Brooklyn Brewery, founded by Steve Hindy a

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Cost Structure

Key Activities

Key Resources

Value Propositions Customer Relationships

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Customer Segments

Revenue Streams

Who are our Key Partners? Who are our key suppliers? Which Key Resources are we acquiring from partners? Which Key Activities do partners perform? MOTIVATIONS FOR PARTNERSHIPS: Optimization and economy, Reduction of risk and uncertainty, Acquisition of particular resources and activities

What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue streams? CATEGORIES: Production, Problem Solving, Platform/Network

What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each Customer Segment? Which customer needs are we satisfying? CHARACTERISTICS: Newness, Performance, Customization, “Getting the Job Done”, Design, Brand/ Status, Price, Cost Reduction, Risk Reduction, Accessibility, Convenience/Usability

What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How are they integrated with the rest of our business model? How costly are they?

For whom are we creating value? Who are our most important customers? Is our customer base a Mass Market, Niche Market, Segmented, Diversified, Multi-sided Platform

What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships Revenue Streams? TYPES OF RESOURCES: Physical, Intellectual (brand patents, copyrights, data), Human, Financial

Through which Channels do our Customer Segments want to be reached? How are we reaching them now? How are our Channels integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines?

What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive? IS YOUR BUSINESS MORE: Cost Driven (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing), Value Driven (focused on value creation, premium value proposition). SAMPLE CHARACTERISTICS: Fixed Costs (salaries, rents, utilities), Variable costs, Economies of scale, Economies of scope

For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues? TYPES: Asset sale, Usage fee, Subscription Fees, Lending/Renting/Leasing, Licensing, Brokerage fees, Advertising FIXED PRICING: List Price, Product feature dependent, Customer segment dependent, Volume dependent DYNAMIC PRICING: Negotiation (bargaining), Yield Management, Real-time-Market

Startup Name Name1, Name2, … DD/MM/YYYY X.Y

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Brooklyn Brewery: Setting the Course for Growth

ID#160404

PUBLISHED ON

AUGUST 24, 2018

BY STE PHAN MEIE R * AND DAN J. W ANG †

Video Prologue: Before reading the case click here to see Brooklyn Brewery and meet the company’s leaders.

Introduction

When Eric and Robin Ottaway took on greater responsibilities in 2010 as senior executives

with Brooklyn Brewery, the company was thriving. The brewery, founded by Steve Hindy and

Tom Potter (CBS ‘83) in 1987, had grown exponentially from a neighborhood enterprise,

brewing traditional lagers for local beer enthusiasts, to one of the top US craft beer producers.

By 2014 the firm ranked ninth among US craft breweries with 260,000 barrels and $60 million

in sales. Brooklyn Brewery beers were sold in 26 states and exported to 20 countries.

But times were changing in the craft beer marketplace. Giant industrial brewers like Anheuser-

Busch InBev (AB InBev) and MillerCoors were entering the segment, selling their own “craft-

like” beers or buying up craft breweries outright. Simultaneously, the craft beer business was

attracting a multitude of local start-ups, and each new entrant promised consumers their local

version of fresh, flavorful craft beer.

In 2015, anticipating tougher times to come, the Ottaways—now with Eric as CEO and Robin

as President—considered several strategic options: upgrading production, broadening

distribution, adding new products, investing more in advertising, or pursuing other ventures.

With these options in mind, the brothers called together the senior team—Chairman and Co-

founder Steve Hindy, Brewmaster Garrett Oliver, and Director of Operations Matt Gordon

(CBS ’12)—to determine the firm’s best path forward.

Author affiliation * Associate Professor of Business, Columbia Business School † Assistant Professor of Business, Columbia Business School

Acknowledgements Kate Permut ’83 provided research and writing support for this case.

Copyright information © 2015-2018 by The Trustees of Columbia University in the City

of New York. This case includes minor editorial changes made to

the version originally published August 14, 2015.

This case is for teaching purposes only and does not represent an

endorsement or judgment of the material included.

This case cannot be used or reproduced without explicit permission

from Columbia CaseWorks. To obtain permission, please visit

www.gsb.columbia.edu/caseworks, or e-mail

[email protected]

CU227

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Company History

The idea for a craft brewery in Brooklyn first came up in a conversation in 1986 when journalist

Steve Hindy and banker Tom Potter met as neighbors in Park Slope. Both were looking for a

new career challenge. They decided to team up and share their love of dark, rich, hoppy beers

with other discerning New Yorkers. At first Potter was skeptical: “What I knew about the beer

industry was that it was big, consolidated, not very profitable, actually shrinking, and it

seemed an unlikely place to stick a small business and try to compete with the giants.”1 But

after attending the US microbrewers’ conference in Portland, Oregon, Potter became

convinced that there was an opportunity at hand. “It really intrigued me. I thought, ‘yes, it’s a

good idea, and more particularly, it could be a good idea in Brooklyn.’”2 The founders put

together a business plan, raised $500,000 from friends and family, discovered a century-old

lager recipe from a long-gone Brooklyn brewery to use for their first beer, and launched

