BA 630

Industry Analysis
The Beer Industry

Spring 2010

Beer Industry
The term beer means any beverage brewed from a starch (or farinaceous)
grain. Because the grain is made into a malt, another term for beer is malt liquor.
(The Beer Industry)
According to the North American Industry Classification System, the beer
industry is found in section 312: Beverage and Tobacco Product Manufacturing.
NAICS states that Industries in the Beverage and Tobacco Product Manufacturing
subsector manufacture beverages and tobacco products. The industry group,
Beverage Manufacturing, includes three types of establishments: (1) those that
manufacture nonalcoholic beverages; (2) those that manufacture alcoholic
beverages through the fermentation process; and (3) those that produce distilled
alcoholic beverages Although beer is within the same section as wine and
distilled spirits, they do not consider them the same. Within section 312 they have
five separate sections: Beer can be found under section 312120 Breweries. Within
this section the term Breweries is comprised of establishments primarily engaged
in brewing beer, ale, malt liquors, and non-alcoholic beers. However, Standard &
Poors would say that distilled spirits, wine, beer and tobacco are all a part of the
same industry the Alcoholic Beverage and Tobacco Industry.
The question we must ask is who is right? How do we determine if beer is an
industry on its own or if it is the same as the beverage industry as a whole? There
are two questions we must ask ourselves in order to answer this question. One, do
the consumers view beer and other beverages the same? Two, can the producers of
beverages easily switch from producing one to another?
OR
Mil
k

Alco
hol

Oth
er
Cof
ee

Wat
er

So
da

OR
Win
e

Spir
its

Bee
r

BEER
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I will first look at the consumer point of view. I think that I can easily argue
that consumers to do see beer the way they would any other beverage. For
example, I cannot imagine that a mother would decide whether or not to give their
child a glass of milk or a cold glass of beer. They are not the same product! Whether
it is juice, milk, soda, or alcohol they are not the same. Each one has a separate
purpose. Therefore, I would say that consumers do not view the beverage industry
the same. However, if we only look at the alcohol industry we may get another
answer. If we look at the middle diagram above you see three types of beverages:
beer, wine, and spirits. We already learned that Standard and Poors would group
them together and this may be true on a consumer point of view. If you were going
to a house warming party and were asked to bring an alcoholic beverage you may
or may not have a tough time making your decision. Some people are only wine
drinkers and would not think twice about switching from wine to beer or spirits.
However, some people may not care. If they were standing in the store and saw that
the price of a bottle of wine had gone up significantly, they would consider an
alternative to bring to the party. They may decide to look at the price of beer
instead. In my opinion, consumers may or may not see beer as an alternative to
wine or spirits. I really think it depends on the customers. Everyone has a diferent
opinion especially when it comes to beverages. So to answer our question above,
my answer is maybe.
If we look at how producers see the beverage industry we will find that it
would be near impossible to just switch from making one type of beverage to
another. For example, a wine producer uses grapes and other fruits to produce wine.
I am sure that the structure of their factories is very specific to the wine production
that there would be no way to just start making beer. Beer is not made from grapes
or other fruits; it is made from wheat, barley, and hops. They are completely
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diferent products. Not only would you have to basically build or buy a new factory
but you would also have to switch suppliers, learn how to produce a new product.
This cannot be done easily. Therefore, producers would not see these products as
the same.
Now that we have answered our two questions I think we can agree that beer
is not in the same industry as wine or spirits or the beverages in general. Beer is
within its own industry based on our findings above.
I would consider beer as a separate product. I would say that the beer
industry is comprised of three segments: Premium Domestic, Microbrew/Craft, and
Imported Beer. I say that it is broken down into three segments because beer is not
just beer. There are diferences in the type of beer we consume. Although I feel that
there are really only three segments to the beer market, author of The Brewers
Handbook, Ted Goldammer says there are 10 segments in the beer industry:
imports, domestic specialties, super premiums, premium regular, light, malt
alternatives, malt liquor, popular regular, and others (The Brewers Handbook).
Goldammer says that the light beer segment is the most significant trend in todays
market. In 2008 there were two leading producers that continue to dominate the
beer industry in the US. According to the Beer Marketers Insights, Anheuser-Busch
Companies Inc. led the pack with a 48.6% share of volume in 2008 (up 0.4% from
2007) and MillerCoors claimed 29.4% (down 0.1%) (Standard and Poors). To
determine the Four Firm Concentration Ratio we would look at the top four firms in
the beer industry. In 2008, the top four leading brewers held 83% of the market
share. Anheuser-Busch is the leader with 48.6%, MillerCoors came second with
29.4%, third place goes to Crown Imports with only 5.3%, and the fourth leading
producer is Heineken USA with only 4.0% which is only a fraction of what the first
two producers obtained (Standard and Poors).
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Craft brewery is a small, independent, and traditional market. Most craft

