Adolph Coors in the Brewing Industry – Case Study

By mid-1970, Adolph Coors Company was extraordinarily successful, posting year-to-year volume gains for the last 23 years and gaining a 16% Return on Sales at its height. However, between 1975 and 1985, performance declined greatly relative to the rest of the brewing industry. In the early 1980’s, Coors faced a key decision, whether to build a second brewery on the east coast. Would an additional brewery improve its position significantly? What else could Coors have done to improve their position? Could Coors have changed their strategy in order to take advantage of the changes in the brewing industry, or were they destined to be the victim of changes in the industry that they could neither control nor remedy?

Extraordinary Success into the 1970s
Coors was extremely successful prior to 1977. Key to their strategy was a set of unique, co-specialized elements: geographic focus, low-cost production, a differentiated product, and market power over their distribution customers. By managing these aspects well, Coors achieved 21.2% market share in their market, with the lowest relative amount of advertising in the industry. At the same time Coors’ low cost per barrel, at $29, was second only to Heileman Brewery.
In spite of their low cost, Coors’ differentiated product allowed them to charge a premium over most of their competitors, giving Coors the highest profit margins in the industry, nearly twice that of their nearest competitor!
Coors’ single production facility, located in Golden, Colorado, served 11 western states stretching from California to Texas. Even though their shipping costs were twice the industry’s, average shipping costs would have been much more had they attempted to enter other states. Besides, Coors made up for the inefficiency with the scale of their plant, the largest in the nation. The location lent itself well to Coors’ ability to differentiate its product. For example Coors was brewed using “pure Rocky Mountain spring water.” Coors had a great opportunity to serve an underserved geographical market. Seven of 24 million barrels sold in the region had to be imported from production facilities outside of the region, and Coors’ Colorado facility was more central to the area than the three other closest facilities in Missouri, Texas, and Wisconsin.
Coors had the second lowest production cost per barrel in the industry, in spite of their claim of the most expensive raw material costs. Their cost advantage stemmed from the industries highest capacity utilization, economies of scale through the country’s largest brewery, single product focus, and the industry’s fastest packaging lines. Matching their low production cost was the lowest advertising cost relative to the industry. The mystique that had been built up about Coors and their differentiating, all-natural appeal allowed them to get away with lower advertising costs than average for the industry.
Coors differentiated their product, both in the materials that went into the beer and in the process they followed to brew it. The perception that Coors promoted was that their beer was the most “drinkable” due to its superior agricultural ingredients, pure Rocky Mountain spring water, and minimal additives. Coors brewing process included four unique components that bolstered its drinkability: a natural fermentation process, 70 days of aging versus the 20 days of aging Coors’ competitors employed, lack of pasteurization whose intense heat would harm the beer, and refrigerated shipping. Coors’ cost advantage from scale, capacity utilization, and other costsaving components allowed them to use higher quality inputs and a more capital intensive brewing process as they attempted to create the perception of a natural, high quality product. With their beer perceived as a natural and high quality product, Coors was able to price it high relative to their customers while maintaining a high volume of sales.

Finally, Coors managed their distribution channel very closely. Distributors had very little power when negotiating with Coors. Coors received hundreds of applications from potential distributors for a single distribution franchise, and was able to force wholesalers to give up other brands if they wanted to carry Coors. High up-front investment by distributors resulted in switching costs that kept distributors loyal. The market power Coors held over its distributors allowed Coors to capture much its added value.
Performance Declines from 1977 to 1985
By investigating a number of key metrics, comparing the changes from 1977 to 1985 for Coors relative to an industry average as detailed in Appendix I, it is apparent that Coors performance decline significantly relative to the industry. During the time, Coors lost the cost advantages it had enjoyed prior to 1977, increased sales volume by much less than the industry, and dramatically increased advertising in campaigns that were generally not focused on maintaining the pure Rocky Mountain image.

