Redhook Ale Loan Proposal

Redhook Ale Brewery

Loan Proposal To

U.S Bank of Washington

By:

Hanna Tirto, Li Tai , Wei Huang, Yue Hou

Redhook Business and Financial Conditions -

Strengths and Weaknesses in supporting the proposed loans

Timeline    

The three stages of company development  

Stage 1 The Redhook Ale Brewery was founded in Seattle in 1981. It showed a strong increasing power since 1984 with an rate of 53% per year. After eight years operations, the company has successfully accounted for 50% of the market shares in Pacific Northwest. From 1982 to 1984, the company launched Redhook Ale, Blackhook boon, Ballard Bitter which got a very good market response. As we can see in the Exhibit 2, the company used 3 years to turn the net income to a positive number, and showed a steady growth capability.

Stage 2  Redhook’s profit increased more than double during 1986 and 1987, but they soon found that the previous productivity has been unable to meet consumer demand. As a result, in 1988 the Redhook company decided to move to Fremont Car Barn. This site could not only keep the company in the middle of the community, but also have an access to the 26,000-square-foot car barn building for expanding the brewing capacity.

At the same time, they made the first loan（SBA, 10 years） to build the most advanced technology at the new company site. The income of the company decreased since 1988 due to the expansion and the related costs and interests.

 Stage 3 Because of the successful business strategy and the increasing profitability, in the early 1990s, the Redhook Ale Brewery felt they were in an excellent period of development, and they need a significant expansion in both capacity and product line. The core plan is to expand its business to the Bay area of north California to exploit a more expensive lager-beer market for higher yields. Base on a extensive market analysis the company plan to build a third brewery in the Puget sound region of western Washington to allow the company to compete with the high-price foreign brands. For this second time expansion, they need another outside financing in significant amount.  The Redhook company also did a projected income statement which predicted the expansion would obtain a great commercial success in the next four years (Exhibit 3), which could increase the income by about 14 times.

  The strengths of the company

1. The change of the Industrial environment

        There are two factors in the market environment which could in favor of the Redhook company’s further expansion. The first on is the market are more favorable for microbreweries. In 19th century America, because of the Prohibition era, the market is dominated by a small number of large-volume, cost-efficient firms. But later in 20th century, there were signs showed that microbreweries will have chance to re-emerge .

        The second factor is that compare to the import which has some adverse effects, the local market has great development prospects in many aspects to provide local high-quality taste products.

2. Accurate market positioning

        The Redhook Ale Brewery’s market positioning is very accurate, they noticed that their consumers are demanding high-quality taste products in the European tradition.

They compete with the foreign company and the local firms, but they also chose a 110-year German company “Anton Steinecker Maschinenfabrik GmbH” to design and build brewing equipment for the new company site--the old Fremont car barn. These action not only expanded the brewing capacity, but also could help Redhook become the most technically advanced craft brewery in North America.

        They also consider to develop new markets with a great market capacity for the larger beer or the high-price section. This market capacity will be the most important source for the future growth and the expansion of the Company’s operations. Actually, they estimated the larger beer will have a huge sales of $25 million with a leading lager-beer, but this far less than the the estimated market size, which is approximately $145 million in Northwest and $1 billion in California

3. Advertisement and distribution strategy

The company’s products were not advertised its emphasized point-of-purchase displays and publicity, in other words, word of mouth was the most important source. Also the company only worked with small group. it owned four-person distribution team which can keep deep in touch with the local market, and keep the top-quality service for its retail licenses. It can deliver the fresh beer within a half hour, and only align with strongest distributors for outside area delivery. They also applied a sophisticated computer system which allows raw materials to be purchased on just-in-time basis accurately. The long-standing relationships with its also prevent the company from production interruption.

The weakness of the company

Even though with the bright prospect, the Redhook company still need to consider repay the SBA-guaranteed loan which carried a prime with 2% and restricted ability to take more indebtedness. The Redhook company needs to find the cheaper and less restrictive source of financial institution. Also, the company needed significant amount to invest in property, plant and equipment and largely increasing the production amount, which means it would have a bad future cash flow. Redhook need sufficient cash to support its operating, so they must find financing sources more proactively.  The company must prove the new product of lager beer can be produce and distribute successfully, in order to shows that the company has a good creditworthiness for the debt funding.

...