The campus Maverick

BevCoCharting the way forward

Business situation

Our client, BevCo, is a leading international producer and marketer of wine and spirits with operations in
the United States, Canada, Mexico, New Zealand, and Italy. Founded in 1960, BevCo has grown to become
a significant player in the alcoholic beverage industry with more than 100 brands in its portfolio, sales in
approximately 100 countries, about 40 facilities and approximately 6,300 employees. Recently, however, BevCo
has been facing declining revenue and profitability due to shifts in consumer tastes to other categories,
such as beer.
To bolster growth, the client is exploring several options to enter the beer market to diversify revenue streams
and broaden its portfolio of brands. The beer industry is highly consolidated, with a few major players
controlling more than 70 percent of total volume and hundreds of smaller players selling to the rest
of the market.
Large domestic brands, while still constituting the majority of US beer sales, are declining as consumer tastes
shift to craft brews, and imports. BeerCo, a US-based brewer with sales and distribution solely in the United
States, has been identified as a potential acquisition target. The BeerCo portfolio includes six of the top 20 craft
beer brands in the United States and a coveted portfolio of premium brands in the growing US craft
beer category.
BevCo has limited experience in the beer industry and has asked Deloitte to help it determine if it should acquire
BeerCo and identify integration considerations that need to be addressed.
You are a member of the Deloitte team engaged to help BevCo understand the market situation and conduct
target analysis, including strategic assessment, financial assessment, and operational assessment. Additionally,
the client would like assistance in estimating the acquisition price for BeerCo.

Campus Maverick Round 1

Case roles and questions

Data sheet 0Key market trends

A
B
C
D
E

1. Estimate the growth rate of the US beer market from 2014-2019. Based on this, how attractive does this market appear?
2. Estimate the growth rate of craft beer in the same period. (You can use average annual growth rate instead of CAGR.)
3. Using available data, compare the attractiveness of the craft beer segment to other alcoholic beverage segments.
What do you conclude from this?

1. What factors should BevCo consider when evaluating the opportunity to purchase BeerCo and enter the craft beer market?
2. Describe in a qualitative manner the potential revenue and cost synergies from an acquisition of BeerCo.

3. Considering the potential synergies above, estimate the new operating margin for 2014 that could be achieved through the
acquisition (using BevCos analysis).

1. Calculate BeerCos operating margin. How does this compare to the industry average?

The range of wine, beer, and distilled spirits offered by brand and by type is wide. Demand is relatively
inelastic during both good and bad economic times.
There is an overall long-term trend of rising affluence around the globe. Thus, more and more consumers are
becoming increasingly discerning about what they purchase.
Premium alcoholic beverages are growing in popularity, particularly flavored ones.
As is the case with premium wine and spirits, craft beers1 are very popular with consumers. These beers are
priced higher and are quite profitable, as long as the cost of their rich ingredients is covered.
Small brewers pay close attention to quality and have expanded slowly, but are capturing market share. Large
brewers, mindful not to lose sales, have developed their own premium brands, while some have acquired
smaller rivals.
Producers of alcoholic beverages invest large amounts of cash in marketing and advertising to build brand
recognition. Debt burdens have been growing in recent years as companies aggressively expand through
acquisitions.
A steady wave of consolidation has led to the alcoholic beverage market being much more fragmented than
it was in the last decade.

2. BeerCo has three primary product lines (Lager,Ale, and Stout). Of the three product lines, which one represents opportunities for
profitability improvement?
3. Based on the above profitability analysis, what levers would you consider to improve the profitability of the identified
product line?

1. There are several methods to determine valuation. What are the pros and cons for each? What is the most suitable approach for
assessing BeerCos value?
2. What purchase price would you estimate based on current financial projections? (Use the M&A information provided by the
clients bankers, and the P&L given. Disregard synergies.)
3. Beyond synergies, what considerations could impact the purchase price?

1. What operational considerations should BevCo keep in mind when setting up this new business unit?

2. As a part of optimizing operations, BevCo would like to better understand BeerCos supply base. In particular, should BevCo
continue to purchase cans from the existing supplier or open
a new production facility?
3. At what point, if any, would building a new facility be more economical?

