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CASE The United States Beer Industry Essay

The premium segment focuses on discerning buyers. Producers are engaged in the art of craft brewing. They build their 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. The microbrewery and importers have been gaining share and currently account for around 11% of the total market. The increase in concentration among mass-market brewers reflects a number of factors. First, consumption of beer in the United States has been gradually declining even though consumption of premium beer has been increasing).

Per-capita consumption of beer peaked at 34 gallons in 1980, fell too low of 29. 1 gallons in 2003, and crept back up to 30 gallons per capita in 2005. The decline in consumption was partly due to the growing popularity of substitutes, particularly wine and spirits. In 1994, Americans consumed 1. 75 gallons of wine per capita. By 2005, the figure had risen 2. 16 gallons. Consumption of spirits increased from 1. 27 gallons per capita in 1994 to 1. 34 gallons per capita over the same period.

Second, advertising spending has steadily increased, putting smaller mass-market brewers at a distinct disadvantage. In 1975, the

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industry was spending $0. 18 a case on advertising; by 2002, it was spending $0. 40 a case (these figures are in inflation- adjusted or constant dollars). Smaller mass – market brewers couldn’t afford the expensive national television advertising campaigns required to match the spending of the largest firms in the industry, and they saw their market share shrink as a result.

Third, due to a combination of technological change in canning and striation, and increased advertising expenditures, the size that a mass market brewer has to attain in order to reap all economies of scale- called the minimum CASE The United States Beer Industry By Physiologically scale of production was estimated to be 8 million barrels of beer a year, suggesting that a market share of 6. 4% was required to reap significant economies of scale. By the early sass, the minimum efficient scale had increased to 23 million barrels, implying that a market share of 13. 6% was required to reap significant scale economies. In sum, the combination of declining demand, increasing advertising spending and an increase in the minimum efficient scale of production put smaller mass-market brewers at a competitive disadvantage. Many sold out to the larger brewers or, in some cases, simply shut down. By the early sass, there were only twenty four mass- market brewers left in the United States, down from eighty-two in 1970. Among the remaining mass-market brewers, Enhances Busch is the most consistent performer due to its superior economies of scale.

The company’s return on invested capital ROCCO) has been high, fluctuating in the 17% to 23% range between 1996 and 2006, While net profits grew from $ 1. 1 billion in 1996 to $2 billion in 2006. In contrast, both Coors and Miller, along with most other mass-market brewers, have had mediocre financial performance at best. Coors and Miller merged with Nelson and SAAB, respectively, in an attempt to gain scale economies. March 2007 Based on this case, please answer the following three questions: I) Explain separately the terms “Industry Structure” & “Strategic Group” & outline their strategic significance for a company.

Name the strategic groups in the Beer industry in the United State in 2006. It) For the mass-market companies in the beer industry, using the detailed diagram for Porter’s five forces framework for industry analysis, analyze and classify each of the following forces as high / medium / low: Bargaining power of buyers Threat of new entrants Threat of substitutes Degree of rivalry Explain separately your strategic rationale for your classification of each of these four competitive forces. Iii) The bargaining power of suppliers to the mass-market companies in the beer

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