 100,000 barrels per year in 1950 to 1 million barrels by 1960, 2 million barrels by 1970, and had approximated 4-5 million barrels since the mid-1970s. In 1985, a 5-million-barrel brewery cost $250-$300 million. Capital costs underlay much of the effect of increasing or decreasing production scale; according to one source, they displayed a 75% scale slope. In other words, doubling brewery scale would cut unit capital costs by 25%; halving it would increase unit capital costs by 33%. Breweries could be expanded if they had been built with that possibility in mind.

For the exclusive use of N. Sun, 2018.

This document is authorized for use only by Ningyu Sun in Fall, 2018 - BUS 497 - Gorman taught by PHIL GORAN, California State University - Northridge from Aug 2018 to Feb 2019.

Adolph Coors in the Brewing Industry 388-014

3

The brewing industry's capacity utilization had hovered in the 60% range in the 1950s because of stagnant demand. It increased in the 1960s and early 1970s as demand rose rapidly: the large brewers, particularly Anheuser-Busch and Schlitz, added relatively large breweries and sold them out quickly; many smaller breweries were closed. The industry's capacity utilization peaked in the mid-1970s at close to 90%. In the late 1970s, capacity surged despite stagnant demand. Miller's expansions were the most aggressive, but the other national brewers also moved to tap economies of scale. For instance, only four out of Anheuser-Busch's ten breweries exceeded four million barrels apiece in 1977; by 1985, all eleven of its breweries cleared that hurdle. Capacity utilization dropped toward 80% and stayed at that level throughout the 1980s. In 1984, excess capacity in the East forced Miller to take a $280 million pretax write-off on a nearly completed 10-million-barrel brewery in Ohio that it had intended to open in 1982.

Exhibit 1 depicts changes in breweries' actual capacities since the late 1950s, and Exhibit 2 summarizes the production configurations of the major U.S. brewers in 1985. By that time, all of them except Coors operated several breweries apiece. Multiplant configurations reduced the risk of catastrophic shutdowns due to strikes, fires or explosions, permitted centralized production of low-volume packages (which increased run lengths), and let brewers absorb the output repercussions of a large new brewery over several existing ones.

Distribution

Beer made its way from producers to consumers via wholesalers and retailers. There were two broad categories of retail outlets for beer: on-premise and off-premise. On-premise outlets such as bars or restaurants carried a limited number of brands of beer, and averaged margins of 190% in 1985. Bars, in particular, sold more than their share of dark, local draft beers. State and federal laws prevented brewers from operating on-premise outlets except at their breweries. Off- premise outlets included supermarkets, and grocery, convenience and liquor stores. They carried a much broader selection of brands and averaged margins of 21% in 1985. Since 1945, off- premise outlets' share of beer volume had increased from 42% to 67%.

Smaller brewers had traditionally distributed their beer directly in their local markets, with a particular emphasis on selling kegged draft beer to on-premise outlets. But less than 5% of major U.S. brewers' volume went direct. They tended to rely, instead, on independent wholesalers who purchased the beer, stored it at their warehouses, and sold and delivered it to retail accounts. Wholesalers also worked with brewers to open large accounts, secure prime shelf-space, and fund local promotions. In 1985, wholesalers averaged a 28% margin on their "laid-in" or landed cost.

There were 4,500 independent wholesalers in the United States in 1985. Each wholesaler had exclusive rights to sell a specific brand within a market usually no larger than a metropolitan area. Wholesalers often carried more than one brand, and might represent more than one brewer. In 1985, a market usually had at least two large wholesalers (one for Anheuser-Busch and one for Miller), one or two other large ones that might carry another major as their lead brewer, and several smaller ones who carried brands or retail outlets that the larger ones didn't. Anheuser- Busch's network was the strongest: its 970 wholesalers usually did not carry other brewers' beer, simplifying inventory management and delivery. Miller's wholesalers were about as large, but often carried 5-12 brands besides Miller's. The other competitors had had increasing difficulty finding large wholesalers to carry them as lead brewers. The average pretax return on sales for wholesalers had fallen from 3.0% in 1981 to 2.1% by 1984.

For the exclusive use of N. Sun, 2018.

This document is authorized for use only by Ningyu Sun in Fall, 2018 - BUS 497 - Gorman taught by PHIL GORAN, California State University - Northridge from Aug 2018 to Feb 2019.

