South Dakota Brewery Case Study
South Dakota Microbrewery (SDM) – Case Study Franco Borrello
Key Relevant Information
- Product mix: Three different labels: Ale, Stout, Bock.
- Market info: Ale label is sold primarily to College bars, in large shipments. Stout and Bock labels are sold to upscale restaurants, in small shipments.
- Market forecast: Ale label: High local competition, high price fluctuations. Bock market forecast: Inelastic to small price changes. Low local competition and steady demand.
- Gross Margin (GM) target: 30% for all products.
- Distribution logistics is considered by SDM management as a key factor to maintain competitiveness and to grow in the future.
Conclusions & Recommendations
Costing methodology: The two different cost allocation methods – Plant-wide cost allocation based on direct labor hours (LHM) and Activity-Based Costing (ABC) – provide substantial different results. These results are shown in Exhibits 1, 2a, and 2b. Due to the characteristics of SDM operations and its cost structure – three different labels, with high incidence of non-labor costs – I recommend to use the ABC method for allocating the overhead costs.
Using the Cost Drivers identified by the SDM accountant, the total costs using the two different methods are (see Exhibit 3 for more information):
Cost per bottle – LHM
Cost per bottle – ABC
GM per batch – ABC
Target Price(30% GM)
The company’s overall operating margin is 29.1%, near the management goals. The overall margin does not change if the costing method is changed. An Income Statement for SDM (1998) is shown in Exhibit 4.
Pricing for Ale label: Even if the management is concerned about the lower GM of this label, the ABC costing shows that currently this is the label with higher GM (42.7%), exceeding the management targets (see Exhibit 3). My recommendation is therefore not to change the price of this label ($1.05 per bottle). The minimum price to achieve the target for this label is $0.78 per bottle, so the company is highly protected against competition and price fluctuations.
Pricing for Stout label:The GM for this label is 37.3%, therefore my recommendation is to maintain the current price ($1.40 per bottle). The minimum price per bottle to achieve the GM goals is $1.14. There is no relevant information about this label that may indicate a change of strategy.
SIOUX FALLS, South Dakota— Ground zero in the ideological war over money in politics and ethics for lawmakers isn’t Washington, D.C., this year.
Instead it’s the windblown plains of this state of just 858,000 people, where a big-money brawl over a ballot measure has emerged as a sign of the divisive times.
Come Nov. 8, South Dakotans will be asked to vote on a measure that would reshape all things political by initiating public financing of campaigns, expanding disclosure of political donors, and creating an ethics commission to police legislators’ behavior.
Both sides in the debate—the one pushing the initiative and one fighting against it—are planning to spend hundreds of thousands of dollars to get what they want. But neither side hails from South Dakota.
In this corner: a nonpartisan group focused on political transparency out of Massachusetts, Represent.Us, which steered Measure 22 onto the ballot. Its top funders are mostly wealthy individuals who struck it rich with West Coast tech companies.
And in the other corner: Americans for Prosperity, a Virginia-based group bankrolled by wealthy industrialist brothers Charles and David Koch and other conservative heavyweights.
What’s happening here is a twist on that old bromide about all politics being local. When it comes to statewide ballot measures, actually most politics is national. And though this battle of the Plains is certainly entertaining to pundits and political junkies, the denizens of the Mount Rushmore State are not especially amused.
At least five of the 10 measures on South Dakota’s ballot this year are mostly backed by out-of-state money.
“As South Dakotans we like to think of ourselves as really pretty independent,” said Sioux Falls pediatrician Jerry Blake, whose wife is a former legislator. “When there’s people that buy votes or people that buy influence that are not even having anything to do with our state, it’s just not fair. My vote means less, you know, because of that.”
This is not the first time a national group has sponsored a state ballot initiative in South Dakota, which in 1898 became the first state in the union to allow this form of direct democracy. And it’s far from the only one this time around.
California billionaire Henry T. Nicholas III has brought his crusade for crime victims’ rights to the state’s November ballot as well. And a Georgia payday lending company is financing support for one measure and opposition for another, both of which concern caps for loan interest rates. At least five of the 10 measures on South Dakota’s ballot this year are mostly backed by out-of-state money.
“These are national conversations that are happening so it’s not surprising that we’re seeing these issues pop up in South Dakota—and also seeing more outside money pop up on behalf of these initiatives,” said Julia Hellwege, assistant professor of political science at the University of South Dakota.