Brooklyn Brewery to sell “fresh, copper colored, full-bodied” premium craft beer in New York

City and beyond.3

LAUNCHING THE BEER

It was a bold move to christen the new venture “Brooklyn Brewery.” As Eric Ottaway

explained, “When Tom and Steve started the company years ago and decided they wanted to

call it ‘Brooklyn’ people thought they were crazy.…Brooklyn back then represented crime,

industrial decay.…If you needed to place the crime scene in a movie, you shot it in Brooklyn.

That was what Brooklyn represented.…But [Tom and Steve] really believed that, under all this

mess, there was still a burning ember…a sort of undercurrent of creativity. Plus, Brooklyn had

a huge brewing tradition.…In 1900 there were over 100 breweries in NYC and half of those

were in Brooklyn. They wanted to bring back this brewing tradition.”4

Renowned graphic designer Milton Glaser, best known for creating the iconic I ♥ NY logo, was persuaded to create the Brooklyn Brewery logo. His elegant white letter B on a green

background became the brewery’s easy-to-spot label. (See Exhibit 1 for the logo in use.) He

also advocated for a strong local positioning, saying “Brooklyn is recognizable the world over,

and somehow it fits with beer. Lay claim to Brooklyn.”5 Glaser continued to work with the

brewery for decades on design and branding. Hindy recounted, “The naming of beers and the

developing of packaging [labels] was basically Garrett [Oliver], and me, and Milton.”6

Although the founders put Brooklyn in the beer’s name, it was actually brewed in upstate New

York. F.X. Matt Brewing in Utica was hired to produce and bottle Brooklyn Lager on a contract

basis. This arrangement had a major benefit: it allowed Hindy and Potter to start selling beer

immediately. But it created challenges, too. Cases of beer had to be shipped 250 miles to the

Brooklyn warehouse. The brewing schedule for each batch of Brooklyn Lager was controlled

by F.X. Matt. There was also the awkward marketing issue: “One of the first PR problems that

we faced was the fact that we were not brewing Brooklyn Lager in Brooklyn, but upstate New

York,” said Hindy.7 “We overcame this problem by rooting our story in the history of brewing

in Brooklyn.”

Brooklyn Brewery: Setting the Course for Growth | Page 2

BY STEPHAN MEIER* AND DAN J. WANG†

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EXPANDING THE BUSINESS

Potter recalled that the Brewery “made tons of mistakes, like every small company would.”8

But with a growing list of beers, inventive marketing, prices on par with imports, and

unrelenting sales efforts, the firm’s sales grew. By 1993 sales were 11,000 barrels a year.9 In

1994 Hindy convinced expert brewmaster Garrett Oliver to join the firm. With the opening of

a small brewhouse in Williamsburg in 1996, using leased space, Brooklyn Brewery was able to

achieve two goals: they now actually produced some beer in Brooklyn and the new equipment

enabled Oliver to test different flavors and beer styles. He experimented with great flair,

winning Carlsberg’s Semper Ardens Award for brewing innovation and the James Beard

Foundation Award for culinary excellence.10

As the business grew, some hurdles were tougher to overcome than others. “We were slow to

realize the power of distribution,” Potter remarked. “It’s the least glamorous of what a

company like ours does. [But] it was the key to succeeding.”11 Mastering this function was

complicated by the US three-tier alcohol distribution system set up in 1933. As a result of an

amendment to the US Constitution, a firm could only operate in one area of the marketplace:

production (producing and packaging beer), distribution (warehousing and delivering beer),

or retail (selling to consumers on-premise in bars and restaurants or off-premise in stores).

This three-tier system was meant to prevent monopolies, increase competition, and provide

greater consumer choice. In some states, companies could only operate in one tier. But some

states allowed producers to distribute their own products and some allowed producers to

distribute and sell at retail. According to New York law, Brooklyn Brewery had to sell its beers

through a New York distributor. Direct consumer sales were allowed only in the brewery’s

local tasting room.

When the company looked for a regional distributor they could not find a partner. Regional

beer distributors were more interested in selling large-volume brands than small craft brews.

With big territories to cover, most distributors did not have the time, nor interest, to educate

bartenders and store owners on craft beer’s many styles and flavors. Rather than accept

second-class service, Brooklyn Brewery expanded into self-distribution. This type of business

was legal in New York State if a brewer set it up as a separate division. Brooklyn Brewery’s

team targeted upscale restaurants, bars, and stores in New York City, primarily Manhattan.

