The United States of Beer Industry Essay Sample
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The United States of Beer Industry Essay Sample
1.Why has the United States brewing industry become more concentrated over the last two decades? Over the last two decades, the beer industry in United States has changed as following reasons; -The consumption of beer in the United States has been continuously declining due to the growing consumption of substitute products, particularly wine and spirits. In order to keep the business in the market, each company needs to take away some market share from their rivals. As a result, the small business could not stay in the market and go out finally. Then, there are few main players to compete each other in the market. -The increasing trend of advertising expense was also the key point to make customer loyalty to the brand. This is the big issue for any small company that cannot afford this cost and forced them to go away from the business. -Due to the technological change in canning and distribution, it leaded to the concentration in brewing industry as well. Most producers turned to focus more on the mass market in order to achieve the economies of scale and not all companies could reach the minimum efficient scale of production.
2.Analyze the competitive structure of the industry using Porter’s five forces model? Based on Porter’s five force model, the competitive structure of the brewer industry can be analyzed as follows;
-Threat of new entrants:
According to the case, there are 2 market segments for brewer industry which are “mass market beer” and “premium beer”. Both of them have different level of barrier to entry.
For mass market beer, the barrier of entry is quite high due to the increase in production and distribution techniques that required further working capital from several billion to hundreds of millions of dollars. Moreover, the influence of marketing and advertising in order to create brand loyalty and recognition has increased. The combinations of technological change in production and distribution including the increased advertising expenditures have created the size of mass market brewer to reach the economies of scale. These factors have increased the barrier of entry to the mass market beer. Adversely, the premium beer has low barrier to entry because there is a large number of microbrewers and importers for this segment. The premium beer producers build their brands around taste and cover higher product costs by charging much higher prices. Moreover, the market growth has significant increased from 1% to 11% of the total market. Therefore, the level of barrier to entry to this segment is still low. -Threat of substitute products or services:
Referring the case, the threat of substitute products is high as there are more variety alcoholic drinks entering to the market especially wine and spirits as well as imported beer. According to the figures in the case showing that there was an increasing trend of wine and spirits consuming in US by 23.43% and 5.51% respectively over 12 years period (from 1994 to 2006). In this case, the substitutes play a main role in determining current position and future growth.
-Bargaining power of customers (buyers):
Due to the rapid consolidation of the brewing industry as well as the increase in popularity of smaller breweries, it seems to be the good position for the brewery industry to grow. Moreover, buyers will gain the advantage with the changing environment and also gain more power through diversifying their product offerings. Therefore, the power of buyers is low as they are at point very dependent on the fluctuations of the brewery industry.
-Bargaining power of suppliers:
For supply side of brewing industry, there are many suppliers relating to the industry which starts with the agricultural raw materials such as barley, hops, corn, and yeast and follows by the production process and packaging materials respectively. These suppliers play a significant role and are the key in production process and pricing strategy of the finished goods. As there are few main players in the brewing industry, the large producers are able to strike and force their suppliers in terms of bulk prices, higher quality raw materials selection and purchasing orders in advance. Even though the brewing industries require a substantial amount of inputs from suppliers, the producers do not control those industries as the suppliers are not only dependent on the brewing industry but also exist in other markets. Therefore, the bargaining power of suppliers is very low to medium level among large firms. -Intensity of competitive rivalry:
According to the brewer industry in US, there are 2 main players for mass market beer, the largest being Anheuser-Busch, and the other being MillerCoors. This implies that there is a high level of rivalry in the industry. In this competition, massive marketing campaign and advertising to create brand value is the key to compete in the market. On the other hand, the craft beer has more variety of players entering to the market as this product focuses on recipe rather than brand image. This industry is quite dependent on the segment of selling alcoholic beverages and also there is also a high level of barrier to exit the market due to the specific technologies and machines. -Conclusion:
After analyzing in detail of the brewing industry, a number of key success factors stand out. The important thing from my point of view is the ability to sustain and emphasize the brand awareness through product quality rather than price. Furthermore, it seems clear that although the industry has recently experienced slow growth and low demand, the companies have remained profitable and the appearance of many microbreweries proves to be a good sign for the future growth and stability of this industry.
3.What are the implications of the evolving competitive structure in the brewing industry for the profitability and strategy of a smaller mass market firm in the industry? According to the case, it seemed to have only 24 mass-market brewers left in the US, down from 82 players in 1970 so there are still many producers gaining the profit from this industry. Among the remaining mass-market brewers, there are many consolidations occurring with the larger brewing firms in order to minimize their production and distribution costs and gain the economies of scale. Then, the merged firms would keep their best financial performance leading to their competitive advantage in the market. Finally, there are few main players staying in the industry.
Furthermore, the booming industry of the substitutes – wine and spirits, is an implication to any brewing company especially the three dominated brewing firms namely: the Anheuser-Busch, SAB-Miller and Molson Coors. However, the effects are much greater to the small mass-market segment due to their low capital, no efficient economies of scale, and other factors. For a smaller mass market firm, the company has shifted their position to be “premium beer” producer which does not focus on brand loyalty. So the small company does not need to use the high advertisement expense and keep their profit available to stay in the industry. In addition, the small company can build their brand through the taste and high quality of the product instead.
4.Are there different strategic groups in the industry? Why are they? Do you think the nature of competition varies between groups? Actually, there are 2 different strategic groups of brewing industry according to the case, the mass-market segment and the premium beer segment. The mass-market segment revolves around aggressive pricing, brand loyalty, distribution channels and national advertising spending whereas the premium beer segment focuses on discerning buyers and they build their brands around taste and cover higher product costs by changing much higher prices. Both of them are focusing on different position in the market relating to the appropriated strategy for each group. The nature of the competition varies between the groups. The effects of these competitions may differ depending on the kind of product.
For example, the substitutes, wine and spirits, are the competitive threat to beer industry. The sudden appearance of these substitutes offering cheaper price has forced the beer industry to limit their change such as product variation and innovation. Finally, the customers will turn to substitutes. Moreover, the mass-market segment also confronts with the higher advertising spending in order to increase brand awareness and the producers need to achieve the economies of scale in order to minimize their cost so the competition in this segment is high among the main players in the industry. For the nature of the competition in the premium beer producers, it is lower level of the competition than the mass-market segment. The premium segment focuses on the quality rather than the price. Therefore, the competition in mass-market segment is higher than the premium beer segment.