QUESTION

Propose best solution, justification and its implementation plan (400 words approx.)

CASE STUDY

Introduction

Osmar Buzin, the business partner, was in the restaurant attached to the plant, where he was contacting potential distributors of their beer. Nois success had exceeded expectations, and he was thinking of alternatives so that the distribution activity would not become extremely demanding for the company. He feared, however, that distributors would jeopardize the distinctive brand positioning and family values of craft beer offered by Noi.

PAGE 2

Osmar was valued for operating his business profitably and without losing quality in the service. One of his concerns, no doubt, was the beverage supply. With eight restaurants, the groups bargaining power over distributors and beverage manufactures was superior to that of a single restaurant. However, complicated trading with a major beverage manufactures had changed the direction of their business.

This new scenario, and an old dream of owning his own brand of craft beer, aroused Osmars idea of opening his own brewery. He thought that his great experience in the restaurant industry could help him understand the dynamics of the market. He also relied on the fact that his chain of restaurants would likely offer him a sufficient initial customer base to open a small operation. The difficult decision to invest in a different business was encouraged by his family, who believed in the new idea and supported Osmars entrepreneurial spirit as customary.

Osmar then began his search for investor partners to open the venture. Through professional contacts, he met brewmaster Gilmar Gutbrodt, who in 2010 had left the small brewery Dado Bier, right after it ceased operations that year. The brewmaster seemed the ideal partner, counting on a long trajectory in the industry, after 18 years of experience in a large industrial brewery and 12 years in Dado Bier. During this period, Gilmar was a brewmaster, leading a team of 400 people. Enthusiastic about beer, Gilmar accepted Omars proposal contract as brewmaster, becoming his partner in the company.

In June 2011, after an investment of seven million reais (around $4.6m), the brewery plant, with a capacity for 28,000 liters per month, was launched in Itaipu district, Niteri. Next to it was built a restaurant with a beautiful view of the production tanks area there the customers could enjoy the beer and its craft manufacture while having a good meal (see Exhibit 1 Figure E1).

Beer market in Brazil

The Brazilian special beer market

Historically, Brazilians are consumers of low-priced Pilsen-type beers, such as those produced by the four largest competitors in the domestic market. However, consumers have been increasingly open to imported or craft beers, the so-called special beers. According to Adalberto Viviani, a consultant who is specialized in the food and beverage market, explained that higher end consumers want exclusivity and have begun to migrate to differentiated products, which has justified the growth of this class of products. In the consultants view, special beer was much closer to wine in terms of status and therefore pleased more consumers. The consequences of this consumption migration were directly reflected in the industry data (Tuon, 2012).

The special labels segment represented, in 2013, 2.2 per cent of the national market (including imported and craft beers), with an above-average growth, having doubled each year since 2010 (Zaccaro and Xavier, 2012). Craft products, in turn, accounted for only 0.15 per cent of national production in the same year; however, industry entrepreneurs projected a growth of thirteen times for this niche of beers in the next decade (Barboza, 2013).

By 2013, the strengthening of the new consumer habit was already visible on supermarket shelves. In higher end supermarket chains, special beers already occupied more than 50 per cent of the space dedicated to this type of drink, with prices that could reach three times the average price of nationally produced pilsen beers.

For Gilmar, the future of special beers was promising and would be driven by the development of this habit in young consumers:

A lot of people have not tried craft beer, but after tasting it, they never go back to the beer they used to buy in the market anymore. There are a lot of people who say they are loyal to a brand and like to drink Pilsen beer. For them, beer has to be that one. But young people are adopting the culture of craft beer and they are the main target.

PAGE 4

The Noi brewery

As soon as it started operations in June 2011, Noi offered only barrel beers in three varieties Noi Bionda (Pilsen), Noi Bionda Oro (Pilsen Premium) and Noi Nera (Schwarzbier) with formulas created by the brewmaster himself, Gilmar Gutbrodt. The beginning of production focused on draft beer barrel, as, according to the businessmen, this was the most profitable way to work, because the margins were high, the selling price was high and the machinery needed for production was more basic than that required to produce beer in glass bottles.