brewers are small because they produce less than 2 million barrels of beer per year.
Beer production is attributed to a brewer according to the rules of alternating
proprietorships. Alternating proprietorships is an agreement between two people to
share the physical space of a brewery. According to The Alcohol and Tobacco Tax
and Trade Bureau, the proprietor of an existing brewery, the host brewery,
agrees to rent space and equipment to a new tenant brewer. Alternating brewery
proprietorships allow existing breweries to use excess capacity and give new
entrants to the beer business an opportunity to begin on a small scale, without
investing in premises and equipment. They are independent because less than
25% of the craft brewery is owned or controlled by an alcoholic beverage company
who does not brew craft beer already. Within this market there are four segments:
Microbrewery, Brew Pubs, Contract Brewing Companies, and Regional Breweries.
Microbreweries produce less than 15,000 barrels of beer per year. Approximately
75% of its sales are of-site. Brewpubs are mostly local restaurant breweries that
sell more than 25% of its beer on-site. The beer is brewed for the restaurant/bar and
comes directly from the brewers storage tanks. If allowed by law, they may sell
beer to go and/or distribute of-site. Contract Brewing companies are mainly
businesses that hire a brewery to produce beer for the business. It may also be one
brewery contracting another brewery to produce additional beer. Regional breweries
have an annual beer production below 2,000,000 barrels. (www.craftbeer.com)
Imported beer is of course beer produced outside of the United States but
distributed within the United States.
I would say that customers treat all beers as close substitutes. If the price for
specialty craft beers go down you may see a decrease in the premium domestic
brews from the major producers. However, if the price of the craft beer goes up, you
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will likely see a switch back to the premium domestic brews. Producing beer in
either segment uses much of the same technology. Producers may be able to switch
from producing high-end domestic beer to a specialized/craft beer without having to
build new factories. Geographically, this industry is on a local, national, and even
global scale. The domestic beer market is mainly national, where the
microbrew/craft brews may be more local. Of course, imported beer makes the
market global.
According to Ted Goldammer, the U.S. beer industry is the largest alcohol
segment nationwide. It is stated that the beer industry accounts for nearly 85% of
all alcohol volume sold in the United States and that it generates more than $91.6
billion annually in retail market sales. The most concentrated of the three beer
sectors is the domestic brews with three major brewers: Anheuser-Busch, South
African Breweries Miller (SAB Miller), and Molson Coors Brewing Co. The three of
them combined account for approximately 79% of all beer sales annually. (The
Brewers Handbook)
Five Forces that Shape Industry Competition

Suppliers:
Farmers
Brewing &
Packaging

Threat of Entry:
Threat of non-beer
producers that can
potentially enter
the market. Such as
Soft drink producers

BEER
Substitute

Buyers:
Wholesalers
Restaurants
Grocery/Liquor
Stores
Consumers

Products:
Barriers to Entry
Wine
The ease in which one can enterSpirits
the beer industry is very important to look at
Non-Alcoholic

