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case_1stack_brewing.docx
9B15A004 STACK BREWING: A LITTLE BREWERY IN THE BIG NICKEL
Cameron Brooks, Benoit Roy, Katarina Schwabe and Cassidy Stewart wrote this case under the supervision of Ron Mulholland 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.
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Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-05-21
In early November 2013, Shawn Mailloux was examining his company’s monthly sales reports. Mailloux was the founder and owner of Stack Brewing (Stack), a craft brewery located in Sudbury, Ontario, Canada. As a microbrewery that was in operation for only half a year, Stack had received many positive reviews about its products. A recent grant from the Northern Ontario Heritage Fund Corporation (NOHFC)1 worth $125,0002 would help facilitate an increase in Stack’s brewing capacity boosting production by 500 per cent for 2014.
A communications plan was necessary to promote the expansion in brewing capacity and grow the brand. Although the majority of the grant would be allocated to the expansion to achieve necessary sales growth, a significant marketing push and an evaluation of current distribution strategies were required. Mailloux was thrilled with the contemplated expansion, but was unsure of what communication and distribution strategies to employ. With all of this in mind, he excitedly began brainstorming possible courses of action.
CANADIAN BEER INDUSTRY
Canadians had long been associated with beer and its consumption. The social impact of national pop- culture references ranging from Bob and Doug Mackenzie of SCTV “Hoser” fame to associations with the country’s most popular sport, hockey, had ingrained the fermented beverage in Canadian culture. In 2013, over one-third of the country’s eligible population consumed beer on a regular basis.3 According to the Conference Board of Canada, the beer industry, which was heavily regulated by federal and provincial governments, generated $5.8 billion in yearly tax revenue. The industry supported over 163,000 jobs directly or indirectly— roughly one in 100 working individuals in Canada — indicating that beer was a major driver of the Canadian economy.4
1 The Northern Ontario Heritage Fund Corporation was a provincial government agency facilitating Northern Ontario economic development through loans and grants to businesses. Job creation was a key value. 2 All currency in Canadian dollars (CAD$) unless specified otherwise. 3 www.beercanada.com/economic-impact-beer, accessed December 8, 2013.
4 J. Palladini and M. Armstrong, “From Farm to Glass: The Value of Beer in Canada,” The Conference Board of Canada, November 2013, accessed December 8, 2013.
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Historically, beer was the alcoholic beverage of choice among Canadians, reaching peak consumption in 1975 at 106.50 litres per capita. It was still the most highly consumed alcoholic beverage in the country in 2013, accounting for 44 per cent market share of alcohol sales despite an indication that sales and consumption were decreasing nationally. Consumption had dropped to 74 litres per capita (the equivalent of nine 24-bottle packs of beer per person per year), demonstrating the impact of changing consumer tastes and preferences. According to the Brewers Association of Canada, 80 per cent of beer consumption took place in the home. Wine and spirits were seeing an upward trend in consumption across Canada.5
Three major players controlled the Canadian beer industry: Molson-Coors Canada Inc. (Molson), owned by Molson-Coors Brewing; Labatt Breweries of Canada (Labatt), owned by Anheuser-Busch InBev; and Sleeman Brewery Ltd. (Sleeman), owned by Sapporo Breweries Limited. In 2011, these three foreign- owned brewers comprised 84 per cent market share in Canada,6 with Moosehead Brewing holding an additional estimated 3.7 per cent.7
Ontario was the brewing capital of the country, accounting for 3,800 direct brewery jobs in 2013.8 Similar to other provinces, the distribution of alcohol was controlled by the government, which restricted breweries from providing their products to non-government approved retailers. In Ontario, the approved retailers included the Liquor Control Board of Ontario (LCBO) that was owned and operated by the provincial government, and the Beer Store, a private enterprise. There were over 850 LCBO retail9 and agency stores and nearly 450 Beer Stores in Ontario.10 Molson, Labatt and Sleeman owned the Beer Store collectively with Molson and Labatt each owning just under 50 per cent.11
In addition to selling beer, the LCBO also sold wine and spirits, and therefore had limited shelf space for beer. Listings were accepted on the basis of appeal in the market based on minimum unit sales. The Beer Store instituted financial and promotional minimum standards for breweries that wanted to sell their beer, limiting the extent to which small brewers were able to adequately distribute and sell their products. For example, in 2013, the initial listing fee for new products was $2,849 and in addition, listing an individual product SKU (stock keeping unit) cost $228 per store for the first 233 stores and $54 for each subsequent listing.12
By 2013, advocates of small breweries wanted alcohol to be available outside of these two primary retailers, but the government had refused the notion outright. This had been a highly publicized dilemma in Ontario for many years and a change was not imminent.13
5 Government of Canada, Agricultural and Agri-Food Canada, “The Canadian Brewing Industry,” www.agr.gc.ca/eng/industry-markets-and-trade/statistics-and-market-information/by-product-sector/processed-food-and- beverages/the-canadian-brewery-industry/?id=1171560813521, modified November 11, 2013, accessed December 8, 2013. Note per capita referred to those aged 15 and up.
