A Conceptual Study for the Chilean “Providencia Pub”

August 2013

By:Martin Meister

Rationale for Investing in a New Brew Pub

The owner of the restaurant-bar “Providencia Pub”, located in Santiago of Chile, is facing a decision making problem:Take the opportunity to increase competitiveness by investing in a new technology for

an in-house brewing systemProduce high quality craft beerWith wholesales possibility 496,000 annual pints capacityUSD 150,000 total investment

Objective of the Study Produce valuable, useful and objective information to help the owner take the

investment decision Founded advice and recommendations of best courses of action

Problem Statement

Chilean Beer Market´s growth of 62% in the last 7 years Craft and Premium brands growing at a double-digit pace 680 million liters consumed annually, 70% located in Santiago Low consumption per capita: 49 liters annual Attractive Pub´s location, with great nocturnal and commercial activity

Project Overview Pub has 78 customers capacity, 546 visits per day, half of the consuming 1.5 pints 81,900 beer consumers annual, 122,850 pints sold 200% overall increase of penetrated market 75% average plant utilization 7% market growth Production for in-house and wholesales USD 50,000 local loan at 10% annual

Market Opportunity

Focus on 2 functional areas: Marketing and Innovation 4p´s Marketing Mix framework: relation between Price, Product, Place and Promotion Generate a well-integrated marketing strategy

Marketing Management Test price levels Product mix penetration Influence between levels of advertising and penetration of in-house beer sales Use of “What if”, “Break Even Point” and “Decision Tree” decision support tools

Innovation Management Creation of Premium Brand Use of “What if” selling prices and variable costs and “Decision Tree” decision support

tools

Managerial Decision Making

Starting assumptions: Use of “industrial” prices 20% in-house sales penetration Advertising of USD 35,000

Marketing: What If – selling prices

Results: Contribution margin do not cover fixed cost Negative profits of USD -52,000 BEP in 16 months

Action for next cycle: Use of “What If” tool Raise prices 50%

Results: Contribution margin cover fixed cost Positive profits of USD 70,000 BEP in 9 months

Starting assumptions: Use of craft beer market prices 20% in-house sales penetration Advertising of USD 35,000

Marketing: Break Even Analysis

Results: Profits: USD 92,000 In-house contribution margin in 92% Wholesale contribution margin in 77%

Action for next cycle: Raise In-house penetration sales to

30% (15% each brand)

Results: Profits growth to USD 138,000 Total Profits in 3 years of USD 683,000

Starting Assumption: More in-house sales penetration will

need advertising increments

Marketing: Decision Tree

Results: Investing more in advertising increases

potential profits 3 year profits of USD 696,000 positively

compared with previous best cycle

Action to take: Construct Decision Tree increasing

advertising to USD 70,000 annual with 4 levels of in-home sales

We assumed different probability levels of occurrence

Starting assumptions: Evaluate creating Premium Brand Use of previous best cycle with 3 year profits

of USD 781,000 Brand 2 price increase in 1 and 2 dollars

(5.35 and 6.35 dollars) Brand 2 variable cost increase in 0.5 USD

Innovation: What If Analysis - SP & VC

Results: Contribution margin increases in USD 42,000

and 85,000 respectively CM decreases in USD 25,000 Positive strategy because market Premium

prices are in between USD 5 and 13

Starting Assumption: Creation of Premium Brand will leverage

profits Start with the best previous cycle

Innovation: Decision Tree

Results: Creation of Premium Brand increases Profits 3 year profits of USD 825,300 positively

compared with previous best cycle

Action to take: Construct Decision Tree using 4 levels of

prices for Product 2 (premium brand) Increase in 0.5 variable costs We assumed different probability levels of

occurrence

Initial Cycle: Prices: Industrial beer Products: Normal craft beers Place: 20% In-house penetration Promotion: USD 35,000 annual 3 year profits of USD -52,000

Marketing Mix

Final Cycle: Prices: Market´s craft beer average Products: Normal craft beers plus Premium Brand Place: 40% In-house penetration Promotion: USD 70,000 annual 3 year profits of USD 890,000

We recommend investing in the brewing system based on the results of the different simulation cycles

Final results: Profits in 3 years: USD 890,000 Net Present Value: USD 55,000 Ending Cash Balance 1st Y: 21,000

For prices we can use the market´s average Maximize the in-house sales penetration in actual customers leveraged with

advertising investment, up to USD 70,000 annual Create a premium brand to increase contribution margin

Recommendations and Conclusions

End