1 What is craft beer? A beer with a distinctive flavor, produced in small quantities and distributed in a particular region
Campus Maverick Round 1

Data sheet 1General market/

company information

2014 US Alcoholic Beverage Market ($B)

2014 US Alcoholic Beverage Market Size

by Category ($B)

63.0

60.2

65.0

66.5

Excerpt from BevCo Market Research

Characteristics of Segments

Wine and spirits market continues to gain market

share from beer, its share will be 17% and 34% of
the US alcoholic beverage market by 2019

59.2

+2.9%

59.2

Data sheet 2Market analysis

9.5
17.2

Competition

Average operating margin is 20% in the craft

beersegment

32.6

Interview Excerpt from BevCo Executive

2014

2015

2016

2017

2018

2019

US Beer Market Segmentation

Sales Volume
(Barrels in
millions)
Segment
Super
premium

2014

2019(E)

2014

2019 (E)

0.64

0.68

12

1.2

1.3

Import

29

31

0.7

0.74

Premium

58

53

0.44

0.45
0.38

107

* 1 Barrel = 318 bottles of beer

In Billions of USD
Average Price Per
Bottle ($)

10

Sub
Premium

Wine

95

Spirits

Beer

0.37

BevCo

BeerCo

Revenue

3.35B

1.11B

COGS

2.18B

669M

SG&A

652.6M

201M

EBITDA
Operating Income
Operating Margin %

530M

260M

517.4M

15.4%

Wine

Medium

High

High

Medium

Spirits

Medium

Medium

Medium

Beer
(Overall)

High

Medium

Low

>>Super
Premium

Medium

Medium

Medium

>>Craft

Low

Medium

High

>>Import

Based on our analysis, we can achieve 5% revenue

growth and 10% total cost reduction through this
acquisition (based on 2014 financials)

Company Financials in 2014 ($)

10

Craft

Total

In considering an acquisition, profitability &

investment required are the most important factors,
followed by the market competition and the
growth rate

Investment
Market
Needed Margin Growth

Medium

Medium

Medium

>>Premium

High

Medium

Low

>>Sub
Premium

High

Medium

Low

Recent M&A Activity

Acq. Price

On the Rocks

1,000

Margarita

641

103

1.6x

9.8x

Craftbev Co

990

Craft beer

510

80

1.9x

12.3x

Park Ave.

112

Beer

17

6.5x

25.9x

Mark North

1,380

Beer

836

159

1.7x

8.7x

Epic MJ

270

Craft beer

156

26

1.7x

10.4x

Won Winery

130

Wine

96

13

1.4x

10.1x

Jane Co.

280

Spirits

175

34

1.6x

8.1x

Target

Target Rev.
($M)

Target
EBITDA ($M)

Transac. Rev
Multiple

Transac.
EBITDA
Multiple

Target's
Segment

Campus Maverick Round 1

Data sheet 3BeerCo

company information

Data sheet 4BeerCo

company information

Financial Information Breakdown*

Financial Information Breakdown*

All numbers in millions of dollars (USD)

Revenue
2013

COGS

2014

2013

SG&A

2014

2013

Cost of Capital

2014

All numbers in millions of dollars (USD)

2013

2014

Financial
Information

2013

2014

Ale
2015

2013

2014

Stout
2015

2013

2014

2015

Lager Product Line

625

719

400

460

125

150

3.60%

4.50%

Revenue

625

719

863

208

228

150

158

173

Ale Product Line

208

228

113

124

30

30

4.00%

4.80%

COGS

400

460

552

113

124

81

85

94

SG&A

125

150

195

30

30

33

23

21

23

Operating Income

100

109

116

65

75

46

51

57

16%

15%

13%

31%

33%

31%

32%

33%

Stout Product Line

150

158

81

85

23

21

4.00%

4.90%

Overall

983

1105

594

669

178

201

3.90%

4.70%

Operating Margin %
Product Line Information

YoY Revenue Growth Breakdown

Product Packaging Product Number of Price

Line
Medium Life
Products
Point
Lager

Aluminum
Cans

110 days 7 varieties

Medium

Ale

Glass
Bottles

90 days

High

Stout

Glass
Bottles

90 days

3 varieties
5 varieties

* When using this information, assume all costs are variable

6

Lager

High

20%
15%

15%

10%

10%

22%

10%
8%

5%

23%

7%
5%

Unit InformationAle
25%
Lager

5%

Ale
Stout

2013

2014

2015

2016

2017

Supply Base Data

Ale Product Line

Financial Information

2014

Number of units

1000

Price/unit

$0.91

COGS/unit

$0.50

SGA/unit

$0.12

Build Own
Facility

Continue to Buy
from Supplier

Number of cans in 2014 is

500 million, increasing by 200
million annually.

Number of cans
in 2014 was 500
million, increasing
by 200 million
annually.

Variable costs will be $.05 per

can.
Initial CapEx of $100 million,
with additional $25 million
CapEx for each 125 million
volume milestone over the
initial 500M (that is, $25
million at 625 million and an
additional $25 million
at 750 million)

BeerCo pays
$0.15 per can
to its existing
supplier.

* When using this information, assume all costs are variable

Campus Maverick Round 1

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