Molson Canada

Source: Exec Digital Canada

Date :07/08/2007 14:43:02

Daniel Pelland explains to Exec Canada why Molson Canada has moved aggressively to cut costs and to maintain innovation with its products.

Written and produced by Andrea Orr & Jason Wright

The person who holds the title of chief brewing officer would seem to be in for a lot of fun on the job, and Daniel Pelland, who holds that role at Molson Canada, certainly has a good time helping develop different brews to serve a multitude of high-end and price-conscious beer drinkers.

However, with very tight competition in the beer market, there is a real challenge to driving customers toward a particular brand and making sure your product is better than anybody else’s, while keeping prices affordable. For Pelland, his focus is on producing a superior product in as cost efficient manner as possible, which contributes to the company’s overall goal of selling more beer to more people within the current state of the market.

Molson Canada, a division of Molson Inc. – which built Canada’s first brewery in Montreal in 1786 and today operates six breweries across the country – has an edge as it is largely perceived as Canada’s beer.

Further, two years ago Molson merged with Adolph Coors Co. to create Molson Coors Brewing Co., the world’s sixth largest brewer. Molson Canada is the Canadian business unit of this newly created entity.

“Beer has long been very profitable, and it still is,” notes Pelland. “However, it is also a very competitive market.”

He says that Molson Canada has a history of regularly achieving strong growth, which has been aided by a number of cost-cutting and efficiency initiatives. For example, western Canada has a stronger preference for canned beer as opposed to bottled beer, so the relevant bottling lines in the western part of the country focus on producing beer in cans, though not exclusively. In this way, the company has used similar initiatives to optimize its brewing network to achieve greater efficiencies.

But even before Pelland took over as chief brewing officer two years ago, he understood the industry was changing. With major North American brewers facing increased competition from an increasingly consolidated market, the company was forced to further improve its cost-cutting strategies to ensure it remained competitive in the marketplace.

Starting in 2002, Pelland was part of a team to study the company’s cost structure and try to extract greater savings. A couple of years ago, Pelland was promoted to lead this team.

The team worked to systematically analyze six key metrics. They included utility costs (such as gas, electricity and water required to run the plant), packaging costs, maintenance costs, waste management, basic brewing costs, and work force costs.

As part of the team’s work, Molson Canada initiated a serious benchmarking study to learn from the best practices of a number of breweries from around the world. What Pelland’s team discovered, is the company still had considerable space for improvement on its cost cutting initiatives.

Utility costs, for example, were a staggering 60 percent higher than best in class rates in Europe, where breweries had already initiated strategies to cut their energy usage and costs. In Europe, he says, utilities had been a significant concern for breweries for a long period of time, but had not been as large of an issue for North American breweries until recently. For Molson Canada, 2002 marked a watershed year as far as increasing its focus on running a far more energy-efficient operation.

Further, results from the other categories the company studied showed more areas that could be improved. Maintenance costs were running approximately $5 per hectoliter (a standard beer industry measure which equates to 1.17 barrels), compared with an industry average of $3.

Cost cutting initiatives were either intensified or new ones begun, but sometimes these efforts faced a strong headwind.

“Molson’s Canadian business was very profitable,” says Pelland. “The Canadian beer market is one of the most profitable beer businesses in the world. We were improving year over year, but our costs were also going up. Inflation acted to mitigate many of our cost savings efforts.”

In the past, Molson had responded to higher costs by increasing its prices as well as working to cut costs. But with the beer industry maturing and Molson’s market share holding relatively steady, as chief brewing officer, Pelland wanted to see the company increase its ability to innovate on its products, analyze new trends, and add to the company’s brand portfolio.

Working within his purview, Pelland was able to develop strategies that acted on the above initiatives, as well as help the company cut costs through making operations more efficient.

It has been four years and counting since his team started its work studying the company’s cost structure, and Pelland says it has made progress cutting costs in all categories. Many of these cost cuts were as simple as paying attention and implementing basic changes such as turning off lights or shutting down machines at the end of the day, or installing meters to track power consumption.

However, the bulk of cuts came about through more aggressive general productivity improvements on the company’s production lines.

“To date, the company’s utility costs have come down between 10 percent and 15 percent,” says Pelland. “About 60 percent of that reduction came just from making sure people were aware of the issues and changing their work habits. It was a matter of getting in the right mindset.”

On the productivity side, the improvements that were made enabled the company over a period of time to produce as much, and as well with 80 less people. This does not mean the company laid these people off; most of them were reoriented to other jobs on the production lines.

Addressing the company’s cost structure is an ongoing process, but as the company has managed to bring costs down by approximately $10 million per year since 2002, Pelland says he can spend more of his time on the fun part of the job: studying all the traditional and new flavors of beer and helping develop new brews to match customer tastes.

The good news, he discovered, is that although the beer industry is maturing, beer consumption continues to grow modestly. In addition, consumer tastes are evolving in a manner that presents new opportunities to compete in some fast-growing niches of the beer business. More expensive beers, what the industry calls super- premium brands, are growing in popularity as are very light beers. Within both those product seg-ments, there are a host of different flavors and styles of beer.

From seeing its popular Molson Canadian brand’s growth remain relatively flat, Molson understands that the best way to address today’s increasingly segmented beer market is to offer beer drinkers more choices. Today the company offers more than 70 different brands of beer in Canada alone, from Rickard’s Original White on the high end, to Creemore Springs, as well as staples such as Molson Export. Most of the new brands it introduces, however, are in the super-premium segment, which it has identified as the best source for future growth.

As Molson reduced its costs and got more aggressive about new beer development, the final step toward building up its business was to add to its marketing efforts through innovation. “We had to reinvent the appeal of beer,” explains Pelland, who says the company has developed some fun and innovative ideas to help its beers stand out from the crowd.

One of these is its Sub-Zero concept, in which it offers a draft tap for bars and restaurants that cools the beer to just below zero degrees Celsius, or the equivalent of 32 degrees Fahrenheit. Because beer has a lower freezing point than water, it can be served in liquid form at a colder temperature: it’s cold, but it’s not ice.

Pelland says that the tap has been extremely popular across Canada and is used for Molson Canadian, Coors Light, Molson Dry and Molson Export, among others.

Under the umbrella of Molson Coors, the company has been able to achieve its cost cutting goals and is on target to achieve cuts of $250 million over the next three years.

“We are embarking on these cost cutting programs to be able to reinvest on brand and product innovations, such as the Sub-Zero Draft Technology tap, which has helped with the overall growth of the company,” says Pelland.