Handouts

SGH Business Game

November, 2021
Over the last year, Situation: The Golden Gate Brewing company (GGB) is a European brewery with a strong presence in
Benelux, UK and France and solid performance over the last five years
GGB has suffered
a sharp decrease
in profits. Trigger point: Profitability has suddenly dropped by nearly 60% in 2019

Gross Profit1 (EUR million) Revenues (EUR million)

-59% -9%

82 472
75 432 430
69 397
64 368
60 345

34

2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

1. Gross profit is the difference between revenues and the costs of making the beer (raw materials, depreciation, direct labor, etc.)
2 Source: Kearney

Kearney | MFK
GGB hired Client objective: Increase profits
Kearney to identify
reasons for its Objective of the project:
poor performance – Gain insights into the profit decrease (find out what went wrong)
and identify
measures to – Provide GGB with a plan for increasing its profitability (incl. specific examples)
improve
profitability.

You are Kearney

consultants. Your task is to
solve Client’s challenges by
addressing the objective of
the project as efficiently and
effectively as possible

3 Source: Kearney

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Interview with Ronald de Putter spends about 20 minutes of your precious interview time telling you about
Ronald de Putter his three week holiday with his wife and three kids in Spain, from which he has just returned.
(CEO): He spends another 25 minutes stressing the high quality of his beer. His family has been
general/broad brewing masters since 1840. When he created his company in 1986 he took an old family
topics. beer formula and revised it to make a super premium beer. He hired an expert biochemist
and brewery consultant, Dr. Owades, to fine-tune the family recipe. In his recipes he always
uses the world’s best hop — Mittelfreu — imported from a longstanding business relation in
Bavaria. The cost is USD 4.5/kg, while ordinary hops cost USD 0.1/kg

Finally de Putter tells you that during his holiday at the Costa Brava he met Antonio Benadiba
— CEO of a medium-sized Spanish brewery — who told him about the growing beer market
in Spain. Mr. Benadiba is 65 years old and would like to retire at the end of the year.
However, he has no relatives able to take over his brewery and is therefore looking for
somebody interested in acquiring his company. Ronald de Putter visited the brewery and
found it to be in an excellent state. Moreover, the company seems to have a wide distribution
network in Spain. Ronald de Putter is therefore wondering whether acquiring this company
might help him boost his profits and would like to hear your advice.

4 Source: Kearney

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Interview with A new production facility was installed in 2018:
Richard Boonstra
– Investment: EUR 150 million
(Production
Manager): – Production capacity: 3 million hectoliters/year
information on
current production – 2018 production: 2 million hectoliters; 2019 production: 10% less vs. 2018
facility Old production facility:

– Was running at full capacity

– Had increasing maintenance cost

– Was sold for EUR 1

During the first two months of 2019, the bottle filling section of the new production facility
suffered a number of production interruptions of up to a week. The problem was solved, but
only after a couple of weeks (the manufacturer did not respond quickly)

5 Source: Kearney

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Interview with Since the installation of the new
Richard Boonstra production facility, the production cost
per liter increased by EUR 0.15/liter
(Production (from EUR 0.95/liter to EUR 1.10/liter) 1.25
Manager): EUR
+15.8%
per
production cost – Twenty additional temporary
liter
data. workers have been hired, which
1.00
has caused an increase in the
0.30
direct labor costs. The workers
have received little training for the 0.20
new production line and that the 0.75
processes have not been revised;
0.30
0.25
– Installing the new production facility
resulted in increased depreciation 0.50
and hence higher fixed cost.

