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Analysis of the Beer Industry Essay

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CHIEF ECONOMIC TRAITS OF THE BEER INDUSTRY

The market size of the beer industry is incredible. The wholesale volume in the beer industry is approxiametly $13.7 billion. The industry employes almost 40,000 people. The average worker is paid about $18.27 an hour. As you can see, this is a very large industry which provides many jobs to the american workforce.

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The market consists of many competitors, some being very large and some operating on a very small scale. The competitive rivalry is broken up into three segments, Natiional, Regional , and Microbrewers.

National competitors have a wide market coverage and generally a large company. Regional competitors are smaller than National in the fact that they only distribute in certain regions. Microbrewers are the smallest of the three because their size and capacity limit them to only distribute to small geographic areas.

The market growth rate of the beer industry is perplexing. In domestic brands, from 1983 to 1984 there has been a decline in consumption of -1.

2%. In the imported section there has been an increase of 14.3%. The total industry as a whole declined .7% from 1983 to 1984. As a result of the decline in consumption of beer a similar result in production occurred with a decline of 1.2% The estimated forecast for 1985 will continue along the same trend as did 1984. The long term outlook for the industry is that sales will remain flat for the next 10 to 20 years.

There are many companies in the industry. Through the years the industry has slimmed down quite a bit. The National market consists of ten major competitors. The Competitors in this market are Anheuser-Busch, Miller, Stroh, G. Heileman, Adolphs Coors, Pabst, Genesee, C. Schmidt, Falstaff, and Pittsburgh. The National companies have 51 plant locations across the United States. Market share in the Domestic market ranges from a low of .5% to a high of 34%. The Import market consists mainly of ten major brands also. They are Heineken(Netherlands), Molson(Canada), Beck’s(Germany), Moosehead(Canada), Labatt(Canada), St. Pauli Girl(Germany), Dos Equis(Mexico), Foster’s Lager(Australia), Amstel Light(Netherlands), and Corona(Mexico). These ten brands hold about 87% of the imported market share. The individual companies range in market share from 34% on down. A few regional companies, and many small microbrewers make up the rest of the companies in the industry.

The customers for the beer industry are highly diverse. They range from being highly educated to non-educated, and male to female. Income ranges for those who drink beer are also very diverse. Single people drink more beer than Married according to 1983 U.S. beer drinker demographics. College professors are known to be customers also.

Due too lack of information in the case the degree of vertical integration among the companies in the industry is not certain. I am certain that a few of the larger companies have gone into producing their own packaging(Cans, Bottles, etc.). This would be a way to cut out some of the power of suppliers if a company were to do this.

The ease of entry in the beer industry is segmented among the three market coverage types. In the national market the ease of entry is low. There are many barriers to entry in the national market. Beer is regulated in 50 different ways in the United States. Large capital requirements and distribution networks make it hard to enter the national market. The regional market is a little easier to get into because of fewer regulations due to smaller market coverage. Capital requirements are not as big in the regional market. Local or microbrewers have the fewest barriers to entry. Capital requirements are small compared to that of a national or regional brewer. Microbrewers generally operate in a small geographic area thus reducing many of the regulations faced by national and regional brewers.

Product characteristics vary among the markets. In the national market the beer is highly standardized and heavily advertised. The beer is inexpensive. There is some product differentiation in the market with the broad product offerings that the national brewers can give. ex. Light beer, Amber beer, Low Alcohol, And Malt Liquor. Imports are perceived to be better quality: when in fact, they are really not. Because of this perception, Import beer costs more than domestic beer does. Imports are differentiated by taste and packaging. Small brewers offer a superpremium product that is not very differentiated. The main differences can be attributed to the brewing process, price, and packaging.

Scale economies is high among national companies due to their large size. Their ability to distribute fixed costs is easily done because of the large volume that is produced. Their is also economies of scale in product extension and brand proliferation. Regional companies have moderate economies of scale. Regionals do not produce as much as larger natioanal companies but, they can still spread some of there costs over their moderate volumes. Local brewers have low economies of scale. Production is so small that it is very difficult to distribute costs. A local brewer cannot spread the cost of advertising over their product without having to raise the price of their product considerably.

