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Assignment 3: Conceptual Study for a New BrewPub System

at Legal Harborside Restaurant

Group 8 - Topaz

Qiaoyu Cai | Zehuang Hong Chen | Yijing Li | Linrui Liu

Budsarin Watcharasemakul | Jingdong Wei

MET AD 715 Quantitative and Qualitative Decision Making

Prof. Richard Maltzman

December 10th, 2018

Business Running Case: Investing in a New BrewPub?

Table Of Contents

Executive Summary …………………………………………………………………..

1. Introduction ……………………………………………………………………….

1.1 Problem Statement ……………………………………………………….

1.2 Overall Goals and Objectives of the Report …………………………….

2. Managerial Decision-Making Process for Selected Functional Areas ……………

2.1 Marketing Management and Decision Making ………………………….

2.2 Innovation Management and Decision Making ………………………….

2.3 Operations Management and Decision Making …………………………

2.4 Financial Management and Decision Making ……………………………

2.5 Organizational and HR Management and Decision-making ……………

3. Application of Decision Support Tools …………………………………………….

3.1 Decision Support Tool for Marketing Management ……………………..

3.2 Decision Support Tool for Innovation Management ……………………...

3.3 Decision Support Tool for Operations Management ……………………..

3.4 Decision Support Tool for Financial Management ……………………….

3.5 Decision Support Tool for Organizational and HR Management ……….

4. Evaluation of the Result of the Business Simulation ……………………………….

4.1 Comparison Based on Marketing Management ………………………….

4.2 Comparison Based on Innovation Management ………………………….

4.3 Comparison Based on Operations Management …………………………

4.4 Comparison Based on Financial Management ……………………………

4.5 Comparison Based on Organizational and HR Management ……………

5. Summary of the Results, Recommendations, and Conclusions ……………………

Business Running Case: Investing in a New BrewPub?

5.1 Summary of Results ………………………………………………………....

5.2 Recommendations ……………………………………………………………..

5.3 Implementation Plan for the Selected Strategy ………………………………

5.4 Conclusions …………………………………………………………………….

6. Appendixes……………………………………………………………………………….

Executive Summary

Business Running Case: Investing in a New BrewPub?

The team has thoroughly analyzed 5 functional areas: Marketing Management,

Innovation Management, Operations Management, Financial Management, and Human

Resources Management to suggest whether or not the owner of Legal Harbourside restaurant

should invest $150,000 in an in-house 40-barrel craft beer brewing system. To take an in-depth

examination into the case, we implemented various decision analysis tools such as PESTEL

Analysis, SWOT Analysis, Decision Tree Analysis, Sensitivity Analysis, Break-Even Point

Analysis, Discounted Cash Flow Method, What-If Analysis, and Optimization Analysis to

support our business plans in all functional areas.

Several findings indicate favorable external factors that can be used to the brewery

investment's advantage such as the continuous growth of U.S. craft-beer industry, the low

competition in Fort Point area, and brewery system is legally allowed by federal and state law.

Our best cycle simulation also indicated that the restaurant will break-even within 4 months or

when revenue is $351,487 with expected profits of $372,243, $517,981, and $674,314 for FY-1,

FY-2, and FY-3 correspondingly.

With all the reasons mentioned above, we concluded that it is a sensible business decision

to invest in a microbrewery system at Legal Harbourside restaurant.

1. Introduction

Business Running Case: Investing in a New BrewPub?

Our client’s restaurant is located in Fort Point, Massachusetts. An area with many upscale

restaurants, historical sites, and art galleries that attract a large customer base of local residents

and tourists. After extensive market research, we concluded that the restaurant has the capability

to increase its market share by investing in a new BrewPub because there is only a few

competitors within a two mile radius and it is located in Boston, a city known for its craft beer

culture. Furthermore, “brewpubs provide an opportunity for consumers to engage with the

culture of craft beer, and right now, there is a golden opportunity to engage with drinkers in a

memorable, meaningful, and interactive way” (Nielsen, 2018). The investment in a BrewPub will

enable the restaurant to target a new market segment, mainly craft beer lovers, and to have a

strategic market positioning not only as an upscale restaurant but also as a high-quality brewpub.

The recommendation to invest in a Brewpub is based on the premise of internal and

external analysis. From an internal perspective, Legal Harborside Restaurant serves food that

pairs well with beer like seafood, pasta, and burgers. It also has the sufficient space to assemble a

Brewpub system and it is legally to do so under federal and state level. Moreover, the restaurant

is located in the port of Boston; as a result, it has the opportunity to attract many customers

because this location offers beautiful sceneries and it is one of the stops for many cruises. From

an external assessment, Boston is an appealing destination for millennials in their early to late

20’s, as it is the home for great universities like Harvard, MIT, and Boston University; the city is

also a popular destination for young professionals working in entrepreneurship and healthcare

industry. For the reasons mentioned above, an investment in a Brewpub system will enable the

restaurant to attract a larger customer base, mostly millennials since we like to experience

something new, “with craft beer, consumers can experiment with a huge diversity of beer styles

Business Running Case: Investing in a New BrewPub?

and taste profiles, and the younger the consumers are, the more likely they are to drink craft beer

at a pub or restaurant” (Carneiro, 2018). With millennials having positive experiences at Legal

Harborside, they often share their opinions on social media, i.e. Facebook, Instagram, and Yelp.