6 Mike King, “Canadian Beer Market Dominated by Labatt Brewing and Molson Canada,” www.companiesandmarkets.com/News/Food-and-Drink/Canadian-beer-market-dominated-by-Labatt-Brewing-and-Molson- Canada/NI7974, September 10, 2013, accessed December 8, 2013. 7 “Breweries in Canada,” IBISWorld Industry Report 31212CA, accessed February 5, 2015. 8 Cansim Table 383-0031, accessed February 5, 2015. 9 www.lcbo.com/content/lcbo/en/corporate-pages/about.html, accessed February 5, 2015. 10 www.thebeerstore.ca/about-us, accessed February 5, 2015. 11 www.theglobeandmail.com/news/politics/the-beer-store-everything-you-need-to-know-about-ontarios-lucrative-monopoly/ article23248112/, accessed February 5, 2015. 12 www.thebeerstore.ca/listingfees, accessed December 8, 2013. 13 K. Leslie, “Kathleen Wynne Nixes Beer, Wine in Ontario Corner Stores, to Protests over Beer Store Monopoly,” National Post, October 29, 2013, http://news.nationalpost.com/2013/10/29/kathleen-wynne-nixes-beer-wine-in-ontario-corner-stores- to-protests-over-beer-store-monopoly/, accessed December 8, 2013.
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Beyond the two distribution outlets, brewers could not sell their products to any other retailer in Ontario, but they were permitted to sell alcoholic beverages from the brewery location. Stack was selling out of its brewing facility in Sudbury to customers that included a number of local restaurants. However, a change to its distribution strategies would be considered if it made fiscal sense.
CRAFT BEER
North American craft beer experienced positive growth in market share due to the changing preferences of consumers. According to BMO Nesbitt Burns, the market is undergoing a “structural shift” with craft breweries increasing volume to 5.7 per cent of the market while revenue is nearly 10 per cent.14
Craft breweries were typically small and independent, and referred to as microbreweries or nanobreweries depending on the amount of beer they produced. The Ontario Craft Brewers Association set 400,000 hectolitres per year as an upper limit for designation.15 In Ontario, major players in the category included Steam Whistle Brewing and the Muskoka Brewery, and many other niche breweries offered similar, high quality products across the province. To supplement this period of growth, the provincial government had instituted the Ontario Microbrewery Strategy and had planned to invest $1.2 million per year to aid craft breweries in exploring different marketing and operational techniques.16
The rise in the craft beer category was due primarily to the general increase in demand for fresh, high- quality, diverse products and a move by consumers to premium products. This was sometimes referred to as premiumization. Craft brewers responded by using different varieties of malted barley or malted wheat along with hops to produce unique, brewery-specific beers. Historically, craft brewers had an advantage over major brewers due to the diversity in products, but the larger brewers had adapted to this change by offering new varieties of their own. This included Molson’s Blue Moon Belgian White and Rickard’s Blonde. Additionally, Molson had purchased outright a number of craft breweries, including Creemore Springs and Granville Island Brewery. Despite this, the craft beer community stayed relatively loyal to its preferred microbrewery brands.