Capacity utilization in the U.S. Beer industry is between 75% and 85%. The beer industry is suffering from overcapacity. Despite this, a few companies are still expanding while others are closing down some operations. Because of flat sales, their is no need to overproduce.

Industry Profitability is decreasing due to heavy taxation and a declining market. Beer is one of the most heavily taxed consumer products. There largest cost in the price of beer is the tax that is placed on it by local and state governments. The industries profitability is also changing due to changing lifestyles, stricter laws, and a declining 18-34 age group.

The rivalry among existing competitors is strong. Demand for the product is slowing. In order for a company to increase market share, another company has to lose it. Switching costs are low for consumers. Because switching costs are low, Competition is very intense to gain new market share. The beer industry is a cut throat business with extreme competition. Because they are in a declining market, it order to stay alive it must be survival of the fittest.

Potential of new entrants is moderate. Capital requirements can be a very inhibiting factor as to whether a company can start up. New entrants must also establish a very strong and sound distribution network that is all to often not that easily attainable. Many laws and regulations may also inhibit a new entrant from coming into the market.

The threat of substitute products is moderate in the industry. Some people believe that wine coolers will continue to steal market share form the beer industry, while others believe that wine coolers are just a fad that will die down. Pre-mixed drinks can also be considered a substitute. Bacardi breezers and Jack Daniel’s country cocktails are a example of this. In a bar, a person has a choice among many different drinks. Malt beverages(ZIMA) can also be considered a threat.

The power of suppliers is moderate. Depending on which company is bigger will decide who has the leverage between the two. The suppliers have power due to the demand for agricultural products. Canneries have power in their ability to produce packaging for the breweries. If the brewery is big enough, they have more leverage as to where they get their supplies and as to how much they pay for them.

The power of buyers is very strong. Switching costs are very low thus enabling a consumer to buy whatever brand he wants. Beer drinkers are easily swayed by advertising and social trends. Special promotions tend to sway brand loyalty.

Changing societal concerns, attitudes, and lifestyles are driving forces for the industry. These factors play an important role as to where the industry is going. Other causes include

1. The population is concerned about healthier lifestyles.

2. The Growth of the 18-34 age group is declining.

3. Drinking and driving laws are getting stricter with the push of support groups(MADD).

4. Legal drinking age being raised to the age of 21.

5. Banning of “Happy Hours” in some states.

National brewers are in the strongest position because of broad product offering and low-to-moderate costs. Imports are in a fairly decent position because of their decent product offering and quality. Regional and local breweries are in the weakest position because of higher costs and limited product offering.

MOVES RIVALS ARE LIKELY TO MAKE NEXT

The following is a prediction of what Golden Gate Brewery’ s competition will do next.

Heineken- Continued push into the U.S. Market. Increase in advertising. est. 22 million.

Molsen- Maintain second place in import market. increase in advertising. est. 15 million

Beck’s- will need to reestablish positioning as market share will be lost due to lack of promotion.

Moosehead- will also lose market share to St. Pauli Girl. again due to lack of advertising.

St. Pauli girl- increase market share in U.S. market due to significant increase in advertising. 14

Anchor Brewing Company- (In San francisco) will maintain positioning of being a small exclusive upscale beer. continued market growth on a small scale.

Sierra Nevada Brewing Company- Maintain positioning as a fairly low cost microbrew. $18 a

case. Will continue to add capacity to existing plant. Will also maintain brewing of mainly draft

Mendocino Brewing Company- Premium Microbrewery. Will fine tune existing “brew pub” Will

Boulder Brewing Company- Bottles only! Will not expand into draft. Increased capacity. Mat

now go outside of existing Colorado market.

The Old New York Beer Company- National Microbrewery. 21 states and counting. Will expand

into more states. Financially sound for a microbrewery. Will open new brewery/restaurant in

Manhattan. Increase in capacity by 300% when new facility is open.

1. Maintain Quality in existing plant

2. Must build a stronger network of distributors

4. Quality control in new facility.

5. Improve access to financial capital for future endeavors.

6. Innovative low cost ideas to promote product( Beer sponsorship at local pub’s, exploit

be rated best brew in America, etc.)