The first major concern about Coors’ operating performance between 1977 and 1985 is the relative increase in cost. Average production cost/barrel, adjusted for inflation, decreased throughout the industry during the time; however, for Coors, average cost decreased 20% less than for their competitors. This change resulted from decreasing average capacity utilization, higher number of products produced at the same facility (320 by 1985 vs. 1 in 1977), and competitors catching up with Coors’ previous operational advantages. Additionally, rising shipping costs were absorbed by Coors as median shipping distances almost doubled by 1985. Advertising costs for Coors skyrocketed during the period, increasing by 600% more than the industry average! Coors had begun to focus more on advertising and marketing during the time, but hired marketing staff from other companies, staff whose campaigns were not well suited for the company. Rather than focusing on maintaining its existing market and product with a message in tune with Coors’ pure Rocky Mountain image, marketers instead focused on niches in which Coors was not successful with themes that Coors’s customers didn't recognize, and rolling out new products. Meanwhile, as Coors’ marketing division lost track of the image, market, and product that had driven wild success prior to 1977, Coors’ management similarly spoiled the corporate image through poor reputation with minorities, unfair treatment in the workplace, tough treatment of its distribution channels, topping union hate lists, and eventually being boycotted by the AFL-CIO. Indeed, it wasn’t until 1985 that Coors launched a successful campaign of their Banquet product by returning to the quiet natural setting and focusing on their better, fresher product.
It is not surprising that simultaneous to Coors’ new “approach” to marketing, their key past success of the premium segment Banquet product sold in their core 11 states lost ground rapidly to its competitors. Although Coors’ total sales had grown almost in lockstep with the national average, their total market share had grown 8% more slowly than their competitors driven by market share decline of 40% of their premium product and a decline by 25% of sales in their primary territory of 11 western states.
From 1975 to 1985, industry capacity in the west grew 82%, from 17 to 31 million barrels due to Coors’ competitors’ new production facilities while capacity utilization dropped industry-wide by about 10%. Pressures to fill excess capacity caused prices to drop over the same period, and Coors’ competitors, with a regional production strategy and California manufacturing, had little choice but to challenge Coors in the west on price. The result was that Coors lost 25% market share in the west while its competitors gained there 20%. Coors responded to the need to fill excess capacity by expanding nationally, almost doubling median transportation distances and increasing costs due to shipping by as much as $3.50/barrel. In 1985, the $51.5 million in additional shipping costs due to national expansion equated to 55% of Coors’ profits.
One final affect of the decreased concentration of sales in their key 11 state region was the affect on Coors’ ability to manage its distribution channel. As Coors searched for new wholesalers, those that were willing to sell only Coors dwindled to a minority. Coors focused on weaker distributors than it had in the past and spent more to manage the relationships. This was caused by applicant’s previous experience in the beer business, higher distributor/sales ratios, rising distributor attrition rates, and the desire by distributors to have Coors’ be more responsiveness.
Should Coors Build a Brewery in Virginia?
In the early to mid-1980s, Coors faced a choice to build a brewing facility in Virginia. There were two primary concerns: a 25-30 million barrel ceiling in their existing facility may not support future demand and increased shipping distances were a costly addition to variable cost. It is not in Coors best interest to build the brewery in Virginia for three reasons. First, there is no strong evidence that Coors will ever need a 25 million barrel capacity. Second, the costs savings from reduced shipping costs could be offset by the difference in capital costs to develop and maintain the new facility. Finally, the new facility, if it has any affect on Coors’ strategic positioning, will have a negative effect and reduce their long-run added value. The first reason Coors should not consider building a new facility is that they will not need more than 25 million barrels in capacity in the near future. Coors’ sales volume from 1975 to 1985 had grown slowly, adding only 2.8 million barrels to 14.7 barrels in 1985. By analyzing Coors’ regional growth patterns, it is apparent that the growth in sales volume by adding new geographic markets offset a loss in market share in their existing markets. Had Coors’ not expanded nationally, they would have lost sales volume. Indeed, in their primary markets from 1975, Coors sales volume had dropped by 3 million barrels, a 24% change. In 1985, Coors had 13.5% market share in their primary markets. With the very conservative assumptions that the current decline in sales volume stabilizes but doesn’t begin to increase and Coors reaches their current 13.5% market share in the untapped markets, Coors will only realize an additional 8.7 million barrels in sales, which would require only 23.4 million barrels.