388-014 Adolph Coors in the Brewing Industry

4

In 1985, five of the six majors—Coors was the exception—distributed their beer in all 50 states. The five national brewers shipped beer a median distance of 300-400 miles to wholesalers' warehouses, at an average cost of $1.50-$2.00 per barrel. Wholesalers picked up this cost in name only; brewers absorbed it, in effect, by adjusting their F.O.B. prices. Median shipping distances had stayed the same over the past three decades because the national brewers, who had displaced regional and local competitors, had all moved to multiplant configurations.

Marketing

Exhibit 3 tracks U.S. beer consumption over the 1945-1985 period. Demand grew at less than a 1% rate over 1945-1960 and 1980-1985; that was also the rate of growth predicted for the 1985-2000 period. Virtually all the volume gains in the postwar period had been registered between 1960 and 1980. The major reason for the gains was demographic: as baby boomers reached the legal drinking age, they swelled the number of beer drinkers; volume went up even more because younger drinkers consumed more beer than older ones. The second important reason was related to the marketing variables brewers worked with: price and differentiation.

Without controlling for changes in mix, beer prices fell by 30% between 1960 and 1980; this must have stimulated volume even though the price-elasticity of demand for beer seemed to be relatively low (between -0.7 and -0.9). Most observers thought that prices fell because of cost reductions and pressures to fill excess capacity rather than because of conscious predation. Anheuser-Busch and to a lesser extent, Miller, continued to charge higher-than-average prices. Brewers used low prices to enter new markets or promote new products, but if they kept them low, could impair the images of all but downscale "popular" brands. Pabst and Schlitz were often cited as cautionary examples of companies that had weakened their premium brands by discounting them.

Brewers differentiated their beers through advertising, segmentation, and packaging. Advertising increased after the war because of the emergence of TV, rising consumer incomes, the shift to off-premise consumption, and brewers' moves to broaden distribution: total advertising expenditures jumped from $50 million (2.6% of the industry's gross sales) in 1945 to $255 million (7.1% of sales) by 1965. Partly because the 1965 expenditures were "overkill," and partly because the national rollouts of the major brands had been completed, advertising expenditures drifted down to $200 million (3.3% of sales) by 1973. But then they skyrocketed again because of a steep increase by Miller (which had been acquired by Philip Morris in 1969), a delayed but even steeper response by Anheuser-Busch, and attempts by the next-largest brewers to keep up. In 1980, advertising expenditures reached $641 million (4.5% of sales); by 1985, they approximated $1,200 million (about 10% of sales; see Exhibit 4). Statistical studies suggested that 90% of the effect of advertising dissipated within a year.

Intensified advertising helped national brewers in several ways: they could buy space or time in larger quantities, use media such as network TV and national magazines, achieve critical thresholds of exposure, and spread the fixed costs of advertising campaigns over more volume. Nevertheless, a large regional brewer still had a wide choice of effective media: for instance, spot TV, even though it cost 15%-30% more than network TV, could be tailored to local market conditions. According to a careful study conducted in the early 1970s, "The cost savings attributable to advertising on a

For the exclusive use of N. Sun, 2018.

This document is authorized for use only by Ningyu Sun in Fall, 2018 - BUS 497 - Gorman taught by PHIL GORAN, California State University - Northridge from Aug 2018 to Feb 2019.

Adolph Coors in the Brewing Industry 388-014

2. F.M. Scherer et al., The Economics of Multi-Plant Operation, Harvard University Press, 1975, p. 248.

5

nationwide scale [rather than regionally] could hardly amount to more than one percent of. . . revenues, other things held equal."2

Segmentation was the second tool used to differentiate beer. Before 1970, there were just two categories of beer: popular beers which were sold primarily on the basis of price, and premium beers which didn't cost more to produce, but were sold primarily on the basis of their images. The premium segment had gotten off the ground when brewers going national had added price premiums to their products to offset extra transportation costs. The construction of regionally dispersed breweries had since eliminated national brewers' extra transportation costs, but the price premia remained: they were used, among other things, to fund advertising. Because of increased advertising by brewers and trading up by customers, popular beers' share of volume had declined from 86% in 1947 to 58% by 1970.