This will promote the popularity of the restaurant without spending excessive costs on local and

online advertising.

To further explain our decision-making process, we will analyze each functional area

with decision support tools to understand the feasibility of a brewing system in our restaurant.

Furthermore, we will employ a business simulation method to foresee the financial performance

and operating conditions of the restaurant for the next three years. From the results obtained in

each functional area, we can determine whether investing in a Brewpub system will increase the

restaurant’s profitability and market share.

2. Managerial decision making process for selected functional areas of the new business

unit

2.1. Functional area #1: Marketing Management and Decision Making

Legal Harborside serves food that compliment well with beers, like seafood platters,

pasta, and burgers. For this reason, we are going to analyze if the owner should invest in a new

Brewpub system to serve his own craft beers. The objective of this decision is to increase our

product offerings and market share to generate higher profits.

The reason why we chose to invest in a Brewpub system is that demand for craft beers has

dramatically increased over the years. In the greater Boston area, the demand for craft beer even

surpassed soda consumption in summer 2018 (1). According to a research published by

Business Running Case: Investing in a New BrewPub?

Columbia University, BrewPub has become the 7th influencer that attract customers to a

restaurant, previously from 23rd in 2016. This reflects the changes in customers preferences for

drinks. As a result, we need to correspond to these changes and make use of this new

consumption to increase our revenue.

Before we proceed with the investment, we conducted market research to evaluate the

craft beer market. The analysis for the demand of drinks in Boston is conducted through a survey

delivered to residents in this area by a random sampling method. Therefore, it represents the

percentage of craft beer consumption in this area. Currently, the number of restaurants that offers

craft beer is only 5%, so there is a discrepancy between supply and demand. Within a 2 mile

radius from Legal Harborside, there are only 27 restaurants serving craft beer, which can meet

annual demand of 125,6650 out of 224,4017. （2)（3）

Among consumers who often eat at restaurants, it has been reported that 62% may

consider eating there only if they sell craft beer. Therefore, this turns out to be a competitive

advantage for restaurants who want to attract more customers and it is starting to be a

requirement if restaurants want to succeed.

Besides the increasing demand and business opportunities in the craft beer industry, Legal

Harborside has another advantage of investing in a Brewpub system. The restaurant has a big

space to store a large variety of craft beers. The current restaurants serving craft beer in this area

only offer 6 different brews. Due to its extensive storage space, Legal Harborside can store over

20 distinct brews, which may attract more customers because it has the capability to offer

Business Running Case: Investing in a New BrewPub?

different brews. Also, a large area allows Legal Harborside to have a higher inventory buffer for

surges in demand, like sport events.

The structure of customers also makes Legal Harborside an ideal place to brew its own

craft beer. 55% of the customers in Legal Harborside are family and 28% of the customers are

coming for business trips (4). According to a research conducted by New York University and by

our observations, 78% of family customers (5) and 87% of business trips customers (6) would

order beers with their meals, please refer to Appendix A. Thus, the high percentage of family

customers and business meal customers increase the demand for craft beer at Legal Harborside

higher, resulting in an ideal place to serve craft beer.

According to our survey and other primary market research tools, we estimate that the

number of craft beer pints we will serve in the first year would be 125,665 or even higher. For

FY-2 and FY-3 will be 159,614 and 202,685 pints respectively. Many of our customers and

partners are also interested in purchasing bottled craft beers. Therefore, we are going to sell two

brews packaged in kegs for wholesale distribution channel. The projected sales for wholesale are

188,497, 195,084, and 202,685 units for FY-1, FY-2, and FY-3 respectively.

Based on our negotiation results, we have estimated that material cost (including

ingredients and transportation) will be $0.28 per unit for the craft beers and $1.50 for the

cocktails as they required extra ingredients, i.e. juice, alcohol. We also estimated that labor cost

per unit would be $0.25 for Pilsner (wholesale), Bavarian Lager (wholesale), Lobster Hurricane

and Boston Pier Mojito, and $0.2 per unit for the remaining beers. There are also other costs,

such as waste, damage, and low quality; the estimated cost would be $0.25 per unit. Based on

our cost estimation, we have a competitive advantage. With the estimated cost, we run the

Business Running Case: Investing in a New BrewPub?

business simulation to forecast demand, revenue, and profit under each pricing scenario. The

simulation takes into account changes in customers’ decision-making when facing with different

prices and seasonal effects, which affects the consumption of craft beer.

2.2. Functional area #2: Innovation Management and Decision Making

Innovation management aims to integrate innovation into the current business by

exploring new ideas to reach new customers and maximize the utilization of existing assets. The

primary goals are to increase profit, decrease overall cost and enhance growth.

