The Basics of Capital
Budgeting: Evaluating
Cash Flows
2597
In 1970, the Adolph Coors Company was a small brewer serving a regional market.
But due to its quality products and aggressive marketing, by 1990 Coors had risen to
the number three brand in the U.S. beer market. During this high-growth phase, the
corporate emphasis was on marketing, technology, engineering, and capacity addi-
tions. When investing in new equipment or factories, Coors always went “the Cadillac
route,” with little scrutiny of proposed projects. In effect, their motto was “If you build
it, they will come.” Indeed, for two decades consumers did switch to Coors.
However, the brewing industry began to experience major problems in the
1990s. Many consumers were drawn to wine, causing growth in beer sales to fall
below 1 percent per year. In addition, large numbers of microbreweries opened,
providing beer drinkers with an alternative to the national brands. These events
proved particularly painful to Coors, whose lack of financial discipline had led to a
frivolous use of capital and thus to a high-cost infrastructure.
In February 1995, Coors hired a new CFO, Timothy Wolf, who soon learned that
Coors had a low return on invested capital, negative free cash flow, and an unreliable
planning/forecasting process. Wolf quickly created an in-house education program to
teach managers and engineers how to conduct a rational project analysis. Even more
important, he began to shift the corporate culture from a focus on undisciplined
growth and high-technology engineering to creating shareholder value. This new
focus was put to the test in 1996, when Coors reexamined its plans for a major new
bottle-washing facility in Virginia. Using the capital budgeting processes established
by Wolf, the project team was able to reduce the cost of the investment by 25 per-
cent. They also implemented design changes that led to lower operating costs.
Under Wolf’s guidance, Coors has steadily improved both its return on invested
capital and its free cash flow. Financial analysts are impressed with Wolf’s efforts. Skip
Carpenter of Donaldson, Lufkin & Jenrette says, “From a financial perspective, there’s
absolutely no question Coors is better positioned to deal with the difficulties of the
beer industry.”^1 Investors seem to agree, as Coors’ stock price has climbed from
about $14 per share when Wolf joined to over $52 per share in mid-2001, an annual-
ized average gain of more than 24 percent.(^1) See an article by Stephen Barr, “Coors’s New Brew,” CFO, March 1998, 91–93.