Kingfisher Beer Company (KBC) has enjoyed being in top position in premium beer segment for the past fifty years and is now facing a potentially identity–changing challenge: the traditional premium beer market has been declining due to changes in consumer preferences at a compound annual rate of 4% and KBC for the first time is experiencing a decline in revenue, whilst a change in leadership infuses new energy to bring a change in their product line.
Jake Hope, son of the retired president and owner of KBC faces the challenge of whether to introduce a ‘light’ beer in a growing beer segment, as maintaining status-quo would no more be an option to sustain their existing position in marketplace in the next few years (see Exhibit 2).
I recommend that Jake would go for the light beer product venture. The recommendation is based on a complex assessment of the company’s financial viability and of more qualitative reflections.
Even if for the year 2007 (the case is restrictive for only a 2-year horizon quantitative analysis) projected Operating Margin does not reach levels KBC had enjoyed in prior years, it is positive and growing substantially. Growth from $599,734 to $2,205,235 ($1,605,601 in absolute growth) from 2006 to 2007 with introduction of Light Beer versus of decline from $4,015,024 to $3,414,586 ($600,438 in absolute decline).
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If KBC will manage to reduce its lost sales of famous Lager (due to market conditions in the premium beer market) from 20% to slightly lower levels then the company could break-even in 2 years (Exhibit 1).
From the case’s limited data it is still certain that introducing Light Beer and managing relatively moderate levels of cannibalization (20% or below – Exhibit 3) of the Lager sales opens opportunities to increase the firm’s financials. Moreover, it is essential to capitalize on growing light beer market (4% annually) which also will help fuel possible future expansion or to retain sustainability.
According to market research, targeted segment where light beer drinking segment holds “anti-big-business” values, is already aware of the KBC brand so the firm can leverage on being independent family owned small regional company. In addition, the introduction of a new product will eliminate the risk of being on a single product brand and reduce risk of being in an unfavorable position with regards to distributors who favor more product offerings. On the other hand the introduction of the light beer will affect the brand image, alienate core customers, and squeeze margins.
In addition, it is most likely the Company will not be able to sustain advertising and distribution cost against bigger competitors (high entry barrier, competitors strong presence in light beer market).
This will lead also to additional unwanted cannibalization of Lager sales and more uneven relationships with distributors and retailers. My recommendation rests on several assumptions (exhibit).
The key assumption is that the KBC will attain the 0. 25 market share to break even in 2007. Another assumption is that the light beer market will sustain its growth and consumer preferences will hold in the nearest future.