0.25 0.50 0.50

0.00
2018 2019
Fixed costs Direct labor costs Direct materials

Note: Direct labor costs include salaries of workers directly involved in the beer production and distribution. Fixed costs include depreciation, salaries of maintenance workers, loan costs, etc. Direct materials
include all materials required for the production (hop, grain, yeast, water, etc.) and packaging.
6 Source: Kearney

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Interview with The production manager believes that the decrease in profitability is mainly due to the
Richard Boonstra decrease in sales volume. He accuses the Marketing & Sales department of incompetence:
(Production – They are unable to get new clients and have lost a number of old ones
Manager):
opinion on reason – They have decreased their advertising and promotion budget
for decrease in
– The company hired a new logistics provider who is unable to deliver products to the clients
profitability on time

7 Source: Kearney

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Interview with Beer consumption in Europe is declining since 2005
Geert van der Poel
Geert van der Poel points out the following reasons for this decrease:
(Sales & Marketing
Manager): – People are adopting a healthier lifestyle;
information on
beer market – The population is aging and older people prefer other alcoholic drinks such as wine;

– Young people are becoming more responsible as alcohol tests on the road become more
intensive.

Premium lager beers and specialties are still growing, while low-cost beers are declining.

Major difference in beer consumption between Northern Europe (>100 liters/capita) and
Southern Europe (<50 liters/capita)

8 Source: Kearney

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Interview with GGB beer is positioned as a premium beer with strong position in Benelux, UK and France.
Geert van der Poel GGB targets the connoisseur, the moderate beer drinker who is particular and seeks a
certain taste. The target market for the distinctive taste cuts across traditional demographic
(Sales & Marketing lines and is not limited to any one class. It includes blue collar workers as well as the
Manager): responsible drivers or anyone with a taste for good beer.
information on GGB’s market share of the premium beer market has fallen from 10% in 2018 to 9% in 2019,
GGB’s market because GGB lost two big clients (large national supermarket chains) at the beginning of the
position year – they switched to a competitor who is able to deliver his product more reliably. Mr. van
der Poel told you that GGB has outsourced the delivery of its product to a logistics provider,
who is failing to deliver on time and in full (i.e. he does not perform its services consistently
enough). You have found out that GGB’s contract with the logistics provider does not have
strictly defined delivery standards.
GGB sells its beer to a variety of customers:
– National and regional supermarkets and other retail outlets;
– Distributors, who buy the product from GGB, then sell and deliver it to pubs, while
providing the personalized services needed to promote such a high-quality product;
– Direct sales to pubs (using third-party logistic providers for delivery).

9 Source: Kearney

Kearney | MFK
Interview with GGB sales and marketing spend
Geert van der Poel
(Sales & Marketing 1.25
EUR
Manager): +10.0%
per
information on liter
beer market 1.00
0.28
0.25

0.75

0.50
0.82
0.75

0.25

0.00
2018 2019

Cost of marketing Cost of sales

1. Cost of marketing includes all costs for above-the-line and below-the-line advertising and PR. Cost of sales includes costs of sales staff, costs of discounts and other incentives provided to customers.
10 Source: Kearney

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Interview with The marketing manager advances three major reasons:
Geert van der Poel
(Sales & Marketing
The production costs are higher than those of other beer producers. Therefore, GGB cannot
Manager): keep up with the fierce price competition in the market.
opinion on
reasons for GGB’s two main clients have moved to a different supplier because:
profitability
decrease – The production department was not able to get the new production facility running on time;

– Repeated strikes of GGB’s main logistics provider at the beginning of the year resulted in
severely delayed deliveries to clients.

Following the sharp decrease of profits, the CEO cut down GGB’s promotion and advertising
budget for the next year (2020) by almost half. As the budget was constant for years, Geert
van der Poel was shocked. He is convinced that this is a wrong decision since almost half of
the sales are realized during promotional periods.