Over the 1970-1985 period, the major U.S. brewers introduced even higher-priced brands and also differentiated beers according to their alcohol content (see Exhibit 5). Over the 1970- 1975 period, popular beers yielded 16 points of share, mainly to premium beers. Between 1975 and 1980, popular beers gave up another 22 points, but this time, light beers, paced by the premium-priced Lite brand Miller had introduced in 1975, absorbed most of the increase. And over 1980-1985, premium beers yielded eight share points; light beers registered an equivalent gain. Superpremium beers, led by Anheuser-Busch's Michelob brand, had increased their share from 1% in 1970 to 6% by 1980, but had since receded to 4%.

Major brewers' brands proliferated as segments multiplied: between 1977 and 1981 alone, their number increased from 30 to 60. Larger brewers had several advantages in introducing new brands: their existing brand names provided leverage, they could afford launch costs ($20-$35 million per brand) and maintenance advertising (about $10 million annually per brand), and their production and distribution capabilities let them quickly ramp up sales. By 1985, a major brewer typically had a popular, a premium, and a superpremium brand in the regular category, and at least one brand in the light category. Exhibit 6 tracks the market shares of the six largest brewers' major brands over the 1977-1985 period.

Packaging was the third way in which beer was differentiated. Brewers had traditionally bottled or canned their output in 12-ounce containers. That changed in 1972 with Miller's introduction of the seven-ounce "pony" bottle, which attracted consumers who drank beer in small amounts or slowly. As states eased their regulation of package sizes in the 1970s, beer was made available in 7, 8, 10, 12, 14 16, 24 and 32 ounce containers packed in units of 6, 8, 12 or 24.

Structural Impact

By 1934, a year after the repeal of Prohibition, 700 breweries had reopened in the United States. A third went out of business before World War II broke out. After the war, consolidation continued. Six major brewers had since come to account for virtually all domestic shipments: Exhibits 7-9 supply information on their market shares and operating performance. Only the uppermost end of the market had resisted consolidation. Several hundred imported brands, which wholesaled at twice the average price of domestic brands, accounted for 4% of domestic consumption. And the ultrapremium "boutique" beers offered by domestic microbrewers added

For the exclusive use of N. Sun, 2018.

This document is authorized for use only by Ningyu Sun in Fall, 2018 - BUS 497 - Gorman taught by PHIL GORAN, California State University - Northridge from Aug 2018 to Feb 2019.

388-014 Adolph Coors in the Brewing Industry

3. John Sutton, Sunk Costs and Market Structure, MIT Press, pp. 300-301. 4. Beverage World, November 1977, p. 134.

6

up to less than 1% of domestic consumption. In the words of one analyst, imports and boutique beers might eventually account for "two or three drops in the bucket, rather than just one."

Most other large industrialized countries had highly concentrated brewing industries as well. West Germany, the second largest market for beer after the United States, was a striking exception to this rule. The West German market was characterized by long-term contracts3 between brewers and retail outlets that guaranteed brewers exclusive supply rights, and by restrictions on the television advertising of beer. Although industry concentration had increased significantly in West Germany since the 1960s, mainly because of mergers, the three largest brewers still accounted for less than 30% of total ouput and approximately 1,300 breweries continued to operate there. Medium-to-large German brewers dominated the low-price category; many of the small local brewers, in contrast, operated in the mid-price segment.

The Brewing Division of Adolph Coors

Background

Adolph Coors, Sr., opened the doors of his brewery in Golden, Colorado, in 1873. His beer company got through Prohibition by making near beer, malted milk, cement and porcelain. Adolph Coors, Jr., took over in 1929 when his father died. Four years later, Prohibition was repealed; that year, Coors sold 90,000 barrels of beer. It also appointed its first independent wholesalers and began selling outside Colorado by adding Arizona to its distribution territory.

During the 1930s, Coors began to sell beer in eight other western states: California, Idaho, Kansas, Nevada, New Mexico, Oklahoma, Utah and Wyoming. In 1941, it introduced its premium "Banquet" label. And in 1948, it started rolling into Texas. It confined itself to those 11 states through 1975.

