EXECUTIVE SUMMARY
The brewery industry is a mature industry and expected to grow at a steadier pace. The global craft beer market accounted for USD 93.7 billion, and it is expected to attain a compound annual growth rate (CAGR) of 14.1% during the forecast period (2018–2023) (Team, 2018). This is due to the increasing opportunity for firms to grow in the industry as there is a high level of intensity in the market. The overall attractiveness of the brewery industry is medium because of the high barrier of new entrants, high bargaining power of buyers, low bargaining power of suppliers, medium threat of substitutes, and high intensity of rivalry. This report analyzes four firms in the brewery industry: Molson Coors Brewing, Anheuser-Busch, Boston Beer Company, and Craft Brewing Alliance. Based on the results of analyzing the following criteria: market share, revenue, 5-year average growth, profit margin, and current ratio, the top-performing firm is Anheuser-Busch, and the bottom-performing firm is Craft Brewing Alliance.
PROFITABILITY WITHIN THE INDUSTRY
An effective way to determine if a firm has a sustained competitive advantage is to analyze the industry and the firm based on Porter’s Five Forces Model. These five forces are the threat of new entrants, bargaining power of buyers, bargaining power of suppliers, the threat of substitute products and services, and the intensity of rivalry. The five forces are used to analyze the brewery industry and whether or not it is a profitable industry to be in or enter into.
Threat of New Entrants
The brewery industry has a high level of market share concentration. Two key companies currently dominating the industry are Anheuser-Busch and Molson Coors Brewing Company. Together Anheuser-Busch controls 37.5% of the market, while on the other hand, Molson Coors Brewing Company controls 21.5% (Lombardo, 2018). Together they control nearly sixty percent of the current market. Craft Brewing Alliance is an emerging firm in the malt industry with 0.23% market share, and Boston Beer Company accounts for 2.2% of the market share (Lombardo, 2018). This constitutes nearly sixty-two percent of the brewery industry, thus creating a barrier for new entrants.
Another barrier new entrants may face while joining the market is the challenging task of investing in a large amount of capital on startup costs. Entry for a new player can be facilitated fairly quickly by leasing pre-existing turnkey facilities and production space. This may start a large-scale production that will require significant cash investments and substantial purchases of capital and equipment (Lombardo, 2018). However, existing firms have total control of the current market due to well-established brands and monitoring of the supply chain. For new entrants to gain market share, they must first deliver the problematic task of perusing customers from existing companies. For these reasons, the threat of new entrants is low in the brewery industry.
Bargaining Power of Buyers
Due to the competitive nature of the brewery industry, buyers have high bargaining power. This can be seen at a consumer level, which is not costly but gives a wide range of choices at multiple points of purchase. Buyers also face no switching costs, which allows switching between different brewing companies easily.
The power of large volume buyers is even more prominent in the industry. When prohibition was repealed in 1933, the United States government implemented a three-tier system. This system includes the producer (Tier I) who makes the beer, the distributor (Tier II) who purchases the beer from the producer, and the retailer (Tier III) who receive shipments of the beer from the distributors (Sorini, 2017). The buyers can then purchase their choice of beverage from the retailers. Even though the government put this in place to ensure regulations were followed and taxes were easily collected, it has given tremendous power to industry-leading firms. For example, Anheuser-Busch controls over 46% of the entire industry’s U.S. sales (Stoller, 2018). This market share can be seen because large breweries are able to use their size to force distributors into exclusive distribution arrangements. Currently, distributors are the largest buyers in the industry.
Bargaining Power of Suppliers
In the brewing industry, the bargaining power of suppliers is considered low. Brewers need two main categories for production: raw materials to brew beer such as water, hops, barley, yeast; and physical components such as vats and bottles (Morgan, 2014). Due to standardized products and a large number of suppliers the market is very price competitive. Therefore, the switching cost for breweries is low, and it is easy for brewers to switch suppliers from one to another. In the brewing industry, companies purchase their ingredients from a large number of readily available farmers. Large companies can control the price of ingredients based on volume by producing more barrels of beer. Producers are willing to cut down the price for major companies due to economies of scale and the vast amount purchased. For domestic and local brewers, they usually purchase their ingredients from suppliers close to their brewery to reduce transportation costs. Another factor that lessens the bargaining power of suppliers would be the inability to forward integration. Due to the barrier entries and the number of capital resources required, it makes it nearly impossible for farmers to forward integrate into a brewing business. Since the ingredients of production for beer is very standardized and there is a large number of farmers available to purchase from the bargaining power for a supplier is low.
Threat of Substitute Products and Services
The threat of substitute products for the brewery industry is considered a medium force. Substitutes pose a threat in the beverage industry environment by potentially reducing the market share and corresponding revenues of existing firms.