Beverages
for ensuring competitive performance.
It appears that the entry into the beer

industry is fairly easy. The beer industry is heavily regulated by federal/state/local

governments, but they do not cause major hindrances to enter. I would say that the
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most significant barrier caused by government regulation would be the taxes set
upon brewers. Economies of Scale can be a barrier to entry. An economy of scale is
when you are able to produce large quantities of your product at a decrease in
costs. According to the Beer Industry, economies of scale do not make it impossible
for a newcomer to enter and be required to supply a large portion of the industry
output. There are only modest costs economies, if any, that can be exploited in
plants with capacity above 10 to 12 million barrels, and production economies may
be ofset by the high shipping costs necessary to move so much beer to market
(The Beer Industry).
You should also consider the size of current competitors which may have an
impact of entry. Lets look at the packaging of the plants output when looking at the
economies of larger breweries. Anheuser-Buschs Houston brewery for example can
produce approximately 1,100 bottles per minute. Other modern canning facilities
are slightly faster with 2,000 cans per minute. It would take a fairly large brewery to
be able to utilize large equipment in this capacity. Being a large brewery will also
help you cut down on labor because you will be able to use more automated
machinery which will also cut down on capital costs. Construction cost per barrel is
cut by about one third for a 4.5-million-barrel-capacity plant relative to a 1.5-millionbarrel-capacity plant (The Beer Industry).
Customer switching costs can be a factor when deciding to enter a market.
An entrant is going to have a very difficult time gaining customers if the costs of
switching are high. In the beer industry, customers are not afected with high
switching costs. They have nothing to lose if they switch to purchasing beer. It
wouldnt be like the airline industry where certain airlines give frequent flyer miles
to their customers. The cost here would be great. If a customer flies with one airline
a lot and has built up a large number of miles, they cannot take the miles with them
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if they decide to fly with another airline. They would basically lose those miles if
they switch. Beer drinkers do not have a significant monetary loss if they switch
from drinking Bud Light to a local craft brew.
The number one factor that can prevent entrance is the high capital
requirements. The price of constructing a modern 4- to 5- million-barrel brewery is
over $250 million. Marketing the new brew also is costly because entrants must
introduce their products to consumers already smitten by the advertising of
incumbent firms. Since World War II, no new entrant has cracked the top three
sellers of beer in the U.S. beer market (The Beer Industry). It is important to
mention the imported beer segment in this section. Imported beers in the U.S. come
primarily from Canada, Mexico, Germany and the Netherlands. The beer imported
from this segment have increased more than 32-fold in the period from 1970
through 2006 (The Beer Industry). In 1998 the brand Corona Extra from Mexico
became a top 10 beer brand in the U.S., making this the first imported beer to
become a top contender in history. Another reason entering the beer industry can
be risky is the large amount of sunk costs involved. Once you build a factory to
produce beer that is all you can do. It would be near impossible to switch from
producing beer to a diferent product like wine for example.
The beer industry also faces product diferentiation in a slightly diferent way
that we would think. When diferentiating beer, we do so by how premium it is.
The phenomenon of premium beer first began when a few brewers began marketing
their product nationally and added a price premium to help ofset the shipping costs
required to reach the national market. To secure the higher price, premium beer
was promoted as superior in taste and quality, allegedly because of the brewing
expertise found at their place of production(The Beer Industry). Although the
transportation of products was no longer a large factor for most large breweries, the
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premium image remained even after prices decreased mostly because of heavy
advertising.
Access to distributors is a major factor when looking at entering the industry.
The distribution process for the beer industry focused on the three-tier system:
Brewer/Importers to Wholesaler to retailers to consumers. The brewers and
importers brew beer for consumption in the U.S. and can include company-owned
packaging and wholesaling operations. The wholesalers act as the middle tier or
your distributors. They purchase beer from the producers and sell it to retailers.
Retailers sell the beer directly to the consumers one of two ways: on-premise
consumption and of-premise consumption. On-premise means the beer is
consumed at that location, i.e. bars, restaurants, hotels, etc. Of-premise
consumption is where the consumer buys the beer to consume at home or
elsewhere. They would purchase from the grocery store, convenience stores, liquor
stores, etc. On-premise sales are the leading retail channel followed by
convenience stores and supermarkets. Brewers generally make higher margins with
on-premise sales (The Beer Industry). There is extremely little forward integration
by breweries into the marketing of beer. In the United States, brewers generally are
prohibited by law from owning retail outlets, leaving wholesale as the only
legitimate forward vertical integration route (The Beer Industry).
The distribution system is slowly changing away from requiring breweries and
retailers to go through distributors. Large retail customers, notably chain stores,
prefer to purchase beer directly from the brewers, bypassing the wholesale
distributor (The Beer Industry). In 2005, the Supreme Court found that New York
and Michigan had violated the U.S. Constitutions Dormant Commerce Clause. The
court ruled that, although the states have broad power to regulate liquor and have
done so through the use of a three-tier system involving licensed distributors New
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Yorks and Michigans discriminatory bans on interstate direct-to-consumer wine