PAST SUDBURY BREWERIES
Sudbury had a 100-year history of supporting breweries starting in 1907 with Sudbury Brewing and Malting Company Limited. J.J Doran, a hotel owner from North Bay, started this Sudbury brewery. Following consolidation of a number of breweries in Sudbury, Sault Ste. Marie and Port Arthur (now Thunder Bay), the company became known as Doran’s Northern Ontario Breweries. One of its brands, Northern Ale was served in establishments across Northern Ontario. In fact, it had a 50-year Northern Ontario monopoly on draught beer sales from 1942 to 1992.17 Following company and regulatory environment changes, Northern Breweries, as it was known, ceased operation in 2006. The demise of Northern Breweries left no competition within a 200-kilometre radius of Sudbury. The nearest brewery, Lake of Bays Brewing Company, was a craft brewery, located in the small community of Baysville, about 250 kilometres southeast of Sudbury.
14 www.bmonesbittburns.com/economics/reports/20120815/SR120815.pdf, accessed March 5, 2015. 15 www.ontariocraftbrewers.com/content.php?nextpage=brewphilosophy, accessed March 5, 2015. 16 http://news.ontario.ca/medt/en/2013/07/excitement-brewing-for-ontario-craft-beers.html, accessed December 8, 2013. 17 Daryl White, “Draught, Development, and Discourse: The Northern Ontario Draught Beer Monopoly, 1972-92,” Journal of Canadian Studies, 47.2, Spring 2013, pp. 5-28 and 293.
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STACK BREWING
Mailloux’s desire to open a brewery came about in 2012, after he noticed the success of microbreweries in Montreal and Southern Ontario. He felt that this could be an opportunity to capitalize on an untapped market. Mailloux’s first step in the process was to purchase a facility in late 2012. The brewery was located in a warehouse at 1350 Kelly Lake Road in an industrial area adjacent to a new, affluent housing development. Though slightly outside of the city core, Stack’s original plan was to sell beer to restaurants and bars in order to achieve production efficiencies through keg sales in lieu of bottles.
In May of 2013, Stack Brewing began to sell beer to four popular, local establishments located in downtown Sudbury: Hardrock 42, Fromagerie Elgin, the Laughing Buddha and The Townhouse. Gaining access to these well-known establishments allowed Stack to introduce the brand to consumers and develop a group of core followers. This was aided by a series of positive earned media articles — the result of word of mouth or buzz about a product — in Sudbury newspapers including the Sudbury Star, Northern Life and Northern Ontario Business. A few months later, Stack began the bottling process and provided beer in two styles of bottle: the Boston Round (a 900 millilitre bottle equivalent to 2.5 traditional bottles) and the Growler (a large, 1.89 litre bottle). The bottles were sold at the brewery at prices comparable to those of other microbreweries in Ontario (see Exhibit 1).
Since its inception, Stack had developed a cult following in Sudbury. Due to its limited production capabilities and varying storefront hours, Stack often opened its doors to a lineup of eager beer drinkers anticipating the week’s freshly brewed batches.
THE BEER LINEUP
Stack Brewing’s lineup was both traditional and explorative, allowing both uneducated beer consumers and enthusiastic connoisseurs to sample unique varieties. The majority of Stack’s brewing time and marketing went towards its five core varieties: Saturday Night, Angry Moose, Valley Girl, Les Portes De L’Enfer and Black Rock. The brewery also offered promotional varieties to match the season, which further allowed its master brewer and consumers to experiment with new tastes.
Each of the five varieties touched on Sudbury culture in some capacity. Saturday Night, Stack Brewing’s flagship beer, was a 5 per cent alcohol by volume (ABV) cream ale that closely mirrored the taste of traditional macro-beers and celebrated the Stompin’ Tom Connors’ classic, Sudbury Saturday Night. Angry Moose was an India pale ale, a very strong 9 per cent ABV beer that reflected the typical Sudbury outdoors person. Valley Girl was a traditional 5 per cent ABV wheat ale that referenced a nearby suburb. Les Portes De L’Enfer, known as a “bière de garde” or “a beer for keeping,” and translated to “the gates of hell,” was a 9 per cent ABV strong ale that referenced Sudbury’s history as a former logging town. Finally, the Black Rock was a no-nonsense Cascadian porter at 8 per cent ABV, reflecting Sudbury’s mining and smelting past.