Osmars restaurants were the first customers of Nois barrels, but soon other establishments in the region started to buy the draft beer because of its initial success. Besides, Noi began to launch branded bars in Niteri. The company also created a service for rental and delivery of beer coolers. This service gave the individual consumer the option of buying 30 or 50 liter barrels of traditional or special beer and could jointly rent a typical electric beer-cooler for important events. If the customer needed a larger amount for a major event, Noi also offered a car that included up to four 50-liter barrels with a bartender present to serve the draft during the event.

Growth continued in 2012. The capacity of the operation was expanded to 40,000 liters per month and three more beer flavors were launched: Noi Avena (Belgian Pale Ale), Noi Bianca (Weiss) and Noi Rossa (Irish Red Ale). Even more important was the introduction of the 600 ml bottles in the companys product portfolio (Exhibit 1 Figure E2). According to the brewmaster, this second stage of the business was more complex because, unlike barrel beer, bottled beer required an investment in machinery for the pasteurization, packaging and labeling processes. But even despite this challenge, the partners started production by manually labeling the bottles.

The decision for the 600 ml bottles, typically used by small breweries, was intended to assist in brand expansion not only in bars and restaurants but also in more sophisticated beverage and specialty stores. The bottles were more easily inserted in the points of sale because they did not need machinery to be served and were not usually tied to exclusivity contracts, as is the case with draft beer. In addition to the barrel and glass bottles, still at the end of 2012, Noi has launched a super premium line of growlers, ceramic bottles with lids that carry up to two liters of draft beer. The difference of this product was the sophisticated container, which was refillable.

In 2013, another type of beer, Noi Amara (Imperial India Pale Ale), entered circulation. This time it was made in partnership with Leonardo Botto, a famous brewer in the region of Rio de Janeiro. The tank capacity was again expanded to 70,000 liters per month, but according to Gilmar, the rest of the structure (filtration, packaging, labeling) was not always able to keep up with production.

The Noi beers, in their first years of existence, was recognized at the market. Mainly responsible for the sales success was the identification that the local consumers created with the brand. The idea of drinking a high-quality artisan beer made in their city and carrying the family history of Osmar, a well-known figure in the region, pleased consumers. Due to this, the advertising of the products was made by the customers themselves, who had a fondness for the beer of the city.

The recognition materialized with the frequent presence of Noi in the lists of awards of best beers. In 2013, Noi Nera won a gold medal in its category at Mondial de la Bire, an international craft beer event that took place in November in Rio de Janeiro. Still, Noi Rossa and Avena won silver medals and Noi Bianca received a bronze medal in their categories at the Brazilian Beer Festival in Blumenau-SC. Members state that these awards have had a very positive impact on the reputation and growth of the brewery, while allowing them to select well which customers they could sell to considering the brand positioning characteristics and customer disposition in properly following price policies. Not coincidentally, it was very difficult to find Noi products in supermarkets. According to Osmar, a famous supermarket chain in Rio had already approached for him, but three main reasons prevented him from selling to it:

I buy the raw material in cash, they want to pay everything in thirty, sixty, ninety days (credit). They want a low price, but I cannot sell for this price because my costs are very high. And I do not want to put all the eggs in one basket alone - they will buy up much of my production capacity. It is not time for this step, it is better to put the product in small points of sale, if one store stops buying than I will look for another one.