The intensity of the threat of substitution is partly based on moderate switching costs and popularity. In regard to switching costs, consumers may face having to pay extra to while having the ability to choose from other brewery products and other alcoholic beverages substitutes. William Kerr’s marketing research shows that the average price of beer is 50% less than the average price of wine. Due to the production and warehouse restriction, the winery industry has a higher cost than the brewery industry (Kerr, 2011). This indicates people are more likely to purchase beer instead of wine due to lower costs. Also, beer is popular for different casual events. According to the study from the University of Minnesota, 48% of fans drink beer at sporting events (Mifsud, 2018). Times Magazine also refers the poll from Gallup which shows American favorite alcoholic beverage and 40% of the participants preferred beer (Mifsud, 2018). Beer is more popular in events and parties compared to other alcoholic beverages.
On the other hand, the taste of alcoholic beverages and American drinking culture weakens the threat of substitutes against the brewery industry. Despite moderate switching costs and popularity, beer is still excelling in today’s alcohol beverage industry. Drinking in the U.S. has been a tradition, whether there is a popular event or just a family gathering. Goldammer stated, “Beer is an iconic symbol of happiness and celebration” (Goldammer, 2018). The threat of substitutes is medium in the brewery industry based on lower switching costs, popularity, and American drinking culture.
Industry Rivalry
Competition in the brewery industry is at its all-time high as the brewery industry consists of international and domestic brewers, as well as local microbrewers. Major international brands have significant competition to all domestic brewers and local microbrewers (Lombardo, 2018). Within the industry, competition is primarily based on brand, packaging, and quality. Major beer brands like Miller Lite, Budweiser, and Coors will have more of a competitive advantage than local microbrewers (Lombardo, 2018). Customers also show significant loyalty to beer brands, and they are likely to buy beer that they are familiar with. Small and new brewers will have difficulty capturing market share from major brewers. Therefore, small companies rely on taste testing and brewery tours to attract customers; while major brewers tend to focus on advertisement (Lombardo, 2018). Small and new firms have a high-intensity rivalry with major firms because of customer loyalty, brand, and packaging.
Moreover, competition from international breweries is increasing. Foreign producers began to copy many popular domestic styles due to growing consumer demand for domestic craft beer (Lombardo, 2018). Also, other related industries have experienced significant merger and acquisition activity among large manufacturers of wine and spirits (Lombardo, 2018). These factors show an intense rivalry in the brewery, wine, and new alternative beverage industry will take over a few consumers whose taste preferences may not be solely dedicated to purchasing beer. According to Lombardo, breweries industry typically focusses on male consumers between the age of 21 to 35 years; however, wine and alternative beverages have become more popular with consumers between the age of 21 to 25 years (Lombardo, 2018). This goes to show, the brewery industry has high intensity of rivalry both internally and externally. The competition within the industry will continue to grow.
Overall Attractiveness of the Industry
Based on Porter’s five forces analysis, the brewery industry has high barriers for new entrants, high bargaining power of buyers, low bargaining power of suppliers, a medium threat of substitutes, and high intensity of rivalry. Therefore, the overall attractiveness of the brewery industry is medium.
CRITERIA FOR RANKING FIRMS
The criteria for ranking the four brewery firms will be market share, revenue, the 5-year average growth of revenue, profit margin, and the current ratio of the firm. Market share shows how well a firm is performing in the market compared to its competitor. Revenue shows the amount of money that a company actually receives during a specific period. The 5-year average growth of revenue indicates the trend of a business and probability of profits for each firm. Profit margin illustrates what percentage of a company’s sales are left after all expenses are paid. The current ratio measures the ability of a firm to meet needs for cash as they arise.
RESULT OF APPLYING CRITERIA
The matrix discusses the result of analyzing the market share, revenue, the 5-year average growth of revenue, profit margin and the current ratio of the firms. The matrix shows Anheuser-Busch is the top-performing firm and Craft Brewing Company is the bottom among four firms.
| Criteria | Molson Coors Brewing | Anheuser-Busch | Boston Beer | Craft Brew
Alliance |
| Market Shares | 21.5% | 37.5% | 2.2% | 0.23% |
| Revenue | $10.88 billion | $56.42 billion | $0.916 billion | $0.211 billion |
| The 5-year average growth of Revenue | 5.31% | 3.62% | 8.26% | 4.15% |
| Profit Margin | 14.5% | 14.25% | 10.59% | 6.70% |
| Current Ratio | 0.66 | 0.67 | 1.61 | 1.57 |
STRATEGIC ACTIONS-RECOMMENDATIONS
Entering New Markets
The brewing industry is quite competitive, as major rivals have differentiated products for customers to enhance the attraction and assertiveness. In the presence of competitors, it seems imperative for the company to expand the business. However, it is essential to navigate some expansion options. For this brewing company, the firm must hit new locations. Being a part of the strategic management of the company, I want the company to expand in areas which are undone by competitors such as Anheuser-Busch and Molson Coors Brewing Company. Geographical expansion refers to developing the business to target new customers. However, the best thing that the company can do is cultural integration to position better in the minds of customers.
