Opportunities and Threats – Analyzing Analyzing the External Environment Case Analysis on:
The United States Beer Industry
1. Why has the United States brewing industry become more concentrated over the last two decades? The United States brewing industry become more concentrated over the last two decades because the industry has changed in a number of ways. Specifically, there are three reasons cited. First, the consumption of beer in the United States has been gradually declining ( even though consumption of premium beer has been increasing). Second, advertising spending has steadily increased putting small brewers at a disadvantage. Third, due to a combination of technological change in canning and distribution and increased advertising expenditures, the size that a mass-market brewer has to attain to reap all economies of scale – called the minimum efficient scale of production – has steadily increased. This resulted to a radical decrease in the number of mass-market brewers in the United States. Because of the high competition that revolves around aggressive pricing, brand loyalty, distribution channels and national advertising spending only 24 mass market brewers were left in the United States down from 82 in 1970. Among these, three companies dominate making the brewing industry become more concentrated.
2. Analyze the competitive structure of the industry using PORTER’S FIVE FORCES MODEL.
1. Risk of Entry by Potential Competitors In the case of the United States Beer Industry, we have identified three established companies, namely: the Anheuser-Busch, SAB-Miller and Molson Coors. These three are under the mass market segment where competition revolves around aggressive pricing, brand loyalty, distribution channels, and national advertising spending. Using the first force in Porter’s Model, we considered companies in the premium beer
segment as potential competitors. The case describes this segment as served by a large number of microbrewers and importers, the majority of which have a market share of less than 1%. It was also described that this segment builds their brands brands around taste and cover higher product costs by charging much higher prices – roughly twice as much for a six pack
as the mass market brewers and that the microbrewers and importers have been gaining share and currently account for about 11% of the total market. In this case, we identified that the risk of new entry is low through which these three companies took advantage of this opportunity to raise/lower their price (aggressive pricing) and to earn greater returns (this is illustrated in the case as these companies are the top three holder of the market). Also, there are high entry barriers such as the presence of brand loyalty and economies of scale. In terms of brand loyalty, the three established companies are the preference of the consumers since 80% of all beer consumed in the United States is produced by these companies. They can also increase their brand loyalty through continuous advertising (which as described in the case , advertising cost steadily increased) because they could afford it more than other companies. This significant brand loyalty makes it difficult for new entrants/potential competitors to take market share away from established companies. In economies of scale, the Anheuser-Busch is superior. Since this established companies have economies of scale, they reduce the threat of entry of potential competitors. This means that high entry barriers may keep potential competitors out of an industry even when industry profits are high. 2. Rivalry Among Established Companies The beer industry of the United States is considered as a consolidated one since it is dominated by a small number of large companies. The dominating companies are namely: Anheuser-Busch, SAB-Miller and Molson Coors. With this, the industries competition revolves around aggressive pricing, brand loyalty, distribution channels and national advertising spending. We can say that the rivalry among the established companies are intense since in a consolidated industry any changes in each others prices or offers to customer value in their product may increase the rivalry among the companies. In addition, the decline in the consumption of beer may cause higher rivalry since the companies will compete for the existing customers and the only way for a company to grow in this situation is to take market share away from other companies. The increase in cost conditions due to increase in advertising spending and technological change incoming and distribution may cause a threat to the established companies and to newly entered company in the industries. The change in the demand of beers, sales of the company enable them to cover their cost but with lower profits. Exit in the industry is relatively costly and exit barriers are high. 3. Bargaining Power of Buyers
The consumption of beer in the United States had gradually decline over the last two decades. As a result, the buyers of beer from the three big companies Anheuser-Busch, SABMiller and Molson Coors have bargained for lower prices since they know that there will be fewer buyers of beer than before. In addition, these powerful buyers have raised the costs and sought for better quality products and services. The buyers also have used the threat of switching their company of choice by choosing the premium beer segment. 4. Bargaining Power of Suppliers In brewing industry, the main inputs are beer, bottles and machine used for operations. Since these inputs are offered only by few suppliers that time, the bargaining power of the supplier are high. The suppliers can demand high price and the br ewing industries can’t force the price down. This bargaining power of the supplier is a threat to brewing industries and they can’t just change their suppliers because it is too much costly. Also the product that suppliers
sell has few substitutes making it hard and unwise to jump from one supplier to another. However, over the growing decades, new technology arise and innovation is raging high making the inputs of the brewing industry easy to attain. Thus, the bargaining power of the supplier starts to lessen. The beer industry has now alternatives to choose from bottles and plastic.
5. The Closeness of Substitutes to an Industry’s Products When wine and spirit industry started to bloom, beer consumption in the United States started to decline. Notoriously, wine and spirit are substitutes to beer that’s why when these substitutes offer lower prices over beer, most patrons switched drastically to them. The existence of these close substitutes signifies a strong competitive threat since it limits the price that companies can change. if the beer companies don’t put a strategy to compress these threats, they might lose their power/control over the market and the competitor might gain the power.
3. What are the implications of the evolving competitive structure in the brewing industry for the profitability and strategy of a smaller mass-market segment firm in the industry? The booming industry of the substitutes – wine and spirits, is an alarming threat to the three dominating big companies namely: the Anheuser-Busch, SAB-Miller and Molson Coors. However, their effects are much greater to the small mass-market segment. When threats emerge, small mass-market segment suffers most due to their low capital, small scale economy, and other factors. For example, when a new big company enters
the industry, the share of market of small mass-market companies become small and this will result to smaller profit. Now the small mass-market strategy might not be anymore and something much better is needed. However new strategies means new cost which may not be able to afford by the small mass industries. 4.
Are there different strategic groups in the industry? What are they? Do you think the nature of competition varies between groups? Yes, there are 2 different strategic groups that can be observed – 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 while premium beer segment focuses on discerning buyers and they build their brands around taste and cover higher product costs by changing much higher prices. The nature of the competition does not vary between the group however effects of these competition may differ depending upon the kind. Say for example, the substitute, wine and spirit, the closest competitive threat to beer industry. The sudden appearance of these substitutes offering cheaper price forces the beer industry to limit their change or else the customers will turn to substitutes.
