Hockley beer

W14150 HOCKLEY VALLEY BREWING CO. INC. Ian Dunn wrote this case under the supervision of Elizabeth M.A. Grasby solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation Version: 2014-04-17 It was late June 2013 and John Miles, shareholder and operations manager at Hockley Valley Brewing Co. Inc. (Hockley), located in Orangeville, Ontario, Canada, had just returned from a summer celebration in Orangeville. Miles and company founder, Tom Smellie, were surprised by Hockley’s beer sales at the festival. Orangeville residents had always supported the local brewer, but this festival saw Hockley’s lighter beers far outsell its dark and amber ales. Hockley had experienced great success with its dark beer and had only recently introduced lighter ales into its product mix. The growing popularity of light beers, as revealed through this festival’s sales, gave Miles pause –– should he reconsider Hockley’s product mix? Should Hockley launch a new light beer? If so, how and where should the brewery promote it? THE BEER INDUSTRY IN ONTARIO The Ontario beer industry was dominated by two of North America’s largest brewers, Molson and Labatt. These internationally recognized companies offered a wide variety of beers for nearly all consumers. They were also majority owners of The Beer Store. Under Ontario’s provincial legislation, The Beer Store was the only non-government-owned retailer permitted to sell beer (excluding bars, restaurants and the breweries’ storefronts). Molson and Labatt each owned 49 per cent of The Beer Store, with Sleeman’s, a large brewer owned by a Japanese brewing company and located in Guelph, Ontario, owning the remaining 2 per cent.1 For decades, these large companies had little competition from local brewers. All other beer sales were through the Liquor Control Board of Ontario (LCBO). The LCBO was a government-owned agency that operated over 634 retail stores throughout the province.2 It was one of the world’s largest buyers and sellers of beverage alcohol and offered a variety of beer, wine and spirits from all over the world. Brick Brewing Company, launched in Waterloo in 1984, was Ontario’s first microbrewery.3 A microbrewery was a small brewery that produced “craft beer.” Microbreweries often relied on local

1 www.thebeerstore.ca/about-us, accessed March 17, 2014. 2 http://lcbo.com/aboutlcbo/index.shtml, accessed March 17, 2014. 3 www.brickbeer.com/our_brewery/, accessed March 17, 2014.

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products, such as barley and hops, as well as equipment and labour from the surrounding communities. Other independent microbreweries had since entered the market, and there were now hundreds of different brands of craft brew available in Ontario. In 2012, craft beer sales amounted to $210 million in the province.4 The Ontario Craft Brewers (OCB) was an association that represented 31 different craft brewers who sought to increase consumer awareness of Ontario craft beers, to promote the excellent quality of the beers produced and to promote the dedication of each brewery to the quality of their beer(s).5 Many consumers believed that craft brews were of higher quality than imported beer, often because of their freshness. Beer consumers had become increasingly discerning in recent years, seeking a variety of flavours and brewing techniques in high-quality beer. This trend in the market helped drive the growth of microbreweries. In 2002, Ontario craft brewers represented 2 per cent of Ontario’s total beer volume. By 2013, craft brewers’ market share had more than doubled, and Ontario’s microbreweries accounted for 5 per cent of the beer volume sold in the province.6 Craft beer sales growth was the highest in LCBO stores, since the LCBO marketed itself as a shopping experience that catered towards those consumers seeking different premium beer brands. Across all retail channels, craft beer averaged a 10 per cent growth rate annually.7 Light beer was the best seller of beer in Ontario and North America. In 2012, Bud Light, Coors Light, Budweiser, Miller Lite and Natural Light were the top five best-selling domestic beer brands in North America. All but Budweiser were categorized as light beer. The top two brands, Bud Light and Coors Light, accounted for 27 per cent of total beer sales in North America.8 The economic downturn in 2008 had resulted in consumers shifting away from some of the more expensive imported brands to the less expensive domestic light beers.9 It was also common for dark beers to be sold in lower volumes since they were a heavier beverage and enjoyed most in cold wet climates. Light beer brands experienced higher sales volume in the summer months; hence, the summer season was used as an opportunity for the promotion and introduction of new products. HOCKLEY VALLEY BREWING Tom Smellie launched Hockley on December 22, 2002 out of a building previously known as the town’s general store in Hockley Village, Ontario. Smellie wanted to create a brewery that would help give the small village some recognition. Since the beginning, Smellie and the brewmaster, Andrew Kohnen, decided to produce beers with more depth and character than many of the popular North American lagers. Kohnen was from a German family who had a history of brewing beer, so brewing flavourful quality beers was something in which he strongly believed and which came naturally to him. Smellie spent a great deal of time researching other microbreweries, craft beer consumers and retailers. For the company’s first 18 months of operations, a light ale called Hockley Gold was its only product. Hockley was the first microbrewery in Ontario, and only the second in Canada, to produce its craft beer in cans. Smellie believed cans were more environmentally friendly, easier to move and store, superior in maintaining freshness and faster to chill. Another benefit was that Hockley would not have to source its bottles through The Beer Store, which controlled the supply of bottles to Ontario breweries.