Beyond South Dakota, this year’s election alone has numerous examples of out-of-state cash calling the tune: the Humane Society is leading an effort to outlaw close confinement for chickens and other animals in Massachusetts; Everytown for Gun Safety is sponsoring gun control measures in Nevada and Maine; and a drug reform group is pushing for marijuana legalization in Arizona, California, Maine, Massachusetts, and Nevada.
But South Dakota can seem uniquely attractive to outsiders. For one, it’s an economical place to push a ballot measure. Campaigns often have to pay professionals to gather enough signatures to make the ballot, as Represent.Us did here. The fewer signatures required, the smaller the tab. South Dakota requires relatively few signatures—only 27,741 for a constitutional amendment this year, versus the 98,492 required in Colorado, for example. And TV ads are also relatively inexpensive, though both sides on Measure 22 have stuck to radio and internet messages so far.
“We’re cheap,” said David Owen, president and chief lobbyist for the South Dakota Chamber of Commerce and Industry. “Two million dollars is a ton of money in this state. $1 million is a lot. So in that sense if you want to dabble in public policy and see how your reception’s going to be, we’re not a high-cost state.”
Measure 22 is long—34 pages. “It’s not got much of a plot,” Owen joked.
Among its many provisions, it would create an independent ethics commission with subpoena power to watch over the statehouse, limit gifts from lobbyists to lawmakers, cap the size of political contributions, and require greater disclosure from those who give them. And it would institute a system of public financing for elections: Each registered voter would have access to two $50 “democracy credits” to donate to candidates, with no more than $12 million for the entire fund.
Supporters say the measure is inspired by a 2012 State Integrity report card from the Center for Public Integrity and Global Integrity that gave the state an “F” overall for a lack of transparency. Some of the provisions come from Represent.Us’ model anti-corruption act.
Represent.Us is also sponsoring similar anti-corruption measures in Washington state, San Francisco, and five other localities this year. Dan Krassner, political director for Represent.Us, said his group came to South Dakota, a state with more cattle than people, because locals asked for help and the state needed reform.
Here the group is allied with a cadre of former lawmakers (Democrats and at least one Republican) who are touring the state to spread its message that South Dakota needs to pass the measure to ward off corruption.
“In South Dakota and Washington, both states have bipartisan local coalitions that wanted to work on anti-corruption measures,” Krassner said. “They needed support to get on the ballot. So it was an obvious choice for us to help them out.”
Represent.Us hired Minnesotan Richard Carlbom to manage the South Dakota campaign. The political consultant has done everything from winning an election a decade ago at age 23 to become mayor of St. Joseph, Minnesota, to leading the coalition that worked to legalize same-sex marriage in that state in 2013.
Though the Washington measure is similar to the one in South Dakota, Americans for Prosperity is not fighting it, national spokesman Levi Russell said, because the group does not have a state chapter there.
In South Dakota, it assembled a coalition of 14 local groups to oppose the measure, including South Dakota retailers and the South Dakota Farm Bureau Federation.
The group also says it has local roots because of its permanent South Dakota branch, established in 2014. Americans for Prosperity’s South Dakota Director Ben Lee moved to the state from Nebraska 23 years ago to attend a small Christian college. He most recently worked in the local office of U.S. Sen. John Thune, a Republican.
“We do think this would be wrong for South Dakota,” Lee said. “We’ve been here long before Measure 22 came around. … If the folks that were pushing this measure wanted to sit down and have a conversation, we certainly would have been part of having a conversation about what might be best for the state. But that’s not what they did. They brought in the out-of-state solution right from the beginning.”
The initiative’s disclosure provision is a major sticking point for Americans for Prosperity. It requires any group that pays for an ad advocating for a candidate or ballot question to disclose its most recent top donors. That’s a key dividing line in the debate over the role of money in American politics.
Americans for Prosperity won a federal lawsuit earlier this year after California tried to force the group to disclose its donors. (The state has appealed). Other Koch-backed groups have long argued against such disclosure measures as violations of free speech and free association. Those on the other side, such as Measure 22’s supporters, argue voters should know who is trying to influence the political process.
Through speeches at clubs and local forums, with mailers and door knocking, both sides are making their case. Last week in the back room of the Royal Fork Buffet restaurant, Americans for Prosperity’s Lee attempted to persuade a room full of South Dakotans to vote against the ballot initiative during a meeting of a local Sertoma chapter, an international service group.