shipments were unconstitutional. The court said that the distribution of wine should
be fair across the field. If a state will allow in-state direct shipping from the wineries
to the consumer which bypasses a distributor, then they must also allow this for
out-of-state wineries. The state may still prohibit direct shipping to consumers, but
the same rules must apply to both in-state and out-of-state wineries (Standard and
Poors). Although this was related to wine, the question of whether beer was any
diferent came up. Standard and Poors sees the dismantling of the three-tier
system to be positive. One advantage would be to the small breweries that would
be restricted to sales within the state they are located. Furthermore, due to the
small size and lack of power, the small companies are not as able to negotiate
competitive distribution contracts with large-sized wholesalers, and therefore
missed opportunities to get their products in front of a larger audience through that
route (Standard and Poors).
However, direct distribution can be very costly for a small company. By
opening state lines, distributors now have greater access to other regions in the
market and the potential for more efficient operations; by opening up state lines,
wholesalers could possibly scale their networks, warehouses, and relationships to
improve efficiencies and lower costs (Standard and Poors). However, the lack of
distributors may also have its downsides. Beer distributors are able to deliver the
most variety of manufacturers small and large, domestic and international to the
consumers. According to Standard and Poors, the lack of distributors may make it
harder for new breweries to get their product to consumers. The number of
distributors has dropped significantly over the years. In 1995 the number of
distributors has dropped from 5,500 to about 2,000 as smaller multi-brand
wholesalers have been bought out (The Brewers Handbook). Beer distributors help
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the government control the sale and marketing of alcohol, collect taxes, and to
eliminate underage drinking. Beer distributors provide a clear chain of custody in
the sale of beer. They source alcohol only from licensed brewers and importers and
sell only to licensed retailers. This system helps to ensure that retailers hold the
appropriate license, do not sell to those under the legal drinking age, pay state and
local taxes and generally comply with local alcohol beverage laws (Americas Beer
Distributors). I would say at this point the bargaining power of buyers would be high
in regards to distributors. Many distributors today are very large scale and do not
depend solely on the beer industry as they may have contracts with several other
producers such as non-alcoholic beverage companies, distilled spirits, etc.
Consumers do not really play a huge part in the bargaining power as much as
distributors/retailers would. In order to get the product out there breweries are
going to have to depend on outside resources unless they have their own
distribution company.
Expected Retaliation is also a threat to entry into an industry. If some of the
current players have been known to retaliate against possible newcomers, then the
threat is very high and it will be very difficult for one to enter simply because they
are scared of that they will be retaliated against. I did not find any substantial
evidence that retaliation is a huge threat when entering the beer industry. As we
read earlier, entry into the beer market is fairly easy. The threat does not come from
the current brewers within the industry, as much as having the capital to begin
production and gain loyal customers. That is not saying that you shouldnt be afraid
of the other brewers because they will retaliate against each other which I will
mention later.
Power of suppliers
When looking at the whether the suppliers of the beer industry have more
power over the brewers we must look at several factors such as supplier
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concentration compared to the producers, dependency of one group on another,

