Background of Redhook Ale Brewery

Background of Redhook Ale Brewery

Founded in Seattle, Washington on May 1981 by Paul Shipman and Gordon Bowker, Redhook Ale Brewery was initially started to compete with imported brands from Europe and Canada. Beginning as a draft only brewery, the first pint of Redhook Ale was sold in 1982 quickly followed by Blackhook Porter in 1983 and the popular Ballard Bitter in 1984. In 1985, Redhook started a bottling line, but demand continues to outstrip production. In addition to imported brands, Redhook now competes with regional beer brands, niche microbrewers, and contract breweries.

Strategy

Redhook is committed to producing a fresh, full-bodied beer that beats the imported competition. To do this, Redhook follows the German purity law of Reinheitsgebotg which mandates using only four ingredients: malted barley, hops, yeast, and water. Using informative salesmanship, Redhook beers are not advertised, instead, point-of-purchase displays and word-of-mouth publicity is the main force behind Redhooks growth.

Increased profitability and projected growth informs their decision to expand capacity and product lines. Redhook plans to add a lager product which will expand their product line and provide a significant growth opportunity. The lighter lager beer has a much broader appeal and may eventually become Redhook’s lead brand. To facilitate this new product line, two new breweries need to be constructed. The construction of the brewery in the Puget Sound area of Washington will facilitate the new lager line and allow Redhook to capitalize on the lack of quality regional lager breweries in the Pacific Northwest. The new facility in the Bay Area of California will increase production of the ale and porters which are set to exceed current capacity in two years.

Redhook Business and Financial Conditions

Redhook is currently located in the 26,000 sqft old Fremont Car Barn with a brewing capacity of 40,000 barrels. Using a sophisticated computer system, Redhook can track deposits, keg floats, ingredient inventories, and other brewing functions. The system also makes projects income and production levels, allowing the purchase of materials on a just-in-time basis. With 20 full-time employees, including the four person distribution team, over 35% of revenues are earned in the 50-mile radius around northern Seattle while the remainder comes from other regions in Washington, Alaska, California, Oregon, Idaho, Montana, and Colorado.

Since inception in 1982, Redhook’s sales have been increasing at a steady pace with positive net incomes since 1985. Sales have increased by an average of 53% since 1985 and Redhook has captured 50% of the competitive microbrewery market in the Pacific Northwest. It’s clear that Redhook’s quality product and business strategy has been essential in increasing sales to this point with projections for the ale and port to steadily increase. The lager market in California is projected at $1 billion and Redhook’s lagers is ultimately projected to become their lead brand with sales of $25 million. Initial sales is expected to be over $8 million (1993) and to double in the year after.

Redhook’s weakness may be their high cost-of-goods sold which is almost half the amount of their net sales. Although the COGS will be minimized as production increases, the expansion will increase COGS substantially and if the projected sales are overstated, it could mean disaster.

Selling, general, and administrative expenses have also increased substantially over the last two years and with the addition of the two new breweries, an increase in these costs are expected.

Other increases that may be problematic are the substantial increase in net receivables and inventory. The high amount of inventory is especially worrying as Redhook’s product is a consumable and although alcohol has a long shelf-life, the long inventory turnover may be an issue. The increasing inventory numbers also bring into question of whether they need to expand so quickly.

Redhook also wants to start an advertising campaign for their lager, but they have limited experience in advertising as most of their marketing comes from point-of-purchase displays and word of mouth. It is questionable if they will be able to meet their sales target with just their current reputation.

Principal Motives for Proposals

There are a couple principal motivations for U.S. Bank in Relation to Redhook’s proposal. First, Redhook has outlined a sound strategy after its recent move to the Fremont Brewery. Since the completed move, redhook has installed a top of the line and highly sophisticated computer system to run everything from the company’s financials to managing project income and set production volumes. The brewery also manages what is known as ‘just-in-time’ operations so that on hand inventory is kept to a minimum.

Redhook has also demonstrated that it has a well rounded and diversified network of suppliers and distributors that work in tandem with the company. Other options from the bank’s perspective is that U.S. Bank’s current total assets are rated at $17B. U.S. Bank’s main goals is to meet all of the financial needs of their customers. Another Asset to Rechook is that U.S Bank is looking into special services to offer to its clients. This is something that Redhook may very well become involved in as a highly valued customer

U.S. Bank is looking to begin offering non-traditional banking products and services by providing a commercial loan to Redhook. Several services are to include insurance, financial planning, asset management, and investments.

Based on Redhook’s long term relationship with the bank, the ability to acquire a loan is expected to be relatively straight to the point. Given the relationship that Redhook has with the bank, there is a great opportunity for the bank to align its interest in a positive direction with the developing Redhook Brewery. There is an advantage for the bank if it can capture the business of Redhook, the bank will then be able to offer the organization other forms of services. These different types of services will include financial management/ planning, investments, as well as insurance options among other options.

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