Brewers Association analyzed a statistic from Nielsen's Harris Poll between 2015 and

2018 and concluded that average growth of U.S. new craft beer drinker is around 4-5 million per

year (Watson, 2018). However, when taking a more in-depth approach into the demographics,

the statistic shows that craft beer drinkers are 31.5% female and 68.5% male in 2018 (Nielsen

Harris on Demand, 2018). Caitlyn Battaglia, Nielsen’s Beverage Alcohol Practice Area manager,

suggested the way to reach female consumers is through beers with crisp, fruity or juicy flavor

profiles since female consumers are less interested in typical IPA brews (Kendall, 2018). This

information triggers the idea to offer more craft beer variety to meet female preferences by

twisting two most popular craft beers into new cocktail drinks. We will offer fruity drinks that

still retain the spirit of craft beer as a base of the cocktail. Lobster Hurricane (Pilsner) and Boston

Mojito Pier (Bavarian) will be added to the restaurant's drink menu all year long. Each cocktail

cost is 2 dollars and the retail price is 12 dollars.

Another idea is that we want to reduce material cost by implementing Yeast Washing

process. Yeast washing is easy, requires minimum equipment and can be done in a short period

Business Running Case: Investing in a New BrewPub?

of time (Smith, 2008). Instead of purchasing fresh yeast for every new batch of beer, we can

separate live yeast from the spent hops and grains after fermentation and reuse them in the next

batch. The average cost of yeast in a craft beer is approximately 1% of the retail price and

washed yeast can be reused 4 to 6 times (Satran, 2014). With that, we can reduce the raw

ingredient cost by 1 cent per unit.

2.3. Functional area #3: Operations Management and Decision Making

The operations management is relevant to restaurant’s current resources and business

philosophy. First, we should have a general understanding on these aspects to better integrate

operation strategies and plans with the company’s strategy and resources. The restaurant is a

chain store with talented personnel, financially stable, and enjoys a great reputation in the local

area. The style of the restaurant itself is outstanding and impressive. The branch we chose is

located in the popular seaside scenic spot. Not only the local diners, but also the thousands of

foreign tourists who come here during the tourist season. In this environment, our business

philosophy has become more proactive and bolder, and we hope to bring better quality food and

services to customers.

Since the craft beer market is rapidly changing, this results in a challenge to quality and

risk management. In the following paragraph, we will be discussing process and capacity design,

and more specifically, on capacity and constraints management (Heizer J, Render B, Operations

Management, 10e, Prentice Hall, 2011, Chapter 7). The chart below (see Appendix H) helps

sorting the tasks and problems we may face in operations management (Zlatev, 2018).

Business Running Case: Investing in a New BrewPub?

To understand the processes of products and services, set production management

objectives, and the combination with the plans of other departments, we learned that seasonal

sales distribution forecast and market capacity of various products from the marketing

department, so as to arrange seasonal production tasks for different flavors of the beer. Based on

the forecast results, select a strategy for production scheduling. Combine the existing resources

of the restaurant to optimize the production process. For example, when our demand is greater

than the current month's production, we should reasonably allocate production tasks, and use the

previous monthly idle production line to produce the next month's demand, which is achievable

in our case, because the beer sales are affected by the season. The impact of changes, there are

more obvious fluctuations (Stephen Ngo, 2016) based on risk assessment, key indicators such as

residual rate, operating rate, scrap rate, unit production cost, evaluate the production process.

2.4. Functional area #4: Financial Management and Decision Making

The Brewpub investment requires our client to invest $150,000 for the acquisition of 8

tanks producing an average of 476,160 pints on a yearly basis. To understand the feasibility of

this project, we forecasted future financial performance using the following assumptions. First of

all, we determined that consumption for craft beer will be increasing by 5% year after year

because we want the restaurant to be branded as a high-quality craft beer and we are also

increasing our social media advertising cost throughout the years to reach a broader audience.

Moreover, to have a more realistic approach to the restaurant’s future performance, we took into

consideration the following costs, i.e. additional workforce, utilities, rent, equipment, and

advertising. For this reason, we decided to take a loan of $40,000 with a 10% annual interest rate

from Bank of America. This will help the owner to meet short-term obligations since we expect

Business Running Case: Investing in a New BrewPub?

the restaurant to start generating profits after the first 3 months of operations with the Brewpub

system in place.

To further understand our assumptions, we will analyze our forecasted sales, costs, and

income tax rate. The forecasted units are 125,665, 159,614, and 202,685 for FY-1, FY-2, and

FY-3 respectively without accounting for wholesale distribution. The restaurant’s current yearly

sales are 139,590 units; therefore, we believed that our FY-1 sales with the new system should be

within this spectrum because it will take some time for the restaurant to be branded as a high

quality craft beer brewery and to attract a larger customer base. In regards to our forecasted

costs, we increase the cost for additional workforce since we need to hire an executive senior

consultant, a sales representative, and a brewmaster. The consultant will evaluate our

performance on a yearly basis, the sales representative will be hired for only a year because we

want him to promote our craft beer, and it is crucial to hire a brewmaster that can successfully

brew high-quality craft beer that appeals to our customers’ taste. Additionally, it is expected that

utilities and equipment expense will be rising, as the restaurant needs more electricity and water

to run the Brewpub system and it also needs to spend on equipment maintenance, i.e. cleaning

the tanks. We also determined that income tax is 35% because Boston has a federal tax rate of

30% and a state tax of roughly 5%.