Soon other craft brewers and foreign beer importers asked them to distribute their beers there,

too. Hindy and Potter said yes. The distributor group grew so rapidly that its profits soon

surpassed the brewery. In 1995 the division expanded to Massachusetts and was named Craft

Brewers Guild. Eric and Robin Ottaway, sons of an investor, joined to run the distribution

division, now headquartered in Boston.12

TRANSITIONING TO THE NEXT PHASE OF GROWTH

In 2000 Brooklyn Brewery sold 30,000 barrels of its own beers while distributing 120,000

barrels for other craft brands.13 Hindy and Potter grew concerned about the imbalance. There

had been many benefits to running Craft Brewers Guild: their staff became extremely

knowledgeable about craft beers; new products were noticed quickly; consumer insights were

gleaned directly from retailers. But the company’s resources were stretched and selling

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BY STEPHAN MEIER* AND DAN J. WANG†

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competitors’ beers undermined Brooklyn Brewery’s market share. Hindy and Potter sold the

division in 2003. The $10 million from the sale was reinvested in the Williamsburg plant, new

IT, and a regional sales force.14

In 2004 Potter decided the time was right for him to leave and he sold his part of the firm (50

percent of the company’s voting shares) to the Ottaway family. Hindy sold his voting shares

to the Ottaways in 2010 and they assumed majority and full controlling ownership of Brooklyn

Brewery.15 Day-to-day management shifted to Eric and Robin Ottaway, while Hindy stayed

on as chairman and public spokesman.

The ownership transition was smooth, according to Eric Ottaway, with the 60-plus

employees16 remaining a happy, tight-knit group. As he explained “I think people like being

here.…We have very, very low turnover. We take good care of our people.…I think people

appreciate that.…that loyalty has come back and paid off many, many times.”

By 2014 the firm was listed among the top 10 US craft brewers, had $60 million and 260,000

barrels in sales, was sold in 26 states and exported to 20 countries. (See Exhibit 2 for top US

craft brewers and Exhibit 3 for Brooklyn Brewery sales.) Private ownership has continued to

make sense for Brooklyn Brewery. Eric Ottaway noted, “All the big players have approached

us…[but] it didn’t match what we thought was right for the company…There’s so much

growth ahead of us, why would I want to sell now?”17

The US Brewing Industry

The global beer industry earned $514.6 billion in 2013, a slight increase of 2.9% over the

previous the year. The US was the globe’s second largest beer market in terms of total beer

sales volume, but was 13th in per capita consumption. (See Exhibit 4 for countries ranked by

sales volume and Exhibit 5 for per capita consumption rankings.) Europe was the largest beer-

drinking region, with 37.4% of the world’s beer volume. European drinkers spent $192.6

billion in 2013 to enjoy their beers.18

PRODUCERS

A striking characteristic of the industry was the dominance of four breweries. The leader was

Belgium-based AB InBev, which sold 20% of the world’s beer. SABMiller was next with a 12%

global share, followed by Heineken NV at 9.2%, and Carlsberg A/S at 5.7%. Industry analysts

had long noted a decline in the number of macro brewer firms. (See Exhibit 6 for the decline

in macro brewers and related rise in industry concentration.) The market shares enjoyed by

the top four came about primarily through mergers and acquisitions, not organic growth.

These four brewers used their market dominance to lock in long-term commodity price deals,

secure top ad placements, and efficiently spread operations across multiple sites to minimize

transport costs. (See Exhibit 7 for the top firms’ production capabilities.)

In the US in 2014 there were over 3,400 breweries making beer, but many were quite small,

producing less than 1,000 barrels a year.19 (See Exhibit 8 for the US brewery count by size.)

Some believe this proliferation of craft breweries had its roots in a 1978 bill eliminating excise

Brooklyn Brewery: Setting the Course for Growth | Page 4

BY STEPHAN MEIER* AND DAN J. WANG†

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taxes for home brewers.20 As home breweries experimented with craft, consumer preferences

began to change—leading to the launch of craft breweries. As consumer preferences and the

composition of the industry changed, several distinct tiers of US beer producers emerged:

 Major industrial firms. The top two global breweries dominated US beer sales. The largest firm, AB InBev, controlled 50.4% of US beer volume in 2013. MillerCoors

controlled nearly one-third, garnering 29% of US market share.21

 Second-tier domestic producers. Independent private breweries and regional producers also captured a portion of US sales, together accounting for a nearly 10%

share.