Sales of Coors's beer had jumped from 137,000 barrels in 1940 to 666,000 barrels by 1950. Between 1951 and 1974, Coors posted uninterrupted year-to-year volume gains: volume reached 1.9 million barrels by 1960, 7.3 million barrels by 1970, and 12.3 million barrels by 1974. One analyst, commenting on the 16% ROS that Coors had posted in 1972, said, "It's the best private company in America. I'd pay any multiple for that stock." A mystique had developed around the company's only brand, premium Coors Banquet (usually referred to as just Coors). Paul Newman and Clint Eastwood insisted on having it on location; Gerald Ford and Henry Kissinger flew cases back east; college students outside Coors's 11-state distribution territory paid premia of several hundred percent for bootlegged supplies. Concerned about maintaining quality (i.e., consistent refrigeration), Coors even placed an unusual advertisement in the Washington Post: "Please do not buy our beer."

In 1975, Coors's volume dropped for the first time in two decades: by 4% to 11.9 million barrels. At roughly the same time, it began adding new states to its distribution territory: its official position became, "We do want to go national if it makes sense financially." Since then,4 its growth and profitability had come under pressure, as had its market valuation. The Coors family had first offered stock—all of it nonvoting—to the public in June 1975 in order to settle

For the exclusive use of N. Sun, 2018.

This document is authorized for use only by Ningyu Sun in Fall, 2018 - BUS 497 - Gorman taught by PHIL GORAN, California State University - Northridge from Aug 2018 to Feb 2019.

Adolph Coors in the Brewing Industry 388-014

7

a $50 million inheritance tax bill. The stock sold for $25.50 at the end of 1975, had paid dividends of $2.79 per share through 1985, and sold for $21.25 in 1985. In 1985, the Coors family continued to hold all of the voting stock (4% of the total), as well as 16% of the nonvoting stock. The book value of all shareholder equity was $936 million at the end of the year, corresponding to $26.46 per share, and the company had set itself the target of a 10% after-tax return on equity.

In May 1985, the company's operations were officially handed over to the fourth generation of the Coors family. Bill Coors, 68, relinquished his title of CEO but retained his position as chairman; Joe Coors, 67, stepped down as president but remained the company's vice chairman. Joe's sons, Jeff, 40, and Peter, 38, took over as presidents of the holding company and the Brewing Division, respectively. All four members of the Coors family remained on the board; the other five directors were also insiders.

The younger members of the Coors family believed that the company's traditional strengths in production had to be supplemented with attention to and expertise at marketing skills. Peter Coors had, in fact, cast the first dissenting board vote in the company's history back in 1976, against the retention of a hard-to-open press tab on its beer cans. Peter and Jeff were also expected to steer clear of the controversies that the older members of the family had periodically ignited. One example dated from March 1984: the Rocky Mountain News alleged that Bill Coors had told an audience of more than 100 minority businessmen that blacks "lack the intellectual capacity to succeed"; Bill Coors insisted that he had been grossly misquoted. Under the new generation, Coors had committed itself to spending $650 million over five years working with minority vendors and distributors, hiring minority employees, and supporting local communities.

The rest of this section describes Coors's traditional strategy in brewing, and the changes that had been made to it between 1975 and 1985. Exhibit 10 summarizes the vital statistics of the Brewing Division over the 1975-1985 period.

Procurement

In procuring inputs, Coors had always stressed quality and self-reliance. The "pure Rocky Mountain spring water" Coors had emphasized on its label for half a century came from 60 springs on company-owned land in Golden, Colorado, the site of its brewery; it continued to acquire water rights and to add reservoir capacity as a hedge against a prolonged drought.

Of the various agricultural inputs to brewing, Coors made its own malt out of proprietary strains of Moravian barley grown for it by 2,000 farmers under long-term contract. Its brewing process could use either rice or refined cereal starch; Coors had long operated its own rice- processing facilities to protect itself from fluctuations in the price of broken "brewing" rice, and in 1983, had acquired a grain processing facility that supplied a third of its refined cereal starch requirements during 1985. Premium hops were purchased from both domestic and European suppliers. According to a Coors legal brief, "From a raw [agricultural] materials standpoint, Coors is . . . the most expensive beer made in America."

Although bottles cost slightly less than cans, Coors canned more of its beer than did other U.S. brewers: 69% versus an average of 57% for the industry as a whole in 1985. Coors had pioneered the first two-piece, all-aluminum can for beverages in 1959, and since then, had sourced all its cans from a captive canmaking facility that had grown to be the largest in the world. It was the first brewer to start a can recycling program and in 1984, using technology developed with