2.5. Functional area #5: Organizational and HR Management and Decision Making

Human resource management is an internal control for a company to how reasonable

assigned number of employees to balance the benefit between company and employees in long-

term development. The company manager should consider about three major areas that are

staffing, employee compensation and benefits, and defining work. What’s more, good human

Business Running Case: Investing in a New BrewPub?

resource management can influence employees to have a positive working attitude, performance

promotion and united collective that are significant for a company internal development.

The most important thing for human resource is hiring appropriate employees that can

give full play to their abilities. The aim for the company is quality rather than quantity for

employees, a better work quality, attracting more customers and making more money. To own a

professional brewer is the key for a brewpub because it will directly impact the quality of the

products and indirectly impact the sales volume of the products. Good managers are also

important for a brewpub based on formulating and adjusting feasible selling strategies that like

brains of the whole teams.

The primary aim for Legal Harborside is retaining one critical salesman and one critical

worker in three years. As a just budding startup company, retaining talent and satisfy their

requirement are significant. Giving them suitable salaries and promising them an increased

salary each year are the ways to increase their working motivation and have passions to seriously

treat this job. In addition, the company can adjust general salesmen and workers based on the

operating status. Our plan for assigning general salesmen and workers is setting up one salesman

and one worker in first year because they can help critical employees share the work. After the

company becomes stable, general salesman is unnecessary existing anymore because critical

salesman can handle the business by his/her self. Decreasing the salesmen number will also save

money for the company and can use the extra money hiring more workers based on company

becomes stable and increasing customers require more labors add-in to provide better service.

Critical and general employees are indispensable because the company needs their mutual

cooperation to create more benefits and values.

Business Running Case: Investing in a New BrewPub?

3. Application of decision support tools

3.1. Selected decision support tools for functional area v#1

Sensitivity Analysis for all brew beer products: After we have conducted the pricing set for

all our craft brew beer products, we also do a sensitivity analysis to test whether our strategy is

reliable and see whether model needs to be changed. Based on the result of sensitivity analysis,

we have found that the swing of our products is accumulated from $0 to $20,162, which is the

difference of the high output value and the low output level. The high and low boundary of the

range of the output are $377,701 and $357,539. The base output is $372,969. Since the total

swing is about 5.4% of the base output, the uncertainty of the model is within our acceptable

range. Therefore, the output of our model is not varying much and could be evaluated as reliable.

Therefore, we can accept the output generated by the model and could use those result for the

followed steps of analysis.

3.2. Selected decision support tools for functional area #2

For innovation management, we implemented two tools to support our decision-making

process. First, the Decision Tree can help us decide whether or not we should add new cocktails

to the drink menu. We use estimated revenue and cost as our Expected Monetary Values (EMV)

to calculate our alternatives. If we add new cocktail drinks to the list, there are two possible

alternatives for launching new items 1) success 2) fail and the probabilities for both options are

high (0.3), medium (0.4), low (0.3).

Business Running Case: Investing in a New BrewPub?

The second tool to support decision-making in innovation management is What-if

analysis. It will conclude the cost reduction and compare the material cost before and after

implementing the yeast washing process. The analysis will show improvement of performance

and present the additional revenue restaurant can gain if the material cost reduced by 1 cent per

unit.

3.3. Selected decision support tools for functional area #3

In the business simulation in MS Excel, we may change variables from cost, cut-off point

to sales projection (distribution). Take the previous analysis in consideration, the main task in

operation management is to balance the demand and supply, reflecting the simulation, that is the

sum of excess demand should be minimized, this is our simulation goal. Besides, it is possible to

observe how the variable cost will affect the total profits. Before applying the analytical tool,

capacity constraints in the running case should be defined:

(v) Maximum capacity of a 40 bbl BrewPub system (8-155 gallon tanks):

Max capacity 32 tanks per month；The storage life of craft beer is 30

days；Variable cost range: min 0.4; max 0.9. Principle-Flexibility: try to put every

tank into full use, in case our supply can’t catch up with the increasing demand. Fast in fast out

strategy. Trace the actual sales performance, figure out sales of each type of beers and take it into

account for the next production cycle. For example, if we find out that the sales of BR01-03

Light Wheat goes down in winter, and BR01-04 Red Wheat goes up instead, we may cut down

the capacity of BR01-03 to compensate the increasing demand of BR01-04.

Business Running Case: Investing in a New BrewPub?

Sensitivity Analysis is based on analytical modeling activities where users are: (1)

exploring possible alternatives and not demanding pre-specified information. (2) using this

decision support approach to find the information they need to help them make a decision.

(Zlatev, 2018) As mentioned, the main task in operation management is to balance the demand

and supply and get to know how the variable cost will affect the total profits. So, in the

sensitivity analysis, I can change the variable cost and see how it affect the total profits, then

decide to use

Optimization analysis is a more complex extension of goal-seeking analysis. The goal

here is to find the optimum value for one or more target variables, given certain constraints. To

make this possible, one or several other variables are changed repeatedly, subject to the specified

constraints, until the decision maker discovers the best values for the target variables (Zlatev,

2018). In optimization analysis, the dependent variable (objects) is determined as profits before

taxes. The changing variable is variable cost. The goal is to maximize profit, constraints are

variable cost should be in the range from 0.4 and 0.6.