INDUSTRY ATTRACTIVENESS/ PROFITABILITY

Factors making the industry attractive- -Market Size $13.7 Billion

-Preference for better quality Brew over domestics.

-Microbrewer/brew pub trend increasing

Factors making the industry unattractive- -Decline in consumption of beer due to healthier

lifestyles-Decreasing profitability due to heavy taxation

-Extensive competition(too many competitors)

Special industry issues/ problems–Increasing consumption despite stricter laws and healthier lifestyles.-Oversees expansion

Profit Outlook–Not very good because of flat sales, increased taxation, and limited success of previous microbreweries.

The company is actually doing pretty good. For the first five months of the new year he will show a profit. Last years numbers are misleading as to the direction in which the company is going. If it were not for the huge advertising expense, he would have shown a profit last year. The company’s competitive approach is as follows. Differentiation. GGB brews a full-bodied lager instead of the mass marketed lighter, paler beers. They use the best hops in the world($4.50/lb as opposed to $.55/lb). The beer is also brewed in the old German Reinheitsgebot tradition. GGB has a market niche. They target the beer aficionados, one who knows how to distinguish a well made beer from an average to below average beer. Distribution. Because of GGB’s size a door to door distribution campaign is used. GGB solicits to restaurants, bar owners, and liquor stores. Their market coverage consists of the San Francisco area and Munich, Germany.

The following is a projected 5 year forcast. Assuming all things remain equal.

(A) Sales @.20 inc.408,000489,600587,520705,024846,028

(B) Cost of goods sold273,000321,300385,560462,672555,206

Gross Margin135,000168,300201,960242,352290,822

(C) Shipping84021,84021,84021,84021,840

(D) Salaries101,003106,053111,355116,922122,768

Rent4,8004,8004,8004,8004,800

(E) Truck lease20,80024,96029,95235,49243,130

(F) Marketing/Promotion 55,0002,0003,0004,0005,000

(G) Repairs1,0001,0501,1021,1571,215

Depreciation7,5007,5007,5007,5007,500

(H) Other9,0579,5099,98410,48311,007

Net Income(65,000)(9,412)12,42739,70873,562

(C) 1986, 70 cases x 24 bottles x 5 = 8400 bottles per week x 52 weeks

= 436,800 x .05 = 21840 *lower cost per bottle due to larger shipments.

Strengths- low overhead, well thought of by buyers, expertise in brewing, fifth generation brewer, Cook’s education, Crowned best beer in America, Penetration into a German market, access to financing looks favorable.

Weaknesses- After six months of operation, still in the red. High costs of truck leasing, high initial cost of advertising, distribution extremely weak, costs more to brew than imports, narrow product line.

Opportunities- Pending affiliations with large distribution network, continued expansion in Europe, possible purchase of abandoned brewery in hopes to expand production capabilities.

Threats- GGB is locked out of 90% of market in Munich, GGB is in a risky business, competition from national, regional, and imports. U.S. population concerned with healthier lifestyles. Blue collar workforce declining. Stiffer laws, regulations, and penalties.

Due to lack of financial information on GGB it was impossible to make accurate price/cost comparisons. However, from a present-day experience, I would conclude that GGB’s prices are not competitive with the top national breweries, but are more in line competitively with other regional, local brewers. According to the case, GGB costs 2-3 times what it costs too brew imported beers. Due to this comparison, it is fair to state that GGB’s production costs are extremely high, thus cutting into their profit margin.

Rating scale: 1 = very weak; 10 = very strong

Strenght measureWeightGGBImportAnchorSierraMendo.BoulderNY Beer

Quality/product perf..2010/28/1.66/1.25/15/15/18/1.6

Reputation/Image.158/1.210/1.55/.756/.905/.755/.757/1.05

Manufacturing capability.105/.59/.97/.74/.43/.36/.67/.7

Technological Skills.057/.357/.355/.255/.255/.255/.255/.25

Dealer Network/Distr..153/.459/1.357/1.054/.63/.454/.67/1.05

Marketing/advertising.103/.38/.83/.33/.33/.32/.25/.5

Financial Strength.104/.48/.85/.55/.55/.56/.67/.7

Relative Cost position.153/.456/.94/.65/.755/.755/.757/1.05

Overall Strength rating1.005.658.205.354.704.304.756.90

CONCLUSIONS CONCERNING COMPETITIVE POSITION

The companies competitive position is improving due to the quality of the product, reputation that is being gained, and technological skills by way of brewing process. The advantages that GGB has is quality, reputation(Best Brew in America), sound management, and recipe. The disadvantages facing GGB are costs, dealer network/distribution, financial strength, and marketing/advertising.