CURRENT MARKETING AND OPERATIONS
Stack Brewing’s logo was instantly associated with Sudbury through use of an illustration (see Exhibit 2). In 1972, the local nickel mining company constructed a smokestack with a height of over 380 metres to lessen the effects of pollution. The smokestack was prominent on the Sudbury skyline. Much of Stack’s marketing indicated that the beer was proudly brewed in the city. Working with a local graphic designer to develop the brand personality, Mailloux had tried to establish this tie between the city and his beer. In
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mid-2013, as Stack began to introduce its core lineup, Mailloux focused on social media to communicate the message and launch Stack’s first campaign. The brewery’s five core brews were announced in sequence with a corresponding contest asking Facebook fans to send in stories related to the name of each beer (see Exhibit 3). The best stories would be included in packaging.
During its first few months of operations, Stack Brewing continued to use social media as a main form of communication. Mailloux also made many public appearances by offering pouring services at events tied to the local university or cultural entities. One such event was a Craft Beer Festival held in August 2013 in Sudbury where Stack was one of several craft breweries featured.
In mid-2013, Stack employed five full-time employees and brewed approximately twelve 117-litre batches per week. About 90 per cent of Stack’s sales were in bottles, while keg sales to restaurants and bars accounted for the final 10 per cent. Stack Brewing generated roughly 50 per cent gross margins for bottle sales, with slightly higher margins for keg sales. At this rate, the brewery sold approximately 5,616 litres per month. However, almost 100 per cent of gross profits were used to pay for the lease on the brewing facility, equipment, ingredients and other operating expenses, and 50 per cent of the batches were often kept in inventory. At that capacity, Mailloux knew that a concentrated marketing effort would likely utilize cost-effective strategies, but allocated the majority of his time to perfecting the product. Despite this, the increase in production capabilities by early 2014 was expected to lead to greater sales and further economies of scale.
SUDBURY’S MARKET FOR BEER18
The City of Greater Sudbury had a population of 160,770 people as of the 2011 census. Within the city, there were a total of 67,765 private households,19 with an average of 2.4 people living in each household at a median family income of $82,220.20
Roughly 127,060 members of the community were of legal drinking age (19+). The population aged 15 and over was 136,000.21 Within Sudbury there were three post-secondary institutions22 comprising well over 10,000 students. Many young beer drinkers were willing to try craft beer, and many students coming from Southern Ontario were already familiar with craft beer due to established beer culture in larger cities. Mailloux knew that these students had likely purchased craft beer in the past, and would likely purchase craft in the future. A common industry assumption was that once an individual has tried craft beer, it was difficult to lure that individual back to conventional brewery products.
Furthermore, an “eat local” movement had begun in early 2010 that would have a significant influence on Stack’s success. This encouraged consumers to support the community by purchasing products and services from locally owned businesses. The movement was gaining momentum in the city, particularly among young and middle-aged professionals, which would have positive spillover effects for the brewery.
18 City of Greater Sudbury, “Population,” www.greatersudbury.ca/living/about-greater-sudbury/key-facts/population/income/, accessed December 8, 2013. 19 www12.statcan.gc.ca/census-recensement/2011/as-sa/fogs-spg/Facts-cma-eng.cfm?LANG=Eng&GK=CMA&GC=580, accessed February 23, 2015.
20 www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil107a-eng.htm, accessed February 23, 2015. 21 www12.statcan.gc.ca/census-recensement/2011/as-sa/fogs-spg/Facts-cma-eng.cfm?LANG=Eng&GK= CMA&GC=580, accessed December 8, 2013. 22 Laurentian University, Cambrian College and College Boreal.
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BEER BUYERS
The Canadian beer industry targeted young male consumers. Over 50 per cent of males aged 18-31 consumed beer at least a few times per month while over 25 per cent consumed at least a few times per week.23 Along with owning the Beer Store, the major breweries frequently sponsored sporting events and heavily advertised through mainstream media to maintain their market share. For these breweries, market share success was correlated with advertising share of voice, and they used massive marketing budgets in order to stay relevant. They had also experimented with ciders and other flavoured beers to capture the as yet untapped female market.