3.4. Selected decision support tools for functional area #4

To assess the projected financial performance of the restaurant, Break-Even analysis,

Discounted Cash Flow, and Financial Statements will be employed to help with the decision of

whether the owner should invest in a Brewpub system.

Break-even analysis is when our total cost equals revenue, in other words, it exhibits

how long it will take for the owner to recover his initial investment and start generating profit.

Furthermore, the Discounted Cash Flow analysis estimates the present value of an investment

Business Running Case: Investing in a New BrewPub?

using its future cash flows and the discount rate; this analysis will use the Statement of Cash

Flows. Also, the income statement illustrates the revenue, cost, and profitability of the company

throughout the years and the balance sheet summarizes the financial position of the restaurant.

All of these decision support tools will help evaluate whether the owner of Legal Harborside

should move forward with the investment.

3.5. Selected decision support tools for functional area #5

SWOT analysis is a useful tool to combine with internal and external factors to analyze

the strength, weakness, opportunity, and threat in human resource management, so that company

can appropriately adjust the labor and salary assignment. The SWOT analysis shown in

Appendix F. Trend analysis is a visual tool using chart shows how feasible the salaries assigned

to every employee. The goal for the company is to reduce the fixed costs as low as possible in an

appropriate range in order to increase the benefit and the growth salary rate should maintain

steady growth.

4. Evaluation of the results of the business simulation

4.1. Functional area #1: Comparison based on selected business parameters for two

different decision cycles

Based on the simulation to forecast the number of orders, revenue, and profit for each of

the craft beers at Legal Harborside. For our current best pricing strategy, the simulation

application has predicted the scenario that is most likely to happen after implementation of this

strategy.

Business Running Case: Investing in a New BrewPub?

In the simulation application, the BR01-01 represents Pilsner (retail); BR01-02 represents

Bavarian Lager (retail); BR01-03 for Light Wheat; BR01-04 for Red Wheat; BR01-05 for Pale

Ale; BR01-06 for Bock Dark; BR01-07 Pilsner (wholesale); BR01-08 Bavarian Lager

(wholesale); BR01-09 for Special Offer; BR01-10 for Lobster Hurricane; and BR01-11for

Boston Pier Mojito.

Among all the 11 types of brew beer (9 brands), the two types that bring the most revenue

are BR01-02 (which contributes to the 17.14% of the revenue) and BR01-01 (which contributes

to the 15.17% of the revenue) （7）

. The two that are most profitable are also BR01-02 (which

contributes to the 19.65% of the profit) and BR01-01(which contributes to the 17.39% of the

profit) （8）

. Based on the simulation, BR01-02 and BR01-01 are the most popular ones

because the demand and supply are the highest.

The simulation also points out some possible threats to us. For BR01-09 (Special Offer)

BR01-10 (Lobster Hurricane) and BR01-11 (Boston Pier Mojito), the number of orders is very

low, even equal to 0 for BR01-10 and BR01-11. Therefore, we may need more evaluation for

these three types of brew beers and have a low stocking at the beginning to see their actual sales

performance in the first couple of weeks. If they are not sold well and same as what has been

predicted in the simulation application, then we may reconsider our strategy or removing it from

our menu.

SWOT analysis, see Appendix B

Business Running Case: Investing in a New BrewPub?

Strength: The craft beer industry is growing at a fast pace. With the general public and market

yearning for brew beer over the seasons, this makes it a perfect topic for discussion. Its demand

and consumption is growing faster than any other drink in the American restaurants. More so, the

craft beer is a complement to a variation of most menus in the restaurants. It is made from

naturally available, nutritionally rich ingredients which are vital for human consumption and

health. It price is more reasonable and buyer friendly than other drinks such as soda, juice,

regular beer and liquor beer. On top of that, it has a high growth margin towards the positive.

Unlike soda and regular beer, the growth rate of brew beer consumption and hence it’s a strategic

opportunity to invest in.

Weaknesses: Higher other cost: Since we have a large stock, we are exposed to a higher other

cost such as low quality, damage and waste if compared with other restaurants that only offer

small volume of self-made beer. Less operational experience: Although we are close to technical

support, we are still new to operating Legal Harborside with self-made brew beer. More

management effort: Since we are new to operating Legal Harborside with self-made brew beer,

we may face more challenges during first couple months and need more efforts to conclude a

corresponding management strategy. Equipment setup time: Since the stocking is large, the set-

up time will be longer and more complicated. Since we are open to 11pm or midnight 7 days a

week, the installation time may be tight and may affects the installation process.

Opportunities: More ideal stocking strategies: After we launched our self-made brew beer, we

have an opportunity to conclude a wise strategy for stocking and managing our 9 types of brew

beer. Reduce other cost: With the better stocking and managing strategy, and becoming more

Business Running Case: Investing in a New BrewPub?

experienced in managing, we are capable of reducing the other cost, increasing the profit margin

and reducing the price.

