South Delaware Coors Case

March 17, 2015

From: Team 6 (Fenn Meents, William Craig, William Irby, Corey Berghoefer, Adam Sorenson)

To: Dr. Rich Gooner, B.S., MBA, Ph.D.

Subject: South Delaware Coors

As Larry's best friend in his current MBA class, I agreed to help him look over his case analysis to determine whether or not to make application to purchase the rights to produce beer in the South Delaware Coors location. At the core of his decision is a break even analysis to determine whether or not to proceed. The break-even analysis formula is expressed as Fixed Costs / (Selling Price - Variable Costs) This break even analysis will give him the confidence necessary to know whether or not Larry is making a wise investment decision. To that regard, the market research reports needed must provide the necessary information to calculate this simple yet powerful calculation,

I have identified Larry’s current cash on hand to be $15,000 for funding of potential research reports through Manson and Associates. Manson and Associates has a total of eight reports they feel could be supplied within an acceptable amount of time.  After reviewing some of the report descriptions, I felt it was necessary to concentrate on the five main reports and not consume all $15,000 in available funds. Below are a list of the reports Larry purchased including a brief description of their purpose and how the information within was used in the break-even analysis.

Study A- National and Delaware Resident Consumption Per Capita ($1,000) - Assists in reviewing alcohol consumption trends. In short, the report gave color to trending annual beer consumption.

Study C- Market Share Study ($2,000) - Estimate of Coors Market Share (1990-1995) - The purpose of using this report was to derive the delta between the breakeven market share and what Coors is estimating the market share to be. Current estimated market share to be 8.9%.

Study E- Beer Taxes Paid by Delaware Wholesalers ($200) - This report is an excellent tool to reverse engineer what the current consumption rate has been in the last 2 years. This reverse engineering formula produced the amount of gallons consumed in the market which was estimated to be between 5.6 and 5.8 million gallons.

Study F- Financial Statement Summary of Wine, Liquor and Beer Wholesalers for Fiscal Year 1988 ($49.50) - This study is used to calculate COGS to assist in formulating the $1.10 profit per gallon of beer (77.1% of sales)

Study I- Survey of Retail and Wholesale Beer Prices ($2,000) - This study provides the avg. wholesale price for a 6 pack is $3.16. Along with the necessary components to drive our calculations to reach a weighted average of $3.72 wholesale cost/gallon and $4.82 wholesale price/gallon.

*Additional disposable cash left over from research funds = $9,750.50

Expenses:

Fixed Cost = $400K

• Salaries - $160K
• Debt Service - $120K
• Other fixed and semi-fixed cost - $90K
• Other - $30K

*Startup Expense = $800K 

• Inventory - $240K
• Equipment - $200K
• Warehouse- $320K
• Land- $32K

*Estimates

As total funds “in house” are unavailable, I recommend Larry looks for additional funding to help support the Startup expenses that will be incurred. Options at this time are both Bank and Family funding, but will come at a steep interest rate of 10%. Total amount that will need to be borrowed equals $800K. Total funds needed for operations estimated at $1.17M.  I recommend borrowing the full $800K at 10% interest and keeping some “trust” funds liquid as some unexpected expenses may be incurred during the startup period.