Case Study Analysis
Boston Beer’s strategy is primarily focused on growth through differentiation. The sources of its competitive advantage can be classified as a company that provides high quality beer with unique flavors, a market driven approach, and a very efficient contract brewing strategy.
In terms of quality, the company created a premium beer by its selective use of ingredients and less water. Boston Beer has won honors such as being the first American beer sold in Germany due to its use of only barley, yeast, hops, and water as its ingredients. With the increase in health consciousness among beer drinkers and the rise in more distinctive and flavorful brews, the Boston Beer Company has been able to use its packaging and commercials to communicate its quality commitment to consumers. It is its image for quality among consumers that allows the company to keep high prices and profits when compared to major brewers such as Coors, Budweiser and Miller.
Contract brewing has allowed the company to use extra brewing space among other firms to brew beer. The Boston Beer Company has benefited from such practice in that no capital was required to purchase facilities and equipment during a period in which it was growing at a double digit rate. Additionally, these breweries were distributed throughout the Unites States thus allowing the company to maximize freshness of the beer it sold. Such outsourcing approach has resulted in a higher focus on selling the product and low transportation costs.
Sustainability will depend on the company’s ability to differentiate itself from major American brewers. It will be critical for the Boston Beer Company to continue focusing on its commitment to quality as it continues its path for growth by investing excess capital in research and development as well as bolstering its image as a company that brews premium beer with unique flavors. In terms of valuation, the company is profitable and creates business value in addition to having a trustworthy and capable management team able to produce stable double-digit returns in equity and gross margins. It is the largest and most successful of the small craft brewers, generates significant cash flow, and has minimal debt. It appears that the stock price should be higher than the $10 to $15 per share initially estimated by underwriters based on the facts previously mentioned.
In recent decades, the concept of an IPO with dual class stock structures have become increasingly popular, especially in situations when mature and/or family-owned companies go from private to public ownership. By utilizing this structure, companies such as Google, Ford Motor Company, and Facebook have been able to raise substantial equity capital without relinquishing control from the founders and management of the organization. From an investor’s perspective, however, the purchase of a non-voting share of common stock relinquishes the voting power that traditionally accompanies such an investment. As a result, investors may require a higher return than if they held Class A voting shares. Jim Koch decided to pursue a dual stock structure for the Boston Beer Company as a result of the unprecedented growth of both his organization and the niche industry in which the company operated. Additionally, by retaining voting power in the organization, Koch shielded the organization from a potential takeover from the large and well-capitalized players in the domestic and import beer markets. While choosing this structure provided the operational control the founder desired, such a decision potentially impacts amount of capital raised in an IPO. Investors purchasing a public equity offering in this situation may require a lower purchase price since the ownership interest in the organization has been diluted to an insignificant share.
Investing in IPOs generally come with risk. According to a recent study, IPOs generally...