11 Source: Kearney

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Interview with Paul Toronto Beer has been one of the market leaders in Canada for premium beers since 1985.
Laval (CEO, Toronto Beer started to export its product in 2001, first to Germany and then progressively to
other European countries. In 2007, it acquired production facilities in Spain and Germany
Toronto Beer – a
competitor): Toronto Beer is growing fast in Europe due to aggressive pricing (10-15% below GGB).
information on Toronto Beer expects to grow 500,000 Hectoliter next year and needs brewing capacity for
global market this volume. Building a new brewery will take 3 years and the best offer Toronto Beer has to
date for contract brewing1 is EUR 75/Hectoliter. Additionally, Mr. Laval has informed you that
potential for the direct materials for his beer amount to 0.30 EUR per liter
premium beers
Paul Laval says that there is a growing interest in premium beer on the international market.
However, very few companies are so far present on the international premium beer market.
He says, “I do not understand why the Belgian premium beer producers have not yet gone
for the international market. The potential is so huge with over 50% higher sales prices”.

1. Contract brewing model: hiring another brewery to brew and package beer / renting out another brewery’s facility to brew the beer on one’s own. The recipe is not transferred
12 Source: Kearney

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Interview with Leo The Crazy Drink company was founded in 1954 and in 2017 produced 2,000 hectoliters of a
van der Kerkhove premium beer called “Ultimate Pleasure”.
(CEO, Crazy Drink In 2005, when the Belgium premium beer market started to decline, Crazy Drink diversified
– a competitor): its activities. It started to import Californian wine and energy drinks, two products with
information on growing market demand.
local market
Today, Crazy Drink distributes Californian wine and energy drinks in three European
conditions countries — Belgium, France and Germany — where it has established good distribution
networks.

Leo van der Kerkhove says that his beer business is no longer very profitable. “Ultimate
Pleasure” generates 8% of Crazy Drink’s turnover but only 2% of its profit.

Leo van der Kerkhove is looking for a company to whom he can sell off Crazy Drink’s beer
production facility, although he is still interested in keeping the distribution activity (i.e. he
would like to continue selling/distributing imported Californian wine and energy drinks).

13 Source: Kearney

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Information The Kearney brewing database provides the following information on the beverage industry:
provided by
Information
Research Center Min Max Average
– Number of production facilities 1 25 3
(IRC)
– Age of production facility (years) 1 18 9
Benchmarks from
the Kearney – Production capacity (million HL/year) 0.2 30.0 3.0

brewing database1 – Employee absence rate 2% 10% 4%

– Personnel cost per hour (EUR) 12 52 25
– Production cost per liter (EUR)
– Direct material costs 0.20 0.55 0.40
– Direct labor cost 0.15 0.33 0.21
– Fixed cost 0.10 0.26 0.16
– Cost of sales per liter (EUR) 0.30 0.85 0.50
– Cost of marketing per liter (EUR) 0.15 0.40 0.20

The data is based on 40 breweries/soft drink producers; companies in the database have
operations in nine different countries (USA, United Kingdom, Spain, The Netherlands,
France, Italy, Canada, China, Australia)

1. The Golden Gate Brewery statistics are not included in the Kearney brewing database
14 Source: Kearney

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Information An article in “Financiële Economische Tijd” reports that the number of alcohol tests
provided by performed on the road by the Brussels police has increased by 50% over the last year. The
spokesman of the Brussels police claims that the tighter control policy has contributed to a
Information sharp decrease in the number of accidents caused by drunkenness.
Research Center
(IRC): In an interview published in “L’Echo” the CEO of “Interbrew” (the largest Belgian brewery)
articles and announced that he is negotiating the purchase of a production facility in Nijmegen. The plant
is specialized in the production of low-alcoholic beer. He says: “The purchase of the
newspapers Nijmegen plant would allow us to strengthen our position in the low-alcoholic beer market
segment, which is growing by 4% annually”.

“De Morgen” reports that the demonstration in Brussels by about 1000 pub owners has
created huge traffic jams. The pub owners were demonstrating against the new tax increase
the Belgian government has levied on beer. A spokesman of the POA (Pub Owner
Association) says “The new tax increase will dramatically affect pub owners’ revenues and
like the 1990’s tax increase force a number of pubs to close”. Since 1990, the number of
pubs has indeed fallen by more than 20%.