The craft beer industry’s target consumers were predominately millennial males. As males aged, they were more inclined to purchase regular beer and less likely to purchase craft beer. While the typical purchase drivers for a male beer customer were price and wide distribution, Mailloux recognized that craft beer customers were comfortable with higher prices, but required improved accessibility to obtain preferred brands.
ENTRY BARRIERS
Approaching the end of 2013, Stack Brewing faced an interesting dilemma. Despite its near cult-like following among its small, core consumer base, the company faced competition from a variety of sources. First, given that Sudbury was an aging city with a smaller number of affluent residents as compared to large craft beer markets such as Toronto, beer drinkers at that time tended to stick with what was familiar. Their familiarity with major brewery products and their inclination to stick to those products likely affected their inclination to sample Stack at the outset. The extent to which these familiar brands had resources to advertise their products and their distribution through the Beer Store, restaurants and bars also put Stack at a disadvantage.
Further, Stack faced competition from other craft beer providers in Ontario. These included the Muskoka Brewery, Steam Whistle Brewing, Lake of Bays Brewery, Creemore Springs and Beau’s All Natural Brewing Company. However, the closest breweries to Stack were Lake of Bays Brewing Company and Muskoka Brewery located approximately two hours drive from Sudbury. All other prominent microbreweries were located in Southern Ontario and in the Ottawa region. These established brands had many products that were readily available in the LCBO and the Beer Store across the province.
Additionally, Mailloux had heard of a craft brewery opening on Manitoulin Island just 100 kilometres from Sudbury, but there was little information available. Split Rail Brewing Company had a successful Kickstarter campaign, raising $23,806. They were scheduled to open in the fall of 2014. Mailloux was unsure whether this would affect his business.
Despite these factors, Mailloux knew that he was poised to capture the attention of Sudbury’s beer drinkers regardless of their preference by providing locally brewed beers that pleased every palate.
23 J. Nadeau and D. Coletto, “Canadian Millennials and Beverage Alcohol,” Commissioned by BevSupport, January 30, 2013, http://canadianmillennials.ca/wp-content/uploads/2013/06/Abacus-Data-Bevsupport-Canadian-Millennials-and- Beverage-Alcohol.pdf, accessed December 8, 2013.
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HOW WILL STACK BREWING “STACK UP”?
With brand awareness for Stack Brewing growing, expansion of the brewery was inevitable. The $125,000 grant from the NOHFC had assisted Mailloux to initiate that expansion in an attempt to significantly grow his business. The new equipment that Mailloux planned to purchase would increase production by five times, and he expected that greater availability of the beer would lead to increased intent to purchase.
The expansion plan also encouraged Mailloux to focus on marketing communication efforts and find the best avenues to promote and sell the beer. He did not want to be left with a white elephant and large quantities of inventory. Mailloux needed to come up with a marketing strategy to reach out to potential consumers and distribute his products. He questioned whether he should focus on bottled beer sales or spend time distributing kegs to restaurants and promoting from within. He thought that if his focus was on bottles, he might need to re-evaluate his distribution strategy to ensure adequate accessibility. Mailloux was also unsure about how to promote each of his varieties, how to differentiate Stack from other breweries and how to communicate that difference.
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EXHIBIT 1: STACK BREWING VARIETY AND PRICING INFORMATION
Note: Beer taxes in Ontario collected by brewers (included in the price) comprised a basic provincial tax of 25.43 cents/litre for bottled/canned beer or 22.71 cents/litre for draft beer plus a volume tax of 17.6 cents/litre for draft or bottled/canned beer. Federal excise taxes for a small brewery were $3.122 per hectoliter (100 litres) included in the price and HST (13%) was also included.
Source: Company Facebook profile.
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For use only in the course Marketing Strategy at Acadia University taught by Wenxia Guo from September 03, 2015 to December 19, 2015. Use outside these parameters is a copyright violation.
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EXHIBIT 2: STACK BREWING’S LOGO
Source: Company Facebook profile.
EXHIBIT 3: “SATURDAY NIGHT” LAUNCH PROMOTION