It is assumed that demand in the industry will remain flat. This will remain true for the next 10 to 20 years. Because of flat sales in the industry, a few companies will be forced to exit the industry. GGB will continue on its slow growth pace.

STRATEGIC DIRECTION/TARGET OBJECTIVES

Golden Gate Brewing Company is a leading small scale brewer of America’s Best Beer. It is the companies mission to give American’s an alternative to drinking foreign beer by providing a beer that is superior in taste and quality.

-Protect current position while concentrating on expanding into other markets. (5 years)

-Improve dealer/distribution network

-Improve access to financial capital for future endeavors

-Come up with some low cost ideas to promote product(Beer sponsorship at local pub’s) -Exploit being rated “Best Brew in America”

-Open additional plant in San Francisco Brewery

Golden Gate Brewing Company should take a fortify and defend strategy. With a moderate growth strategy, GGB will be able to maintain it’s current position and respond to changing market conditions better. Because there is little room for growth in the industry, GGB will need to carefully watch the moves of competitors. With a conservative growth strategy, GGB will not step on any of the bigger companies toes thus enabling GGB not to get squashed. The distribution network needs to be greatly improved. An improved dealer network would lower costs, and free up some of Cook’s time so that he can focus on other issues within the company. GGB also needs to look into ways to exploit the rating of “America’s Best Brew”. Optimization of both the old and new San Francisco facilities is essential.

APPROACHES/MOVE TO GAIN COMPETITIVE ADVANTAGE

GGB should slowly expand into new markets while at the same time strengthening it’s present position. GGB should continue with it’s differentiation strategy. Because they are an alternative to imported beer, they should proceed with the positioning of a high quality, connoisseur’s beer. The status of being the first U.S. brewed beer to be sold in Germany could also be used to gain competitive advantage. GGB might consider having “Best Brew in America” printed on the bottle. Posters for bars would be an inexpensive way to promote the product. GGB could also sponsor special nights at bars/pubs where they could offer discounts on the product or have contests.(Beer tasting contests)

Marketing/sales- The core competence for this company is quality and being rated the “Best Brew in America.” It is marketing and sales job to stress this competence. There are low cost ways to support these claims. Putting these features on the bottle’s label will entice those who see. Any one who is a beer drinker will want to try a beer that has been rated the “Best Brew in America”. Quality should be exploited.

Finance- The company has three options for financing future projects. These options are an IRB, UDAG, or Market rate financing. The most appealing type of financing for GGB is the IRB or Market rate financing. The USAG is not very attractive because of the restrictions on profits. The other two options are still questionable. What bank is willing to lend that much money with the financial status of GGB. It will be tough for GGB to get a loan for that large of an amount.

Distribution- This is a key area that GGB needs to improve and expand in order to grow. If the company can find an attractive way to better distribute it’s product, GGB will have access to previously unattainable markets. A regional distibutor would be a good way to start off the distribution network.

Prodution- The key to lowering costs will be having a very efficient production facility. They can increase prodution which will lower the amount of fixed cost per product. They should look into ways of cutting down on waste.

OTHER STRATEGIC ACTION RECOMMENDATIONS

GGB needs to look into ways to lower overall costs without reducing the quality. They could shop around for a cheaper supplier of packaging. They should also look into the options of buying some used trucks. This will lesson the high cost of leasing the trucks. Once a good distributor is found, costs will get lower as a result of more production thus enabling the costs to be spread out more evenly over the product.

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Cite this Analysis of the Beer Industry Essay

Analysis of the Beer Industry Essay. (2018, Jun 29). Retrieved from https://graduateway.com/analysis-of-the-beer-industry/

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