The second reason why building a new facility is not a good approach for Coors is that the costs savings from reduced shipping costs could be offset simply by scaling their existing facility. If Coors’ capacity utilization at the new facility was 100%, they would annually save $44 million more than just with the existing packaging facility. With this additional level of savings, however, it could take Coors 10 years or longer to recoup the additional investment and maintenance cost it would take to create a new facility rather than to scale the existing facility.
Depending how much investment Coors must make to build the facility, they could find it impossible to recoup their investment. Assuming 10% cost of capital (equal to Coors’ historical return on equity), a need to renew 7% of the plant assets annually (again, equal to historic trend), and based on a simple calculation demonstrating that scaling the CO facility by 10 million barrels would cost $334 million, it would take Coors 60 years to recoup their investment if building the new facility cost $592 million and 10 years if it cost $523 million. Finally, Coors needs to consider the strategic implication of the facility in Virginia. Building the new facility will go against one of Coors’ only remaining differentiating factors: its product differentiation, image and mystique. A primary ingredient in Coors’ model for drinkability is the pure Rocky Mountain spring water. Any facility built outside Colorado will not brew beer with the Rocky Mountain spring water. During the decade prior to 1985, Coors lost their regional dominance, their strong cost advantage, and their position over their distribution chain. Their image and differentiated product was their sole remaining competitive advantage and due to the thematic churn of their marketing department, these had been damaged as well. Should Coors’ consumers believe Coors beer was no longer brewed with the high quality ingredients such as pure Rocky Mountain spring water, Coors products would no longer be differentiated from their competitors, their image would suffer, and they would lose volume at current prices.
What could Coors have done better?
Between 1977 and 1985, Coors suffered setback in most the areas in which it had previously enjoyed competitive advantages over the industry. Competitors moved production into its “Golden” underserved territory. Cost advantages diminished relative to the industry. It became more difficult to differentiate their product due to the rapid increase in competitive products.
The Coors image became tainted and was no longer able to drive sales without advertising the way it could in the past. Finally, Coors mastery over the distribution channel subsided greatly. Some of its setbacks were unavoidable. It was inevitable that Coors’ competitors would eventually erode Coors’ cost advantages, and Coors’ could only introduce further efficiencies for so long. Similarly, Coors’ could not fully control the number of new brands entering the competitive landscape. However, there was much Coors could have affected. Coors should have adjusted their strategy towards vertical integration to reduce initial fixed setup costs and ongoing operational losses from markets that were not attractive. Coors’ brewing division accounted for over 100% of Coors’ operating income in 1985, which meant it was compensating for Coors’ other divisions which were not even making accounting profits. Many of the markets Coors entered; including water, malt, brewing rice, labels, secondary packaging, bottles, equipment, and energy; were either commodity markets, regulated markets, or simply efficient markets. For the fixed costs Coors spent to vertically integrate into these markets, Coors received little, if any benefit. Perhaps only in the can-making market, which Coors pioneered the two-piece aluminum can for beverages in 1959, was vertical integration required to have access to the product, and even this could have been divested in the 1980s when sufficient excess capacity became available. Coors could have continued to dominate the western region in which they had previously been so successful. In 1975, 24 million barrels of beer were consumed in Coors’ 11-state distribution territory. Coors produced 11.9 million barrels and 7 million barrels were imported from other regions. In 1975, only 5.1 million barrels were produced within the 11-state distribution territory by producers other than Coors. Coors’ extreme stance on capacity utilization should have been relaxed to allow faster growth of their production facility to support more of the consumption in their region. Coors should have rapidly expanded capacity to meet the region’s demand, and sent a signal to its competitors that the Western region belonged to Coors. Competitors would have been left with two choices, neither of which was appetizing: to ship beer into the West from outside the region at higher than average shipping costs and lower than average profits or to build a large, underutilized, production facility in the region that would affect profits negatively.

By dominating the region, they could have put much pressure on the new brands entering and they could have maintained their power over the distribution channel. New brands eroded Coors Banquet’s differentiated position, especially with the growth in the super-premium and ultra-premium segments. As new segments defined by high-quality product gained a toe-hold in the industry, consumers that would have purchased Coors natural, high-quality product might likely move to super-premium segments instead of buying a high-quality premium product. Although this change in the industry was difficult to combat, Coors could have done a better job by gaining the dominant position in the western region and keeping out competitors that would have incentive to introduce super-premium products to compete with Coors’ high-quality perception. Additionally, by growing dominance in their western territories, Coors would have built an even stronger position over their distribution channels. Coors could have done more to bolster their pure Rocky Mountain image that had driven sales in the past. Between 1977 and 1985, Coors’ marketing efforts cost them dearly, both in the cost of the advertising and the tainting of Coors’ image and mystique. It was appropriate to spend on advertising in response to rising competitor advertising costs, but the approach should have been different. Coors should have focused on maintaining the Coors’ brand image in Coors’ core territory rather than reaching the niche market that currently wasn’t buying Coors beer. Marketing material should have been in line with Coors’ pure Rocky Mountain image, supporting the perception that Coors was a natural, high-quality, drinkable beer. Management should have focused less on strict treatment of employees and distributors to reduce cost, and should have instead compromised more with those groups to reduce bad publicity that negatively affected their image.

Finally, Coors should have taken a different approach to their product strategy. Rather than expand into so many different product segments, Coors should have considered one additional brand to address the rapidly growing light beer segment. Coincident with the growing capacity in the Western region, an additional production facility solely for the additional brand should have been considered. Allowing Coors to enter the light beer segment, this approach would have maintained natural high-quality image, reduced cannibalization of super-premium products on Coors Banquet, bolstered Coors’ cost advantage, and facilitated growth in the Western region