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Beer Industry: Issues That Abound

The beer industry has experienced immense transformation throughout the years. The concentration has risen dramatically at all geographic levels. Two companies of long-time global standing have been especially successful–Anheuser-Busch and Miller. They have more than displaced the regional brews that once held sway, except for Coors, which has expanded from its regional origins to rank third nationally in the US. None of these three has grown appreciably by merger.

Rather than contribute to concentration, mergers have, in this industry, served as a salvage mechanism, a refuge for failing brands and companies. Changes in economies of scale at plant and firm levels contributed to the rising concentration among the large nationals and the declining conditions among the smaller noncraft regionals. However, economies of scale contribute no more than a partial explanation, and most of the multiplant economies observed relate to image-building efforts.

This finding brought us to product differentiation, which as we have seen can be based on real product attributes varying horizontally and vertically, incomplete information among buyers, or nonrational subjective impulses driven by symbolic or experiential needs (Greer 1998, p. 48). Greer (1998) further explained that by strict economic standards, the performance of the beer industry is less interesting than its structure and conduct. One reason for this is the easy predictability of performance given what has been said thus far.

It should be no surprise, for instance, that Anheuser-Busch is by far the most profitable firm in the industry and that it ranks on top among all corporations in the economy. If we concluded that advertising expenditures and other promotional outlays for beer were not merely high but excessively high (creating an uneconomic level of cost that some have termed X-inefficiency), we would likewise probably be affirming your expectation rather than catching you unawares. On the contrary, non-economic performance is something else to ponder.

The beer industry has come under attack by those fighting alcohol abuse. In 1990 a nationwide US Roper poll of college students disclosed that they thought alcohol abuse was by far the biggest problem in their campus (Beer Marketer’s Insights, 11 October 1990). Since the start of the 1970s and early 1980s, advertising has become a crucial factor in the industry as it shook the financial foundations of all but the biggest brewers because brand image is critical to success in this industry.

Also, strategic behaviors of various sorts, such as price discrimination and product proliferation, have favored more popular brands than others. Until 2003, distilled spirits and beer industry voluntary codes in the United States required that alcohol ads be placed only in media, where more than 50% of the audience was of legal purchase-age. However, in a monitoring study only half of the eight companies who submitted reports to the Federal Trade Commission (FTC) were able to show that nearly all of their ads were shown to a majority legal-age audience (FTC, 1999).

The FTC requested the industries to reduce the exposure of youth to their advertising. US beer and distilled spirits industries announced a ‘reform’ of their advertising codes in 2003, pledging not to place ads where underage youth were 30% or more of the audience. However, the Center on Alcohol Marketing and Youth (2004) had pointed out that, because 30% is twice the percentage of youth aged 12-20 years in the general population (the population at greatest risk of initiating drinking in the US), this threshold allows ad placement where underage youth are twice as likely to see them as adults.

In the UK there is a voluntary code in place preventing placement of ads in youth-oriented print media (ASA, 2003). Similarly, in Switzerland, beer and wine cannot be advertised in youth-oriented print media, on paraphernalia such as T-shirts and baseball caps, or in places and events frequented mainly by adolescents. According to the Global Status Report on Alcohol Policy, published by the World Health Organization in 2004, of 118 countries responding to a survey on alcohol policy, just over one in four had bans on distilled spirits advertising on national radio and television.

Slightly fewer jurisdictions banned wine and beer advertising. Print and billboards were even less regulated with only one in ten banning distilled spirits ads in print media. The global status report found that 13-16% (depending on media and beverage) of countries relied on voluntary codes and a further 28-57% had no restrictions at all. In terms of comparing beer to the over-all alcohol beverages, the prices of virtually most alcoholic beverage industries have fallen substantially in the past 40 years. Net prices to brewers have dropped 37%, to wineries 16%, and to distillers 31%.

At the same time, real wage rates generally have risen, and, except for brief instability during the 1970s, so have capital rental prices. Real material prices in all three sectors rose from the 1950s through the 1960s, fell through the 1970s, then recovered by the mid-1990s to their early 1970s levels. Relative factor prices in the beer industry, broadly representative of those in the other two sectors (Xia & Buccola, 2003). In terms of taxes, the basic import tax on alcoholic drinks other than wine and beer has been reduced to 150% in compliance with WTO stipulations, while additional duties have been retained.

The additional duty was imposed on bottled imported spirits as a countervailing duty in lieu of state excise tax when quantitative restrictions were removed in April 2001. That said, the beer industry has been pushing towards the removal of the additional duties as they are considered to be inconsistent with the provisions of the General Agreement on Tariff and Trade, 1994. The special additional duty of 4% that was present on all import items, including wine and beer, has been abolished (Whisky News, 2005). In March 2005, a ? 0. 04 tax increase on table wines and ? 0.

01 tax increase on beer was announced by the UK’s Chancellor of the Exchequer, Gordon Brown. Duty on sparkling wine was frozen, narrowing the gap between still and sparkling wine excise to ? 0. 42. In addition, tax on sales of spirits and cider remained static. Despite the rise in duty, UK ministers have ruled out addressing the country’s binge-drinking crisis through prohibitive tax rises on alcoholic drinks going forward. This was asserted through discussions with the UK Wine & Spirit Association, which has long campaigned for a reduction in alcohol duty to bring the UK in line with several of its European bedfellows.

The problem of tax evasion on spirits is of particular interest to the UK government. Consequently, the compulsory use of spirit “stamps” was announced in the 2004/2005 Budget. All spirit bottles will need to display a paper “stamp” on the lid, to prove duty has been paid, from 2006 (Euromonitor, 12 September 2005). Moreover, Pohl (December 2004) reported that the slowing down of the UK economy in 2003 is expected to continue, which is creating concern in the beer industry. The low growth of the economy also slows down consumer spending, which adversely affects beer sales.

Pohl argued that in a difficult economic climate, consumers reduce spending on leisure activities including visits to the pub and other similar venues, which reduces the income for the on-trade outlets and increase the beer volumes sold through the off-trade channel. However, the growth in trendier and sophisticated on-trade outlets as well as the increased popularity of premium beers have enabled the on-trade to maintain high prices and thus preserve their value share of the market.

In the off-trade sector, however, multiple retailers drop the prices sharply in order to encourage higher spending as well as to win market share from beverage specialists as well as from other outlets. Often this leads to price-cutting by all beverage retailers and often beer is sold under cost price. Although this low price strategy helps to increase in-store traffic and boost beer sales volumes, it does very little to create profit margins for the retailers. The beer industry is concerned that the price-cutting would lead to reducing the value of high profile beer brands and cheapening the shopping experience.

Thus, as the difficulties pull the beer sector downwards, these will likely force leading UK and European brewers to work together, increasing consumer awareness and the uplifting of the image of beer in the future. As an industry, brewers need to unite to be vital to get their business in a mint condition. It is also likely that leading brewers may take a higher interest in on-trade and off-trade activities to market beer brands using innovative strategies. The beer industry should always believe it can create growth in the beer sector through product innovation, as well as offering higher product quality.

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