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Two Brothers Brewing Co. - Team 8
- 1. Deloitte Consulting LLP TWOBROTHER’S BREWING COMPANY’S SUSTAINED ROAD TO GROWTH Client Discussion document : Growth plan over the next 3 year 9th November, 2011
- 2. Team Resumes ¡  Nationality:Indian •  Undergrad: St. Stephens School, New Delhi ¡  Nationality: Polish •  Undergrad: Politecnico di Milano Karam Malhotra Michal Laube ¡  Nationality: American •  Undergrad: Columbia University ¡  Nationality: American •  Undergrad: NYU Stern School of Business Edward Krule Val Misra . Photo Photo Photo Photo
- 3. - 3 - USConsultingReportTemplate_R1.5V_0411.pot Opportunity Thereis an opportunity to maintain sustained growth and expand its business by more than 2-3x in the next 3 years through: •  Larger distribution reach (geographic and channel) •  Increased consumption levers •  Improved product mix •  Competitive M&A expansion Two Brothers has the opportunity to more than double its revenue in the next 3 years even in a current diminishing beer category •  Craft beer is a $7.6 bn in the US and accounts for 5-6% of the total beer category •  Overall beer industry is declining at 1%, but craft beer has been growing at 13-15% •  Competition has increased dramatically with an estimated 1790 breweries in the USA, (10% increase YoY) Industry Trends and size Consumer Trends Two Bros distinctive positioning •  The primary drinking category ages of 24-35 drink more craft beer due to niche taste preferences and premium perception •  Also, although on-trade accounts for 25% distribution and 50% revenue, the growth in off-trade is outpacing on-trade currently •  Two Bros is primarily concentrated in the Midwest and is 100% family owned •  They have low brand proliferation as compared to competitors and focus on artisan and seasonal beers
- 4. - 4 - USConsultingReportTemplate_R1.5V_0411.pot Whencompared to the Top Regional Craft Breweries, Two Brothers has potential to increase its production volume, price and distribution network Sales Volume Salve Volume (Barrels) Revenue Distribution 154149 97 13 TwoBros +642% Bell’sBoulevardSummit 30 27 18 SummitTwoBros 2 +800% Bell’sBoulevard USD million 17 21 17 7 Bell’sBoulevardSummitTwoBros Number of states Average Price Estimates 195 181186 153 +21% Bell’sBoulevardSummitTwoBros USD / barrel Source: Inc.com, Mintpost.com, medill.edu
- 5. - 5 - USConsultingReportTemplate_R1.5V_0411.pot Potentialorganic and inorganic initiatives Can we grow organically? Can we grow through M&A? Acquire other breweries Move into adjacent spaces Increase pricing Increase per capita consumption How can we grow substantially over the next three years? Create additional drink occasions Revamp channel distribution strategy Expand geographically Increase pricing of current products Create an upscale line/ brand Breweries in Chicago area to improve economies of scale Breweries in other regions to improve distribution Increase the number of customers Modify SKU sizes / packaging type Target new customer segments Enter wine / RTD drinks production
- 6. - 6 - USConsultingReportTemplate_R1.5V_0411.pot Fourinitiatives should be launched immediatelyFeasibility/Easeofimplementation High Wave 2 Wave 1 Medium Wave 3 Wave 2 Medium High Mid-term growth potential Create additional drink occasions Revamp channel distribution strategy Expand own distribution to new geographic areas Increase pricing of current products Create an upscale line/ brand Breweries in Chicagoland to improve economies of scale Breweries in other regions to improve distribution Modify SKU sizes / packaging type Target new customer segments Enter wine / RTD drinks production 1 2 3 4 5 6 7 8 9 10 1 2 3 4 56 7 10 8 9
- 7. - 7 - USConsultingReportTemplate_R1.5V_0411.pot Wave1 Initiatives: TwoBros will need to follow an inorganic growth strategy in the West and a more in-house strategy in the east to cover the key beer states Impact: •  Acquisition of $1.5mn revenue brewery would allow to double current sales and would break- even within 3-4 years •  Growth in the Northeast could allow for 3-5% one-time growth of current sales (as consumption per capita in untapped states is ~20% higher, though volume base is lower) TwoBros current reach Top 10 states for craft beer1 Acquisition of a local Westcost craft brewery would allow to tap into the largest markets in the US as well as expand distribution of TwoBros beers 5 9 Organic growth in the Northeast, extending the reach of distribution networks to Vermont, New Hampshire, Delaware 1 State’s favorability was ranked along the following metrics: production, consumption, tax regulation, number of breweries per capita Source: Craft Brewery Business booming – The Street