“I heard that 75 percent of the money to support this is coming from out of state,” one man said during the time for questions.
“There are no local organizations supporting it,” Lee answered. “Their money comes from a group in Massachusetts.”
Lee did not get into the details that his own national organization raises millions from around the country.
As Sioux Falls resident Bryan Dahl emerged from the Minnehaha County auditor’s office last week where he’d voted “no” on Measure 22, he said that out-of-state money for ballot measures bothered him. But he reconsidered when thinking about the crime victims’ rights measure, which he favored and which has been adopted in multiple states thanks to billionaire Nicholas’ backing.
“If it’s out of state and it works, maybe it’s a good idea,” he said. “We’re just a small spot in the country.”
But other voters said the out-of-state money was problematic.
“We don’t really need money from Massachusetts to run our state government,” said Norm Dittman, a retired investment banker who was persuaded to vote against the measure by Lee’s presentation at the buffet restaurant.
“We embrace the irony that it takes the money to fight corruption,” said Krassner. “But there’s only gains for the public interest if this passes.”
Some Measure 22 supporters say they hope that South Dakota can lead other states to pass similar measures.
“We get it done at the state level and another state and another state and another state and eventually maybe the folks in Washington might start paying a little bit of attention to the folks out here,” said Rick Weiland, a former Democratic U.S. Senate candidate who supports the measure.
He makes no apologies for using out-of-state money to push the campaigns. Represent.Us’ top donors this year include a Google engineer, two venture capitalists, and Connie Ballmer, wife of Microsoft executive Steve Ballmer, who each gave at least $100,000, according to the group.
“States can be an incubator for ideas,” Weiland said. “These are national issues.”
Americans for Prosperity has a warning for voters: Measure 22 will mean their tax dollars will pay for politicians’ campaigns, negative ads and all.
“We know that South Dakotans care about how their tax dollars are used,” Lee said. “We wanted to focus on that, because it’s easy to understand.”
He and other opponents think the “democracy credits” could be the measure’s downfall.
“What they have written is so nonsensical and flawed. It’s worse than trying to watch a penguin fly,” Owen said. “Look, if this thing passes … I’m going to have 100 friends that are going to give me their democracy credits, and we’re going to have a public rally in the park. And there’s going to be a lot of beer.”
The public financing proposal has already soured some voters who might have otherwise voted for the measure.
Beth Buehler, a retired Sioux Falls resident, came to cast her absentee ballot last week with a small folded paper she called her “cheat sheet”—containing how she planned to vote after reading through the sample ballot at home. Though she considers herself liberal and had heard the state had ranked high on corruption rankings, she voted against Measure 22.
“It’s almost like funding it for them,” she said. “They need to do their own work.”
Just how bad things are in South Dakota politics is a question that divides state residents—and could be the deciding factor for whether Measure 22 passes. Lourn Lysne doesn’t consider state lawmakers corrupt.
“We’re too Midwestern,” the retired electrical lineman said while waiting for his food at an Applebee’s in Watertown, about 100 miles north of Sioux Falls.
Outside evaluations have given the state poor marks on whether it has the type of laws that prevent corruption. In addition to the Center’s State Integrity Investigation, a 2014 study by the University of Hong Kong and Indiana University ranked South Dakota as the eighth-most corrupt state in the union.
And the measure’s supporters are quick to point to two recent scandals involving state employees misusing federal funds meant to spur investment and improve Native American education. Supporters of Measure 22 blame such scandals on the ruling Republican Party’s unwillingness to probe too deeply into the inner workings of state government.
But state Rep. Jim Stalzer, a Republican who is running for the state Senate this year, has a much more sanguine view of local politics and is skeptical that the new measure would improve anything.
Lobbyists don’t dole out lavish gifts to South Dakota lawmakers, he said. Most of the gifts are what he called “trinkets.” The most expensive thing he remembers receiving is a backpack that can hold a laptop.
“They don’t give us enough money to buy us,” he said.
Yet his Democratic colleague Rep. Patrick Kirschman already voted “yes” for Measure 22, mostly because he wants the state to have an ethics commission—a fight that Democrats have already tried to win in the Legislature and lost.
“It just needs more oversight,” he said. “Nobody’s paying attention to all these little pots of money.”
This story was published by the Center for Public Integrity, a nonprofit, nonpartisan investigative newsorganization in Washington, D.C.