Threat: Emerging other competitors: Now we are facing the challenge of emerging competitor.

Since the cake of current market is big, so more restaurants are joining and may become a threat

to Legal Harborside. Customers losing interests: We are not sure whether the customers’ interest

in brew beer will be increasing in the future, or the interest is just temporary. Therefore, we are

facing a threat that the interest is temporary and may be diminishing at certain point in the future.

Based on what we have tested in the simulation application, we developed the following

Break-Even Analysis. Our pricing strategy will make our investment breakeven in 3.9 months

with the sale for $351,487, please refer to Appendix D.

4.2. Functional area #2: Comparison based on selected business parameters for two

different decision cycles

To analyze all alternatives thoroughly, we should consider the decision tree carefully, see

Appendix C. The best case scenario of adding new cocktails to the menu is that the two drinks

will generate additional 97,000 dollars and the worst case is that we will lose 7,900 dollars from

its ingredients cost. We assigned the probability of successful launch as 0.6 and fail launch

probability as 0.4. The EMV calculation of the successful launch is 55,100 and the EMV of fail

launch is 5,270 (see Appendix C). We can conclude that the decision tree supports the alternative

of offering new cocktails to the customers whereby the best case scenario will generate

additional 97,000 dollars revenue to the restaurant.

Business Running Case: Investing in a New BrewPub?

For What-if analysis, by comparing the two scenarios 1) the case where yeast is not

reusing and 2) yeast washing process is implementing, What-if analysis shows that the restaurant

can gain a slightly higher margin from the innovation process and the cost reduction can enhance

the break-even period. The change in variable cost for implementing the yeast washing process

also determines that by reducing 1 cent per material cost on all items, the overall expense

reduces by $2,949 and improving the break-even period from 3.91 to 3.90 months (see Appendix

C).

4.3. Functional area #3: Comparison based on selected business parameters for two

different decision cycles

Cut-off point and excess demand comparison. From decision support tool system in MS

Excel, there is no good way to determine the exact cut-off point formula. But it is clear that when

the cut-off point changed, supply changes as well. The table below shows the cut-off point

excess demand numerical relationship (see Appendix H). A certain type of beer is selected, with

the cut-off point changing, we can see how the supply number change correspondingly. After

running several cycles, a general conclusion can be drawn: the lower the cut-off point, the higher

the supply.

Since the sum of excess demand should be minimized, the cut-off point is relevant to the

supply, the projected demand is fixed, we can realize our goal by changing our cut-off point.

Below is the result of our best cycle, which is cycle 14.

Business Running Case: Investing in a New BrewPub?

The cut-off point data used in cycle 14 is: BR01-01 Pilsner 0.8, BR01-02 Avarian Lager

0.8, BR01-03 Light Wheat 0.6, BR01-04 Red Wheat 0.6, BR01-05 Pale Ale 0.6, BR01-06 Bock

Dark 0.6, BR01-07 Pilsner (wholesale) 0.8, BR01-08 Avarian Lager (wholesale) 0.8, BR01-09

Special offer 1, BR01-10 Ster Hurricane 0.5, BR01-11 Boston Pier Mojito 0.5. The excess rate

from FY-1 to FY-3 changed from 6% to 3%, showing that our decision of changing the cut-off

point is doing well in balancing demand and supply.

Although the parameter (excess demand) in cycle14 indicates that our decision is pretty

reasonable and the result is acceptable, running the next cycle for different inputs is a useful way

to reach a valid conclusion. Compare to cycle 14, the cut-off point data used in cycle 15 is:

BR01-01 Pilsner 0.8, BR01-02 Avarian Lager 0.8, BR01-03 Light Wheat 0.8, BR01-04 Red

Wheat 0.8, BR01-05 Pale Ale 0.8, BR01-06 Bock Dark 0.8, BR01-07 Pilsner (wholesale) 0.8,

BR01-08 Avarian Lager (wholesale) 0.8, BR01-09 Special offer 1, BR01-10 Ster Hurricane 0.5,

BR01-11 Boston Pier Mojito 0.5.

The excess rate from FY-1 to FY-2 changed from 12% to 6%, but again rose to 7% in

FY-3. An ideal production cut-off point management should lead to decreasing excess rate. The

Business Running Case: Investing in a New BrewPub?

result from cycle 15 indicates that the current cut-off point may lead to an unstable demand-

supply scenario.

Further, refer other parameters to evaluate the result from two cycle: Break-even point

and profits (before taxes). In cycle 14, with mentioned inputs, the break-even point is 3.9, profits

before taxes are 372,243 (FY-1), 517,981 (FY-2), 674,314(FY-3). In cycle 15, the break-even

point is 3.68, profits before taxes are 335,790 (FY-1), 536,287(FY-2), 661,428(FY-3), (see

Appendix H). Although break-even point is smaller in cycle 15, which means in approximately

three and a half month, the restaurant’s expense equals income and start earning profit from then

on. But take profits into account, the most important parameter in simulation, cycle 14 is still a

better decision, since the total profits in three years are higher than that of cycle 15. In

conclusion, cycle 14 inputs is the optimized choice.

