THE COMPETITIVE FORCES AFFECTING INDUSTRY MEMBERS: PORTERS FIVE-

FORCES MODEL FOR ANALYSIS

Pressure from Buyer Bargaining Power--High

The three components that make up the buyers of beer are made up of distributors/wholesales,

retailers/restaurants, and consumers. Distributor/wholesalers embody an essential link in the market

channel for breweries here in the US given regulations prohibiting the sale of beer directly to both

retailers and consumers. Thus, distributors/wholesalers have quite a bit of bargaining power and can

impact market share by way of their support, marketing, and promotions depending on the incentives

offered by the manufacturer.

Retailers and restaurants are another cog of the buyer channel. The main goal of the retailer is to drive

traffic through their stores in order to improve sales and, coincidentally, balancing profit margins. As a

result, retailers are looking to stock their shelves or bars with the beer products that are selling with a

recent focus on more sub-premium brands due to the recent economic situation, as well as supporting

their growth of craft beers which have been outgrowing the industry and offer higher average selling

prices as well as higher margins.

Lastly, consumers ultimately drive the preferences of both the distributor and the retailer channel as they

are the end user of the beer beverage. With the plethora of beverage choices in the market, both

alcoholic and non-alcoholic, along with the consumer becoming increasingly knowledgeable, several

themes have played out impacting the industry: As noted above, consumers are trading up to craft beers

given consumers are drinking less as a whole and looking for more flavor when they do. Thus, the

newness, interest in experimentation with unusual flavors, and, often, the desire to support local business

is driving a shift to the smaller brewers. At the same time, the beer consumer is also economically

sensitive so a trade down to less expensive sub-premium beers is occurringthus, squeezing the middle

tier brands/players. Notable here is beer prices have grown ahead of inflation over the last 5-6 years and
increasing excise taxes are also impacting the affordability of beer. Health and wellness (believe it or not)

is also a theme playing out in the beer industry with strong consumer appeal for lower calorie, ultra-light

beer.

Pressure from Supplier Bargaining Power--Medium

Competitive pressure from supplier bargaining power is considered to be generally low with respect to the

industry as a whole. However, due to the high commodity raw material exposurearound 58% of

industry cost of goods soldwhich include packaging (glass/aluminum/cardboard), barley, sugar, malt,

corn, rice, wheat, hops and preservatives--uncertainty regarding cost swings is high. Suppliers of these

materials would include hops and grains suppliers, wheat and barley farmers, flour millers,

corn/wheat/soybean wholesalers, sugar processors, wood pallet suppliers, cardboard box/container

manufactures, and glass product manufacturers. Thus, when recent shocks hit the commodities market,

i.e. Russia placing an export ban on wheat, brewers see their costs rise in accordance.

Rivalry amongst SellersMedium/Increasing

Competition among sellers in the Beer Industry is based primarily on brand, quality, and packaging with

price not embodying the most important factor. In recent years, the industry has also consolidated quite

notably with the top four brewersAB Inbev, MillerCoors, Heineken, and Carlsberg--controlling 50% of

the global share and AB Inbev and MillerCoors alone making up 80% of the US market share. With this

consolidation and the resulting stronghold over the market, competition is increasing within the Beer

Industry for distribution, raw material access, and customer loyalty.

The rise of the craft-brewing sector is another notable competitive development. The smaller brewer

segment has gone from only 50 in 1983 to 1,828 in 2010. This segment continues to grow/gain share and

has outperformed the overall beer category for 6 straight years as consumers are looking for newness,

experimentation, and supporting smaller local brewers. Retail support has also been strong for this

segment given its relatively higher margins as well as the four straight years of double digit growth the
segment has seen in the supermarket venue. However, while the share of craft brewers has grown to 5%

in 2010 from 3% in 2000, it is still dwarfed by the top four and often seen as a breeding ground for

potential acquisitions for the large breweries as they look to find growth.

Lastly, import brand is another competitive set in the Beer Industry. Recent data shows imports are

perceived as a higher-end product which appeals to the consumerimport share in the US was up 1.9%

in 2010 vs. domestic down 2.6%.

Pressure from Sellers of Substitute ProductsMedium/Increasing

The pressure from sellers of substitute products is considered medium to increasing. Recent data suggests

both the wine and spirits industry are gaining share at the expense of beer. A 2011 Gallup Poll noted 36%

of those surveyed preferred beer to wind and liquordown from 41% in 2010. Within that, the all

important 18-34 year old group saw its beer preference fall from 51% to 39%. Also notable, the per

capital consumption of malt beverages has been steadily decliningfrom 24.6 gallons in 1981 to 20.6

gallons in 2010. The drivers to this include both the wine and spirits industries have increased both their

promotions and pricing more aggressively versus beer, the growing perception of beer being less healthy

and exotic than wine and spirits, demographics, and both increased alcoholic and non-alcoholic beverage

competition.

The Threat of New Entrants--Medium

While the Beer Industry has seen a boom of craft brewers enter the marketplace over the last five years,

the barriers to entry still remain fairly high. The big brewers have significant economies of scale, the

ability to spend large amounts on branding, marketing, and promotions, as well as somewhat of a lock on

both the limited shelf space of the retailer as well as the distributor/wholesale channel with regulations

limiting the number of distribution agreements on a regional basis. In addition, the process of brewing

beer is very capital intensive with the manufacturing process and the branding involved. Lastly, as

alluded to above, the industry is highly regulated and taxed on both a federal, state, and even local level.
A few charts for appendix