participant switching costs, diferentiated products, lack of substitutes, and
integration. Generally speaking a supplier will have more power if they are more
concentrated than the producer. At this point, I cannot honestly say whether the
suppliers for the beer industry are more concentrated. I would have to look at all of
the diferent suppliers within their own industry in order to determine that. Brewers
heavily depend on all of the ingredients needed to brew beer. However, that does
not mean that just because the brewers depend on the products the suppliers have
more power. I would assume that it is diferent for each segment that supplies the
beer industry. I would imagine that hops growers would not have as much power
simply because Hops are not used in anything other than beer to my knowledge.
They can however; say they will not produce Hops anymore and switch to a
diferent crop, but at what expense? This may not even be a valid argument. It
might not be as easy as it sounds to just switch to a diferent crop, who knows? The
beer industry depends on hops growers just as much as the hops grower depends
on the beer industry. It would not make any sense for them to argue back and forth
over price when it will lead nowhere. I would imagine that they just come up with an
agreeable solution that keeps both in business. Without one, the other will fail in my
opinion which would argue that there is no substitute for hops. Wheat growers
though, they may have the upper-hand. Wheat is used in so many diferent areas
that they are not dependent on the beer industry the way Hops is. They could easily
say that they can just take their business elsewhere much like the bottling/canning
companies could. There are plenty of other markets out there that these companies
could take their business if economies-of scale allowed.
According to Standard and Poors, the level of vertical integration among the
largest US brewers varies by company. Anheuser-Busch is a classic example of
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vertical integration. Anheuser-Busch obtains its raw materials both internally and
from independent sources. (Standard and Poors) Anheuser-Busch operates farming
activities for grains, rice drying and milling. It also manufactures beverage cans for
its own use as well as for other companies. They also have several other whollyowned subsidiaries which produce cartons, labels, and recycling of aluminum cans
and bottles. AB is not the only company to use wholly-owned subsidiaries to
perform non-brewing functions; SABMiller and Molson Coors began using this model
(before they merged together in 2007). For the large major brewing companies,
economies-of scale are not such an issue. They may have the bargaining power
over their suppliers because they could potentially say, its okay, I can just create
my own bottling business much like Anheuser-Busch did. Small microbrew/craft
brewers may not be this lucky. They will not have the capacity within their current
factory or the financial means to begin this threat. Sadly, the suppliers have more
bargaining power than the producers do (not including hops growers).
Power of Buyers
Consumers play an important part in the pricing of beer within the industry.
According to Standard and Poors, the relatively saturated US market for alcoholic
beverage and tobacco products acts to limit manufacturers pricing flexibility.
Instead, producers rely on brand loyalty to maintain profits. Economists see beer as
an experience good, meaning the characteristics of the beer can only be measured
after it has been consumed (The Beer Industry). The beer industry knows this, which
is why they advertise so heavily. Their advertisements will tend to show what kind of
image one would posses by drinking their brand. According to The Beer Industry,
statistical estimations indicate that the market demand for beer is inelastic- in the
range of 0.7 to 0.9. Brand loyalty is not strong enough to make the demand for any
particular malt beverage inelastic. Non-consumer buyers do not really have power
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over brewers either. Packaging manufacturers who rely on the beer industry as well
as other non-alcoholic beverage producers cannot threaten the producers by
integrating backwards and producing the products themselves. Instead, it is the
other way around which we saw earlier. The brewers would be able to begin
producing their own packaging materials which gives this group very little power.
Threat of Substitutes
The threat of substitutes varies for the beer industry. Porter says that a
substitute performs the same or similar function as an industrys product by a
diferent means. Why do people drink beer? The answer varies among consumers.
In college, most consumers drink beer for the alcohol and to have a good time. In
most cases, your typical college student of drinking age is not looking at the quality
of beer they can purchase they are looking at the quantity of beer they can
purchase. Most likely, they are going to purchase premium beer; either highpremium or low-premium. However, if they are able to buy vodka, rum, or any other
distilled spirit at a cheaper rate, they will purchase that instead of beer.
A leading substitute for beer back in the early 1990s was Zima. Zima was a
clear malt beverage and was very appealing to women. Because it was clear many
men didnt feel it was a mans drink so they didnt consume it as much. In an