4.4. Functional area #4: Comparison based on selected business parameters for two

different decision cycles

Break-even analysis exhibits that the owner will break-even in roughly 4 months or when

revenue is $351,487, see Appendix D. After running several cycles, the one with the best results

is Cycle 14. Expected profits from our analysis are $372,243, $517,981, and $674,314 for FY-1,

FY-2, and FY-3 correspondingly, see Appendix E for more details. These numbers illustrate that

the Brewpub system is indeed a lucrative investment, so we recommend the owner to install the

brewery system at his restaurant.

To further understand the positive results of investing in a Brewpub system, we will use

the Discounted Cash Flow method to evaluate this investment. According to Wall Street Journal,

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Boston Beer Company has a discount rate of 8.5% (2018). For this reason, our discount rate

should be 25% due to higher risks in comparison to established breweries. Additionally, our

future cash flows derived from Cycle 14 because it yields the most accurate results. Using these

assumptions, the NPV is $1,375,730 and the IRR is 187%, see below for a detailed explanation.

Based on this analysis, the NPV is greater than 0 which entails that the investment will be

profitable and the IRR is greater than our weighted average cost of capital, which also suggests

that the project should be accepted because we expect to receive earnings from this investment.

4.5. Functional area #5: Comparison based on selected business parameters for two

different decision cycles

The two cycles we chose from the business simulation are cycle 14 and 16. In the cycle

16, the staffing setting up number of employees and how salary assigned shows in Appendix F,

the surplus for critical salesmen and general salesmen are negative which means the company

cannot afford this much salary for employees based on the current operating business status and

also for future two years. For critical workers and general workers, the surplus for them is still

positive which means in current operating status, the company still have extra money to afford

their salaries except in FY-3 which has a negative surplus. Also in Appendix F, the

compensation costs increase from FY-1 to FY-3 are not very stable because compare to FY-1 to

FY-2, the increase from year 2 to year 3 number is too high, which means the company pays

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high salaries to employees or it hires too many employees. To improve the current situation, the

staffing use two tools to analyze the company current human resource situation find out that the

growth rate for critical employees should increase based on the current rate because the company

should retain the talent by using appreciate salaries. Increasing the growth rate for critical

employees will decrease the number of general employees to balance the limited salaries

expenditure. Specifically, the position of general salesmen could be eliminating after year 1 and

critical salesmen could take place of them because once the business stays stable after year 1 and

increase the salary growth rate to 5% in year 2 and 10% in year 3, the critical salesmen can work

by themselves. The critical workers such as brewers are the key of producing beers, so they will

regard as a talent, so the company decides to increase the salary growth rate to 10% in the next

two years to keep their motivation for the job. Once the company’s business becomes stable and

more customers are willing to come to the restaurant, more general workers should be hired to

provide a better service. The cycle 14 result shows in appendix F, although the surplus is

negative for salesmen in first, the salary assignment becomes more suitable before the two tools

using. Also in appendix F, after using the tools, the increase compensation cost from FY-1 to

FY-3 grows steadily, the decrease compensation cost directly influence the fixed cost becomes

less, so that it can make more benefits in other areas. The internal employee’s salary adjusting

has less influence for the whole business, but it is also very important for the company to retain

the talents for beer producing and innovating.

5. Summary of the results, recommendations, and conclusions

5.1. Summary of the results

Business Running Case: Investing in a New BrewPub?

We analyzed five different functional areas that including marketing, innovation,

operations, financial and human resource management to use several decision-making tools

including SWOT analysis, Decision tree analysis, What-if analysis and so on to analyze if we

need to invest a new brewpub in the restaurant. The result of the new brewpub will have an

increase profit annually which is a good beginning for a startup company. But there is still some

problems for the predicted sales volume, the situation of higher profit margin for top-sellers, long

period notice for customers and how to make the operational and managerial experience

frequently.

5.2. Recommended strategy

Based on our analysis of the profit margin and revenue share of each brew beer products,

we have come up with some recommendations for the operation and management:

1. For the products that are predicted to have low sales, such as BR01-09 (Special Offer)

BR01-10 (Lobster Hurricane) and BR01-11 (Boston Pier Mojito), we should have a low stocking

at the very beginning, even though it may increase the average total cost of them. We should not

give them up but must to very cautious about its potential performance. We recommend testing

them in the first week and see their performance to determine whether to continue or not.

2. For the top-sellers which also have a higher profit margin, we should try to expand its

sales. We should make use of their advantage of popularity to increase the sale. For example,

when a customer is not intending to purchase our brew beer, but they have the ability to

purchase, we should offer them some samples for free and may increase the opportunity of future

purchases. This action could also let them know our products and they may come for it at next

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time. In this way, we are not making revenue only by our brew beer but also by attracting them

to come back in the future.