15 Source: Kearney

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Information In 2017, Kearney performed a Change Management assignment for the premium beer
provided by IRC: division of Carlson Beer in Sweden. This was the least profitable of Carlson Beer’s divisions
and Carlson Beer wanted to know what to do about this business. With four production plants
previous and a capacity of 150,000 hectoliter/year the premium beer division was the largest premium
assignments and beer producer in Sweden. Kearney’s final report outlines the following recommendations:
presentations
– Centralize the purchasing/sourcing of raw materials

– Reduce administrative staff by 10%

– Sell the private/own transport fleet and outsource the transportation function to a logistics
provider

Implementation of Kearney’s recommendations in 2017 and 2018 resulted in a cost reduction

of 15%. Sales climbed by 10%. By the end of 2018, the premium beer division had become
Carlson Beer’s most profitable one.

16 Source: Kearney

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Information A site with a list of suppliers of beer ingredients provides the following purchase prices for
provided by IRC: different hop grades:
internet research Uncle Sam (USA) Bierfarm (Germany) Titsu (China)

– Ordinary grade USD 0.15/kg USD …/kg USD 0.08/kg

– Tetnang grade USD 0.96/kg USD …/kg USD 0.51/kg

– Hallertqu grade USD 1.80/kg USD 2.01/kg USD …/kg

– Mittelfreu grade USD 3.40/kg USD 4.50/kg USD 2.89/kg

On average, about 0.004 kg of hop is required for the production of 1 liter of beer.

A database at the University of Groningen lists an article by Prof. Siegbahn, who reports on
the influence of demographic changes on beer consumption. Prof. Siegbahn estimates that
the European beer market will shrink by 8% by the year 2023 because of:

– The decreasing number of younger people

– Increasing number of older people concerned about alcohol abuse

– The shrinking blue collar worker group, who considers beer as their traditional drink

17 Source: Kearney

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Information A report published in March 2019 by BBA (Belgian Brewery Association) reveals that the
provided by IRC: Belgian beer consumption declined by 2.3% between 2017 and 2018
(-150,000 hectoliters). The premium beer consumption, which represents 4.2% of the total
market reports beer consumption, has decreased by 9,000 hectoliters (-4.5%). The consumption of “low-
alcohol” beers in contrast has increased by 6%. According to BBA, the main reasons for this
decline are:

– The healthier life style adopted by many people

– The intensified frequency of alcohol tests on Belgian roads

– The new tax which has been levied on beer

– The increasing number of substitute products, especially Californian wine

A report by the European commission reveals that the beer production of the member states
has increased by 1.5%. Countries which have registered the strongest growth are France,
Spain and Germany with respectively 4.2%, 3.8% and 2.9%. Belgium and Denmark are the
tail-enders with a decline of respectively 2.6% and 1.4%

18 Source: Kearney

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Information Nielsen has interviewed about 1,000 consumers. 34% of them never heard of GGB beer. Of
provided by those who knew GGB beer:
Market Research – 60% have tasted it at least once
Agency (Nielsen):
consumer – 58% recognized it as a tasty, high quality beer
satisfaction
– 32% do not buy it on a regular basis because it is too expensive (they only buy it for
survey special events)

– 15% do not buy it because the bottles are not returnable

19 Source: Kearney

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Information Nielsen has interviewed about 60 clients (25 nation wide supermarket-chains, 8 distributors,
provided by and 27 pubs):
Market Research – 19 of the 25 supermarkets and 7 of the 8 distributors complained about supply problems
and unreliable deliveries
Agency (Nielsen):
– 7 supermarket-chains and 3 distributors were considering replacing GGB beer by a
trade partner competitor’s product
satisfaction
– All the pub owners said that since the recent tax increase, a number of clients switched to
survey lower price beers. Also, a significant percentage of clients have tasted other brands
following the frequent stock-outs at the beginning of the year. They did not switch back to
GGB.

20 Source: Kearney

Kearney | MFK