For Instance, this firm is struggling to generate enough revenues despite having good financial capability. Now may be the best time to enter into neglected markets. In the undervalued market, the firm can make a successful entry by acquiring one or two brewing companies. Also, the strategic alliance can also be a prominent market entry strategy for the company in the competitive brewing industry. Asian countries have been neglected by the company, as the focus is just on the United States and neighbor countries. Now, these Asian countries have become potential markets for the company, and it can also help to make more customer segments.
The company already exists in an intense rivalry. Every potential market contains prominent competitors. In different countries, the firm has to enter along with an effective execution plan regarding different business strategies. The biggest advantage that this firm can take is the segmentation. For Instance, if the company aims to enter into China, it can make several customer segments due to high population. Aging populations in potential markets is increasing, and it can help to divide customers (Marketingtochina.com, 2018).
Captivatingly, these customer segments can also facilitate the management of the company to come up with an attractive product or brand portfolio. Customer demographic is a crucial segment, and it will be a significant revenue generator in the competitive landscape. It is necessary to analyze or examine the market potential. A strategic analysis tool such as Porter five forces has already identified the brewing industry. However, the management is quite capable of considering potential markets to make the difference (Conick, 2016).
Geographical expansion and target new demographics are suggested for the brewing company. These options can help the company to regain growth. Business expansions trigger business success and sustainability. With time, the firm has to evolve in these potential markets. The most important thing is to integrate with modern industry trends to be relevant and lucrative in the markets. The expansion process must integrate with several customer strategies as well.
New Product Introductions
In the new market, the best option for the company is to introduce new products. In this competitive landscape, the firm must develop the imitating capability. Product imitation is a profitable product development strategy that can reduce the cost of product development. Interestingly, the brewing companies usually contain satisfied and loyal customers due to their high quality and differentiation. Product imitation is the best strategy to gain early success and market share. However, depending on the financial capability, differentiation is also a key option for the management to get an edge in the competitive market. By imitating, the competitive advantage seems rare.
However, differentiating in the presence of other companies can provide a lead towards the competitive edge. Addressing gaps regarding quality is a prominent factor, which justifies the differentiation. High-quality brewing products can be justified through improvements in the ingredient processing. By reducing or eliminating the quality gaps, the firm can come up with a different product that has never been experienced by customers. Protecting innovation with patents is also a critical option.
The differentiation can be justified by making innovative products. Innovative packaging, content, and supply chain are some possible outcomes of the patent strategy. However, it is to mention that the creative culture is a crucial driver for innovative product development, it seems essential to build the innovative culture and integrate with the parent company to provide a blistering response to the market. Leveraging the brand name with related products is also a workable strategy, as far as product development is concerned. The firm must power up the brand or product strategy through increasing the product line.
Developing the brand portfolio is a good idea to hit new customer segments and needs. It has been revealed that technology plays a vital role in the product development process. The brewing industry has enabled the standard processing of ingredients. Leveraging the new technology can open ways to develop new products. Interestingly, technology can increase innovative and creative capability. Thus, instead of imitating rival’s products in the competitive landscape, the firm may focus on differentiation (Stealingshare.com, 2018).
If the firm aims to enter into the new market with excellent financial capability, it can use the advanced brewing technology to get an edge over other rivals. Introduction of new products is a better strategy to the introduction advantage. It can be converted into a sustainable competitive advantage with the product evolvement (Stealingshare.com, 2018).
Entering new markets and the introduction of products are imperative. Market entry can make the business profitable. On the other hand, the introduction of new products can enable competitive advantage. Thus, it justifies the trade-off between these options.
REFERENCES
Conick, H. (2016, July 25). How Do Local Breweries Market Globally?
Goldammer, Ted. (2008, October) “The Brewer’s Handbook”.
Kerr, W. (2011). A bottle of beer, a glass of wine or a shot of whiskey? Can the rate of alcohol-induced harm be affected by altering the population’s beverage choices?
Lombardo, C. (2018). IBISWorld Industry Report 31212. Breweries in the US.
Marketingtochina.com. (2018, May 27). What You Should Know About The Beer Market In China.
Mifsud, C. (2018, October 01). Why Beer Is the World’s Most Popular Drink.
Morgan, J (2014, June) BronDAngelo -Hopunion -CheriseSchacter -HopSnobber.
Sorini, M., Sorini, M. E., Russel, D., & McDermott Will & Emery LLP. (2017, September 01). Understanding the Three-Tier System and Its Impacts on Craft beer.
Stealingshare.com. (2018, July 10). Beer Marketing and Differentiation.
Stoller, G. (2018, March 20). Craft Breweries Dominate the Top 50, But Guess Which Giants Rule the Beer Market.
Team, M. (2018). Craft Beer Market Share, Analysis, Trends | Forecasts (2018-2023).
Wilkinson, J (2013, July) Supplier Power (one Of Porter’s Five Forces) • The Strategic Cfo. R
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