3. In the first two weeks, since we have just introduced our brew beer, it may take a long

time for our customers to notice our new self-made brew beer. However, our simulation

application predicts the sales performance by an ideal situation. So, we should try to let our

customers be aware of our new products at the very beginning to match the predicted results and

our breakeven point. Here we recommend offering some coupons for the craft beer before we

start offering the brewed beer and be well prepared. We can also let our waiters and waitresses

introduce our brew beer to our current customer and tell them the expected launch date. A pre-

awareness of our products could enable the sales performance of our self-made brew beer to be

better than without it.

4. We should conclude our operational and managerial experience frequently and adjust it

with any updated changed and situations.

5.3. Implementation plan for the selected strategy

Based on the result of decision support tools and the restaurant’s strategy, an

implementation plan covers actions from financial, operation, innovation, marketing and

organization management is given below, see Appendix G. The investment decision should be

made within 3 days, in which 2 days are used for negotiating different size and new price with

the seller. Next, based on the previous decision, financial preparation takes up to 17 days to

complete, including writing a business plan and obtaining a business loan from a financial

institution. With the decision made and finances secured, the owner may start purchasing the

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micro-brewery system and arrange transportation. 8 days and presumably $150000 (depends on

negotiation result) are spent during this process. After the purchase, there are three actions

coming up simultaneously: prepare the production and distribution site for the new business unit

(cost 40 days and $3520); hire the relevant personnel to operate the brewery (cost 30 days and

$55000) and enter into multi-year contractor with pre-selected wholesalers (cost 40 days). When

the relevant recruitment is done, start training personnel for 10 days. There are three marketing

methods used in this project, social media, local channels, and trade shows, adding up to a

$48000 cost. Social media marketing campaign begins right after the installation of brewery

system but ahead of the recruitment, lasting for 90 days and cost $25000. Advertise in local

channels and trade show should be activated respectively one month and one week prior to the

execution of the brewery system. Finally, a 90-day observation is required to trace the

performance of brewery system and quickly respond to the business scenario. The whole plan

starts on 09/01/2018 and it finishes on 02/07/2019.

5.4. Conclusion

Based on our extensive analysis for each functional area and decision support tools, we

have concluded that the owner of Legal Harborside restaurant needs to invest in a Brewpub

system because he will recover his initial investment within 4 months and expected profits are

$372,243, $517,981, and $674,314 for FY-1, FY-2, and FY-3 correspondingly. Besides projected

financial performance, the consumption for craft beer is expected to increase in the next years, as

it is becoming an appealing drink for millennials, especially in the greater Boston area, home to

many prestigious universities, i.e. Harvard, MIT, and Boston University. The overall objective is

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to increase profits, market share, and establish a craft beer culture for this restaurant. For this

reason, our team has agreed that Legal Harborside should accept the investment.

References

Carneiro, Joana. (2018). What Makes Craft Beer so Popular with Millennials?. LinkedIn.

Retrieved from https://www.linkedin.com/pulse/what-makes-craft-beer-so-popular-millennials-

joana-carneiro/

The Boston Beer Company. (2018). 2018 Annual Report. Retrieved from

https://www.bostonbeer.com/static-files/00b47161-8fbc-4568-8482-e307c1763709

Nielsen Holdings. (2018). How the Taproom Phenomena Is Helping Reinvigorate U.S. Craft

Beer Sales. Retrieved from https://www.nielsen.com/us/en/insights/news/2018/how-the-

taproom-phenomena-is-helping-reinvigorate-craft-beer-sales.html

Watson, B. (2018, June 12). Shifting Demographics Among Craft Drinkers. Retrieved from

https://www.brewersassociation.org/insights/shifting-demographics-among-craft-drinkers/

Kendall, J. (2018, July 19). Power Hour: Nielsen Shares Latest Craft Beer Consumer Insights.

Retrieved from https://www.brewbound.com/news/power-hour-nielsen-shares-latest-craft-beer-

consumer-insights

Smith, B. (2008, July 25). Yeast Washing: Reusing your Yeast. Retrieved from

https://beersmith.com/blog/2008/07/25/yeast-washing-reusing-your-yeast/

Business Running Case: Investing in a New BrewPub?

Satran, J. (2014, September 12). Here's How A Six-Pack Of Craft Beer Ends Up Costing $12.

Retrieved from https://www.huffpost.com/entry/craft-beer-expensive-cost_n_5670015

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Appendix A: List of Figures, Tables and Graphs

(1)

(2) (3)

(4) (5) (6)

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(7) (8)

Appendix B: SWOT Analysis for Marketing Management

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Strengths:

Lower material and labor cost

Better access to technical support

Big customer size

Prime Location

Less competitor

Weakness:

Higher other cost

Less operational experience

More management effort

Equipment setup time

Opportunities:

More ideal stocking strategies

Reduce other cost

Threat:

Emerging other competitors

Customers losing interests

Appendix C: 4.2 Decision Tree Analysis and What-if Analysis for Innovation Management

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Appendix D: Break-even Analysis

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Appendix E: Projected Financial Statements

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Business Running Case: Investing in a New BrewPub?

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Appendix F: Organizational and HR Management Tools

Business Running Case: Investing in a New BrewPub?

Business Running Case: Investing in a New BrewPub?

Business Running Case: Investing in a New BrewPub?

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Appendix G: Implementation Plan

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Appendix H: Operations Management Tools

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