attempt to sway the men, Zima created an Amber colored Zima and advertised the
product heavily. They tried to say that if you drank Zima you would be cool and the
party would be rockin. That however, did not catch on and Zima finally went out of
business.
Wine coolers used to be very popular especially among women. It is a fruity
wine spritzer with about the same alcohol content as beer. In my opinion many
women prefer a fruity fun drink rather than a bitter, harsh drink like beer. To
compete with the wine coolers, a new line of malt beverages became very popular.
Mikes Hard Lemonade was a perfect alternative to beer. It now comes in many
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flavors such as lime, strawberry, raspberry, etc. Smirnof started to see the trend of
these malt beverages and began producing Smirnof Ice, a delicious malt beverage.
It too comes in many flavors.
Rivalry among existing competitors
You tend to see an increase in rivalry when you have a large number of
competitors. As of today, there are more than 1,500 breweries in the United States.
This includes the number of all breweries both premium domestic and
microbrew/craft brewers. The beer industry saw a fluctuation of breweries from the
1960 2005. According The Beer Industry, the number of brewers was only 175 in
the year 1960 and dropped down to only 71 in the year 1985. Since 1985, the
growth of the market was slowly rising, ending with 1,367 in 2005. In the past 5
years we have seen a slight increase, but I expect this trend to continue to be flat.
To use the terms local, regional and national does not really mean a whole lot in the
beer industry the way it used to. When we had a smaller number of brewers, you
truly had defined them into these markets. Very few brewers we able to branch out
of their local or regional areas and even fewer were able to operate nationally. The
geographic territory served by the major brewers from one plant has grown due to
the economies of large-scale production and, to some extent marketing (The Beer
Industry). During the 1950s through the 80s there were large number of
consolidations among the brewers. Many regional brewers simply went out of
business mainly because of consumer preference at the time. Many people in this
period were moving away from the dark, strong flavored beer and were moving
more towards the lighter beers. Another reason for the small increase in
concentration was a few mergers that took place. In the 1970s Miller Brewing
company was acquired by the tobacco company, Philip Morris. Miller and Coors were
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involved in many diferent mergers throughout the 70s and into the 2000s. The
most notable merger came in 2007 when Coors and SAB Miller announced their joint
operations in the U.S. Although, Coors and SAB Miller held the second and third spot
on the top three lists of brewers, their combined eforts did little to afect AnheuserBusch which still had 50% of the market share alone. With the merger of these two
companies we saw a change in the CR4. In 2008, the top four brewing companies by
total beer sales in volume were Anheuser-Bush holding number one, MillerCoors in
second, Pabst Brewing Co. in third, and Boston Beer Co. taking fourth. Although we
have 4 companies leading the pack in terms of total volume sales, we have to give
it to Anheuser-Busch for really stealing the game. They have been on top of the
beer industry since 1957 when they officially became the largest beer producer in
the United States, a spot they have yet to lose.
The top four brewers claim more than 83% of the market share in the year
2008. This would go to show that the rivalry within this industry is going to be
relatively low in regards to pricing. So rather than have price competition we will
see more non-price competition within the beer industry. After Phillip Morris
acquired the Miller Brewing Co. in the 1970s the advertising game changed forever
when the popular T.V. advertisements for Lite Beer were introduced featuring
popular NFL and MLB players. One of the most famous slogans was the Tastes
great, less filling which was a pitch to sell their new line of lite beer. From here,
all of the other major brewers quickly began to produce their own version of light
beer and advertising heavily. In 2007, the beer industry spent roughly $975 million
on advertising costs according to the Brewers Handbook. The top three of course
go to Anheuser-Busch who spent $378 million, SAB-Miller spent $175 million, and
Molson Coors spent $151 million in 2007. Most of the advertising dollars went to
promoting the high-premium and light beers.
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Bibliography
1. Americas Beer Distributors. www.nbwa.org/about/what-is-a-beer-distributor
2. Beer Sales. www.brewersassociation.org/pages/business-tools/craft-brewingstatistics/facts
3. Elzinga, Kenneth G. The Beer Industry
4. Goldammer, Ted. The Brewers Handbook: The Complete Book to Brewing
Beer. www.beer-brewing.com/beerbrewing/US_beer_industry/beer_segments.htm
5. North American Industry Classification System: NAICS
6. Standard and Poors Industry Survey. Alcoholic Beverages & Tobacco,
November 12, 2009.
7. www.craftbeer.com
8. The Alcohol and Tobacco Tax and Trade Bureau (TTB) website:
http://www.ttb.gov/beer/alternating_prop.shtml
9. http://www.beerhistory.com/library/holdings/beer_commercials.shtml

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