Options Evaluation: Profitability of Brewing Company Startup

The candidate should recognize that a quantitative comparison between the options is needed to make a recommendation. 

The following information can be shared if asked

• Time value of money can be ignored - the case should not turn into a DCF evaluation
• A split between fixed and variable costs does not have to be considered - fully loaded cost in Exhibit 5 are sufficient for this exercise
• Details on a demand plan or how fast breweries typically grow are not provided - the candidate will have to make assumptions
• Demand can be considered on the holistic US level - a regional breakdown does not have to be considered

The candidate should be able to provide some quantitative context to why one option is preferential to another.  

Some of the potential analysis:

1.Minimum volume to make a profit: candidates should use Exhibit 5 to confirm that the brewery needs to produce at least 60,000 barrels before ABC makes a profit on a barrel. Any assumption, therefore, of ABC going it alone and selling fewer than 60,000 barrels per year is unreasonable

2.Breakeven between selling the plant to JBI and partnering with BBC (ignoring time value of money) = USD (3.0m – 0.5m) / ((USD 225/barrel - $190 / barrel)/2) = 143,000 barrels.  
If ABC produces volumes within the small brewery range but partners with BBC (leveraging their baseload to produce at a lower cost) it should take about 5-6 years to achieve the cumulative sales volume to reach USD 3m in profit (which JBI would pay right away). Good candidates should see that if the goal of ABC was to be a microbrewery, they should sell

3.Breakeven between partnering with BBC and going it alone hinges on the fact that with BBC each barrel is profitable but that 50% of the profit goes to BBC.  BBC will also pay USD 500k up front.  On an annual basis, ABC must be able to produce over 60,000 barrels. Over 60,000 barrels would put ABC in the top 3.5% of breweries in the country.  With any reasonable ramp-up in production assumptions it becomes clear that partnering with BBC will be a preferred option unless ABC is confident it can get to at least 75-100k barrels per year.  

Sample calculations (not necessary for the candidate to have performed) are shown in the screenshots

Candidates should explore the sensitivities around their proposed option and discuss respective implications

Potential sensitivities impacting the recommendation could be:

• Change in the production volume ramp-up – if ABC were to struggle with their volume plan, breakeven and subsequent profitability would take longer to achieve (ABC only has 4 years of financial runway)
• Market penetration poses a challenge – ABC might be able to produce the required volumes from an operational standpoint but they cannot sell that amount of beer given that they are a new market entrant trying to compete with established medium-sized players
• Fluctuations in raw material and energy cost – the key cost drivers for beer are water, barley, hops and electricity. A change in prices could impact ABC’s cost curve making production more costly. In that case, selling the business might become more attractive
• ABC manages to re-negotiate offer terms with JBI – if Alistair were able to sell ABC for more than USD 3m, it would take longer to break even in the partnership and standalone scenarios