The differentiated positioning of the beer and the premiums conquered by the quality of the drinks made Noi stand out even more, becoming one of the beer brands chosen to be served in the restaurants of Copacabana Palace, one of the most traditional and sophisticated hotels in Rio de Janeiro. Osmar recalls one episode:

In a regular month, Noi sells approximately 30,000 liters, divided between the two main products, beer bottles and draft beer. Pottery vessels had a negligible share of sales volume and revenue. The approximate volume sold in bottles was 5,400 liters, the beer sold in barrels for bars and restaurants was 19,500 liters and the volume sold through the delivery service was 5,100 liters. In terms of revenue, draft barrels for bars and restaurants accounted for 57 per cent of sales; bottles of beer accounted for 26 per cent; barrels for delivery accounted for 17 per cent. Noi sought to sell as an equal price for all its customers, charging only the freight, negotiated on time in the case of establishments outside the city of Niteri. The average price of a 600-milliliter beer bottle was around R$8.00, and the 50-liter barrel the best-seller costs R$425. These prices were practiced for bars, restaurants, specialty shops and delicatessens. The purchase of draft beer through delivery cost approximately 20 per cent more than the price for bars and restaurants. The result used to be very satisfactory for establishments that sell national beers. In the case of Noi, for example, the mark-up practiced by customers could reach 100 per cent on beer bottles and almost 190 per cent on barrel (Exhibit 1 Table EI), depending on the selling price of the draft beer adopted by the bar.

The distribution channels

Since its beginning until the second half of 2013, Noi did not have the participation of distributors or wholesales to distribute its products to make the contact with the bars, restaurants and stores, as well as to transport the barrels and bottles of beer to the establishments in Niteri and surroundings. Sales to the city of Rio de Janeiro (30km away from the Noi plant) were occasional, with a freight value negotiated on time. All deliveries were made using the brewerys own structure, which consisted of two vehicles and two salesmen.

Sales of draft beer was going well, but the bottles because of their easy transportation, storage and long shelf life were the ideal product for brand strengthening, increasing customer numbers and geographical expansion. For those already buying from Noi, to include bottles on order was not difficult, but reaching new customers left the current

PAGE 5

channel strategy very costly for the company. It was Osmar who personally handled the prospect of potential buyers.

As Noi became more renowned, Osmar Buzin received more and more purchase orders. Over time, however, it was not only the owners of bars and restaurants that were going to the plant but also distributors who wanted to become distributors of the company in regions where Noi was not sold yet. The business partners saw that this could be an opportunity to expand the company geographically without bearing the logistical costs of this strategy.

Osmar was beginning to consider a new distribution strategy. The initial idea was that Noi would continue to be responsible for the sale of draft barrels and would also sell beer bottles to customers who bought barrels, as the same transport would be used. For the beer bottle sales, however, the distributors could be responsible for picking up the product at the Noi plant, and selling and delivering them to bars, restaurants and specialty stores. Eventually, the distributor could also sell barrels if they ensured the sale quality. The profit to the distributor would be the 15 per cent discount on the purchase of all products.

Nois future

Noi was successful with its customers in general and, even more, with experts and lovers of craft beer. The partners believed that the growth potential for specialty beer, like Noi, was very large. However, for new investments in the plant to be made, it would be interesting to increase the brewerys sales threshold. The capacity of the tanks was 70,000 liters with the potential of reaching 100,000, which they considered as the ideal for the return of investment and generation of profit. It would be necessary to invest to increase the capacity of other equipment.

In the restaurant attached to the plant, the discussion between the partners began with the presentation of some possible distributors who contacted Osmar. These new distributors would cover large areas hardly served by Nois structure, including some country cities in the state of Rio de Janeiro. In addition, three other partners were interested in distributing the product in the city of Rio de Janeiro, the largest and most promising consumer market near the Noi brewery.

The two seemed to agree that partnerships with distributors could leverage the sale of beer bottles, increasing the capillarity and coverage of the distribution. This would generate more brand exposure at points of sale; more people would meet Noi and demand would consequently increase, ensuring reinvestments at the plant.

When lunch time arrived, Bianca Buzin, Osmars daughter and General Director of the brewery, sat down with her father and Gilmar at the restaurant table. Bianca asked about what they were talking about and her father commented on the distributors interested in selling the beer in unexplored places by Noi, including the city of Rio. Bianca was excited by the idea, but then questioned the two:

Osmar knew that Biancas doubt was pertinent, and it weighed him down. He needed to take all these issues into account to decide on the best expansion model at that time. He knew that decision had to be made soon, at the risk of missing the bus.