- 8. - 8 - USConsultingReportTemplate_R1.5V_0411.pot Grocerysupermarkets ¡  Increasingly important channel (untapped) ¡  Crucial to identify and cover key growth segments specific for craft beer, e.g. Whole Foods Wave 1 Initiatives: Distribution - Two Brothers must ensure that distribution covers the most important as well as the highest growing segments for craft beers On-trade channels ¡  Traditionally main distribution channel ¡  Often first touchpoint with the brand ¡  Important to maintain relationship with selected local bars to build awareness and loyalty Convenience stores ¡  Main distribution channel for home consumption ¡  Key growth channel for craft beers. E.g., C stores, liquor stores Mass merchandizers ¡  Difficult to cover ¡  Low negotiating power ¡  Lack of production capacity to cover potential demand ¡  Still low number of target customers in stores 6 Impact depends on current channel distribution structure. Typical improvement seen in range of 10-20% of revenue Priority
- 9. - 9 - USConsultingReportTemplate_R1.5V_0411.pot Wave1 Initiatives: Pricing: There is a large opportunity in increasing pricing to match competitor levels 1 2 Average Price Estimates USD / barrel 195 181186 153 +22% Bell’sBoulevardSummitTwoBros 1 2 Increase price on current brands •  Quick win, easy to implement for short term gain •  Will most probably lead to decreased consumption among current customers Launch premium, artisanal brands •  More difficult to implement, potentially requires research and high marketing expenditures •  Potentially high upside, especially over a longer time horizon There is a consumer trend to move into premium craft beer segments – willingness to pay is rising Source: Inc.com, Mintpost.com, medill.edu
- 10. - 10 - USConsultingReportTemplate_R1.5V_0411.pot Descriptionof Wave 2&3 initiatives ¡  Experiment with packaging and communication to increase the number of occasion drinking (beer with a home dinner, cans ) ¡  Create artisanal packaging and aim to become a wine substitute ¡  Introduce larger bottle size (22oz, 750 ml) to increase the single occasion consumption and smaller SKUs to drive frequency Create new drink occasions Experiment with SKUs Acquisition of brewery in Chicagoland area Entry into adjacent segments – wine & RTD ¡  Acquisition of a brewery in Chicagoland would help Two Brothers achieve economies of scale, especially in sourcing (stronger negotiation position against suppliers) and in distribution ¡  Acquiring a Westcoast brewer is a priority to larger potential for upside and lower cannibalization risk ¡  Wine is one of the highest growth categories and is often considered as a substituting beer (especially traditional domestic beers) ¡  TwoBrothers now in the highest growing category within beer – recommend to focus limited immediate resources on ancillary services Target new customers ¡  Create new tastes catering to new untapped segments: women, the elderly and other ¡  Develop new seasonal tastes (Octoberfest, Christmas) ¡  Experiment with can packaging and target environmentally-aware customers 3 4 7 8 10
- 11. - 11 - USConsultingReportTemplate_R1.5V_0411.pot Inorder to achieve this, Two Brothers will have to strengthen their internal functions ¡  Two Brothers will need to support their increase in demand in both bottling and fermentation facilities. –  Short term demand - Contract brewing / acquisition of a brewing facility. –  Long term demand - Expand current production facilities Production People Marketing Financial prowess ¡  Two Brothers still has less than 70 employees. TwoBros will need to invest in –  FTEs especially well trained on distribution and sales –  M&A experts in the Craft brewing industry ¡  Two Brothers will have to review its marketing strategy –  They will be entering new geographies and extending product lines –  New speciality brands could also be launched (SKU sizes, cans instead of bottles, low-calorie variants for women / football season) ¡  Due to the busy M&A activity that may arise, TwoBros should –  Negotiate better interest rates with banks if it plans to take on debt –  As the TwoBros forecasted IRR is high enough to support VC funding, they could look at this and other sources of cash generation
- 12. - 12 - USConsultingReportTemplate_R1.5V_0411.pot Impactof various initiatives deployed in Wave 1 and Wave 2 along with enablers, could more than double the business in 3 years 285 1,500 380 190 Total (yr 3) 4,350 Wave 2&3Total Wave 1 inititatives 3,970 Channel rationalization Westcoast Acquisition Northeast Distribution 95 Pricing improvement 2011 1,900 32% ¡  Pricing improvement of 15% of current revenue, after considering loss in sales ¡  Northeast dsitribution: 3-5% additional sales ¡  Westcoast acquisition: 1.5m in revenue ¡  Channel rationalization : 10% ¡  Wave 2-3 initiatives: ~20% additional contribution through increase in consumption and product base Assumptions Revenue, USD ’000s
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- 14. - 14 - USConsultingReportTemplate_R1.5V_0411.pot Backupof NPV analysis assuming $6m investment in yr 0 St line depreciat ion 35% Tax 13% CoC 1 2 3 4 5 1000000 2000000 18000000 27000000 30000000 13041 96799 149088 153973 153.3625 185.9523 181.1011 194.8394 0 yr 1 yr 2 yr 3 yr 4 yr 5 Rev '000s 2000 2700 3645 4920.75 6643.013 8968.067 PAT 140 189 255.15 344.4525 465.0109 627.7647 FCF with TV -5860 609 675.15 764.4525 885.0109 6975.163 DCF -5860 608.2093 673.398 761.4789 880.4237 6930.001 npv 3993.5 BACKUP