Canadian closures (A)

Richard ivay School of Business The University of Western Ontario

9B00M019

CANADIAN CLOSURES (A)

Davin Li prepared this case under tl,e superjision of Professor Louis Hébetí solefy fo provide mate'lel fo, cless discussion. The authors do not inicad fo illusirate ellhereffeotive orineffective handling of a menegerial situation. The autbom mes, hat,e disguised cedein nemes end otheridenüfying informetion jo protect confidentiality.

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Qn April 9, 19931 Bernard Kayvon, general manager ((3M) of Canadian Closures liad just arrived in his Mississauga office when bis telephone rang. It was Toro Brockner, bis manufacturing manager: "fm afraíd we have a prob]em. There's sometbing wrcing with the laequer en the crowns produced during the last shift. We don't know what's wrong, but they didn't pass the copper sulphate test - " Kayvon exclaimed: 'flat shipment's worth over $500000 .2' His response met with silence. "Put a hoid en the entire shipment, III get back te you."

Afier puttmg down the phone, he siumped into his cliair. He had been hired Mo montEs earlier te head this bottlecap (crown) producing joint venture between Johnson & Gil)' Pie and Macklin, ono of Canada's leading brewers. Bis mandate was fo solve custoiner complaints, improve qualily, and lead the company toward profitabiity. Thejoint venture's only client Macklin Breweries, was becoming impatient with di e constant batrage of quality problems at thefr plants, for which they were blaming Canadian Closures' crowns. Already, 75 nilIlion crowns had been rejeeted and they wanted tobe reirnbursed. On top of these probiems, dio relationship between fue partirnr finns was also becoming increasingly tense. In spite of it aH, Bernard knew that he had todo wbat was best for Canadian Closures.

THE CANADIAN BEER INDUSTRY

The brewing jndustry had been a significant part of Canada's economy. lii 1993, it contributed $10 billion te the ec000iny, approximately 1.5 por cent of the Canadian gross national produci. The 1993 television advertising expenditures made by the largest breweries were estimated at $100 million. Furthermore, the industry employed, either directly or indirectly, 179,929 people or 1.3 per cent of working Canadians. The Canadian beer industry consisted of two major companies, a score of smailer regional breweries, wad several mierobreweries. The txvo largest players were Labatt and Molson, which accounted for about 90 per cent of al] Canadian beer sales. The remaining 10 per cent belonged fo regional and microbreweries, and te even lesser extent fo imports.

When cmwns (or boftlecaps) do not pass the copper sulfate tesf, seal efticacy tannot be gueranteed, end theta is e high ikelíhcod of corrosion orrust formetíon on the interior of fha crnwn.

share percentage point gained contributed $10 million in operating profits. For this reason, the competition for market share was intense. Every attempt in differentiating through price, advertising, marketing, product line or packaging type was quickly copied throughout the industry. However, a first mover advantage could result in a significant increase in market share, making rapid differentiation a vital key to success.

Government Regulations

Due to federal and provincial government interventions, the Canadian brewing industry evolved as several regionally based markets. Regulations discouraging the sale of beer produced in other provinces included the application of provincial import duties on beers produced outside of the province. To avoid losing significant market share, national brewers were compelled to build breweries within each province. These same regulations also kept regional breweries such as Moosehead of New Brunswick from expanding outside their home provinces. Because provincial governments required all breweries to set up provincial plants, none of the Canadian breweries could achieve economies of scale. It was estimated that a brewery needed the capacity to produce approximately four million to five million hectolitres3 of beer annually in order to minimize its costs.4 In comparison, the average size of a brewery in Canada produced only 1.24 million hectolitres.5 The provincial governments also heavily regulated the beer distribution system. However, each province was different. In Ontario and most other provinces, breweries could sell through their own private retail stores and government-run outlets. In Quebec and Newfoundland, beer was sold in corner grocery stores.

The federal and provincial governments also influenced, the price of beer by levying taxes that were equivalent to 53 per cent of the retail price paid by the end-consumers. These beer taxes had increased 222 per cent since 1980. High Canadian barley prices also led to higher Canadian cost structures. A study estimated that Canadian beer drinkers would save $50 million annually if the government allowed domestic brewers to buy malt on the open market. Canadian brewers were forced to buy their barley malt from the Canadian Wheat Board at set prices. Foreign competition, such as U.S. breweries, had a huge cost advantage because the higher priced barley acted like an extra tax.

U.S. Imports

Another factor that influenced the long-term viability of the Canadian brewing industry was the threat of cheaper American imports. American imports enjoyed lower cost structures because of larger cost- minimizing breweries and lower priced barley. To illustrate, only one of the largest plants in the United States could have supplied all of the beer consumption in Canada. Because of these considerations, the government placed heavy tariffs on imported beer so Canadian products were competitively priced. Whether these tariffs would exist in the future was still under debate.

Packaging System

The Canadian brewing industry evolved in a way that favored more costly packaging, resulting in higher cost structures. Returnable glass bottles comprised about 81

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