 Import companies. Corona was the US top-selling imported beer, with $1.3 billion and 41 million cases sold in 2013. Heineken was the next largest, with 2013 sales of over

$670 million. Constellation Brands imported leading global beers such as Corona,

Modelo, and Tsingtao.22 Diageo imported Guinness, Red Stripe, Harp Lager, and other

brands. 23

 Craft breweries. American craft beer producers were identified by three factors: size (annual production of six million barrels or less), independence (no more than 25%

owned by a larger non-craft beer alcohol beverage company) and ingredients (majority

of beer’s flavor derived from traditional or innovative brewing ingredients). 24 The

number of new microbreweries launched in the US had recently soared. (See Exhibit 9

for yearly growth of US craft brewers.) In 2014 craft beer sales were 21.8 million

barrels.25 Total dollar sales hit $19.6 billion, up 22% from 2013. Craft brewers were the

only beer producers to experience annual double-digit growth.

CONSUMERS

In 2013 two-thirds of US adults consumed alcohol. Among those, 41% preferred beer versus

31% wine and 23% spirits.26 Yet, while beer was a clear favorite, the market had been in a

decades-long decline since 1994, when nearly half of Americans preferred beer. The amount

consumed had been dropping, too. United States’ beer per capita consumption declined from

25 gallons in 1981 to 20 gallons in 2012.27 Forecasts to 2018 predicted a drop of -0.3% CAGR as

consumption slowly declined.28

In terms of taste preferences, half the beer Americans consumed was light beer, 100 million

barrels in 2014. (See Exhibit 10 for top US beer brands based on volume.) Bud Light topped the

list of individual brands, selling 295 million cases for nearly $6 billion in 2014.29 But its flavor

was rated “awful” by BeerAdvocate, an independent grassroots community of beer drinkers

and beer professionals. The tastiest beer among the top 20 sellers was Yuengling Lager, an

historic beer from a Pennsylvania regional brewer.30

Although volumes were declining, US consumers were still spending a lot on beer, paying

$101.5 billion in 2014, up nearly 1% from 2013 spending.31 The slight rise in dollar spending

was a result of many beer drinkers trading up to better–and higher priced–brews. Twenty five

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percent of beer volume and 35% of dollars spent on beer were attributed to consumer

purchases in the high-end beer segments.32

MANUFACTURING PROCESS & COSTS

Startup costs for a new brewery were low, depending on the owner’s decisions on how to

operate the business. First, the firm had to decide whether to build a plant, get new or used

equipment, or use a “contract arrangement” to rent another brewery’s excess capacity. Second,

raw materials were needed. Water was available for a small charge, depending on location.

Although grain and hops were relatively inexpensive for small quantities, the quantities

needed were huge. Malt prices averaged 40 cents to 50 cents per pound.33 Hops usually cost

$4-$6 a pound, though some special varieties neared $20.34 Third, the firm decided on a beer

recipe. The amount of malt controlled alcohol content, color, and sweetness. Hops effected

bitterness and aroma. Yeast varieties determined whether ales or lagers were produced. By

adding other ingredients, altering brew times, and adjusting temperatures, one brewhouse

could produce many beers. Packaging costs (bottles, cans, kegs), warehousing, shipping, and

taxes varied by volume produced.

Video Insight: Click here for a tour of the Williamsburg plant, led by Brewmaster Oliver, to

understand the beer production process. See also Appendix 1.

Brewers managed the manufacturing process closely to maximize efficiency. Product loss

could occur when liquids transferred between vessels or if something went amiss and a batch

had to be discarded. Losses varied by facility, near 15%-20% in older plants and 5% in newer

breweries.35 There were some economies of scale in brewing, from production to bottling. (See

Exhibit 11 for estimated minimum efficiency scale (MES).) Jimmy Valm, Brooklyn Brewery’s

production manager noted that recipes made for a 25-barrel system, when scaled up to brew

in a larger plant, used only 85% more hops and yeast to brew 100% more beer, preserving the

same flavor. However, there were no such economies of scale for malted barley.36

Determining the right amount to brew was a delicate calculation. Brewers wanted their

product to be fresh when it reached consumers. If beer sat in a warehouse it could potentially

be exposed to heat and light, which eroded flavors. Brewing beer in the optimal quantity, so it

was fresh when bought, required constant process adjustments and fine-tuning.

In general, beer manufacturers enjoyed sizeable margins. Both large and smaller brewers

reported earning substantial gross profits and regularly made double-digit returns. But the

scale of industrial manufacturers allowed them to typically outperform smaller brewers on

most key financials measures. (See Exhibit 12 for a comparison of key financials of industrial

brewer AB InBev versus craft brewer Boston Beer Company.)

DISTRIBUTORS

The role of American beer distributors was to manage beer inventories, deliver beer in cans,

bottles or kegs to bars, restaurants, and retailers, stock shelves, set up promotion materials,

and collect taxes. Almost every state required breweries to sign an exclusive contract with a

single distributor. This gave the distributor virtual carte blanche to decide how a brewer’s beer

Brooklyn Brewery: Setting the Course for Growth | Page 6

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