Francisco

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Trigueiros
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Trigueiros
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Date: 2009.07.08 21:50:59 +02'00'

Francisco Trigueiros
THE U.S. BEER MARKET – AN ANALYSIS OF
PORTER´S FIVE FORCES

Index
- Introduction 2
- Rivalry 3
- Threat of Substitutes 4
- Bargaining Power of Buyers 5
- Bargaining Power of Suppliers 7
- Entry Barriers 8
- Summary 10
-Critique to Porter´s Five Forces 10
-Bibliography 11
Introduction

The brewing industry in the United States began in 1625 when the first brewery in America was
founded. Lager beer as we know it today has changed a lot since then, and so has the industry. In
the early nineteenth century the industry was highly fragmented, and competition among different
breweries only existed in small geographic circles. It was not until the late nineteenth century that
refrigeration and mechanical pasteurization revolutionized the industry.
Companies could now transport beer across previous geographical limits. After prohibition was
repealed in 1933, the industry as it is today began to take shape. Now the beer industry is a $91.6
billion market in the United States, it accounts for 52% of total alcohol beverage sales and 85% of
the consumption. The United States produces about 230 million hectoliters (6 billion gallons) of
beer annually and leads the world in beer production.

After 1996, the U.S. beer industry had consistent growth with about 3,500 brands on the market in
2002. The U.S. exported beer to almost one hundred countries worldwide. The beer industry peaked
production with 6.2 billion gallons in 2003. The American beer industry includes more than 300
breweries. Nonetheless this industry is dominated by three producers who command approximately
80 percent of the market share. The three power houses are Anheuser-Busch, Miller Brewing and
Adolph Coors.

However the beer industry in the United States is continually changing and therefore companies in
this industry must be versatile. Their versatility comes in a variety of forms, from changing their
product offering, to changing their strategic goals, and finally, recognizing opportunities and threats.
This paper explores many aspects of the industry though the use of Porter's five forces model. We
analyze the internal rivalry present in the industry, any buyer or supplier power that is present, entry
barriers that exist, and any substitutes and threats that face the industry. In conclusion, we will
provide a short summary and a critique to the Porter´s Five Forces Model.

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Rivalry Analysis
Rivalry is the extent to which companies compete with one another for customers. Rivalry can be
price-based or non price-based. Rivalry is also measured by the concentration level of the industry;
the more concentrated the industry, the less rivalry. Other factors that increase rivalry are large
capital asset requirements and high switching costs.

Price-based rivalry
The beer industry does not have evidence of price wars. Beer prices have increased, but that is
mostly due to inflation. The increased prices are industry wide and not company specific. According
to Barbara Hagenbaugh of USA Today: “Retail prices for beer at supermarkets and other stores
were up 3% in May from a year earlier, the biggest increase in 2½ years, according to the latest data
from the Labor Department.”

Non-price based rivalry

The beer industry primarily competes with non-price based rivalry. There are various product
innovations throughout beer brewing companies such as Budweiser Select, which is Anheuser
Busch’s low carbohydrate beer. Miller Brewing Company released Miller Chill throughout the
United States in July 2007, which is a light lager that is brewed with salt and lime.

Product differentiation
Within the industry there is a lot of product differentiation. The term used to differentiate and
categorize beers is known as the beer style. Different breweries use various beer styles to meet
consumer preferences. Beer styles can vary depending on the color, flavor, strength, ingredients,
production method, recipe, history, or origin of the beer. All of the major companies offer different
variations of their core product. All beer is classified as either a lager or ale; which is determined by
the production method and which type of yeast is used.

Concentration of industry
The concentration ratio is a measurement of the revenues of the largest firms, in comparison with
the rest of the industry. The CR4 refers to the top four largest firms. If a CR4 is greater than 40%, it
implies significant concentration effects. As the following table shows, the CR4 of beer brewing is
77%.

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 Table 6: Concentration Ratio of Top Four Competitors
Company Revenues (in millions)
SABMiller $ 18,620
Anheuser Busch 16,685
Molson Coors Brewing 6,190
Boston Brewing Co. 341
CR4* 77%

The Herfindahl Index is another measurement of concentration within an industry. It is measured by

taking the sum of the market share of all firms within the industry and squaring it. A HI greater than
1800 implies significant concentration effects. As the next table shows, the HI for beer brewing is
2362.

Company Revenues (in millions)

SABMiller .10
Anheuser Busch .35
Molson Coors Brewing .14
Boston Brewing Co. .20
Others .21
HI: 2362
After review of the CR4 and Herfindahl Index, it is apparent that the beer brewing industry is a
concentrated industry.
Summary of rivalry effects
This industry is experiencing significant concentration effects, which decreases rivalry. Also, there
are significant barriers to exit, which increases rivalry. Therefore the effect of rivalry is neutral.

Threat of Substitutes
To determine the threat for the US beer industry caused by substitutes, it can be differentiated
between direct customers, e.g. wholesaler or supermarket chains, and end customers. However,
direct customers of a brewery do not primarily buy beer to fulfill own personal needs. It is more
realistic to say that such wholesalers are only buying beer in order to fulfill their corporate model
which is satisfying the needs of end customers. Thus, when investigating the threat of substitutes,
the observed object must be the end customer.

Available Substitutes
A substitute is a good which can replace a afore used good because it satisfies the same needs of the
customer 1. One might assume that beer simply fulfills the customers' desire to drink liquids.

1 Rutherford, Dictionary of Economics, p. 445

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However, market observations do not support that as the main driver for consuming beer. In fact,
the per capita alcohol consumption has risen by 1% annually since 2000, the highest increase since
almost two decades 2. This indicates that alcoholic drinks are not likely to be replaced by non-
alcoholic drinks, leaving as the main substitutes beverages like wine and liquor 3.

Current Market Share

With 52% share of the total beverage alcohol sales in US$ and 85% in consumption, beer is
measured to be the leading choice of alcoholic drink in the US 4. However, despite draft beer having
an enormously increase in its market share 5, reports show that the customers' overall appreciation of
beer is fading away, especially towards wine 6 but also in favor of liquor 7. Accordingly, beer is
slowly but surely losing market share in the US 8.

Switching Costs
When wine and liquor appear to be more popular that beer, it is crucial to investigate the switching
costs in order to determine the threat of those substitutes. Clearly, it does not cost the end customer
anything to make a different choice when choosing his drink. Although wholesalers are dependent
on distribution networks, it must be assumed that channeling more through its wine network will
not result in significant costs for those direct customers of the breweries either. However, beer is
still crucially cheaper than other choices of alcohol, especially true when it comes to any decent
wine. The price sensitivity of the customer must be born in mind when thinking about switching
costs. Since most consumers of beer purchase it on a very regular basis 9, the choice of alcohol will
have a major impact on the sum they spend on it. Thus, although switching itself does not result in
any costs, the choice has a perpetuating result on the customers' budget.
Overall, it must be said, that the threat of substitutes for the US beer industry is moderately high.
There are a number of substitutes that fulfill the customers' needs and many customers are willing
to switch. However, as of today, beer still has a significant price advantage over most other choices.

Bargaining Power of Buyers

Beer is a consumer good which is consumed by an individual customer. Therefore, it is the end-
consumer who ultimately buys the beer. However, the quantity purchased by him/her is not
significant enough to have an impact on the Beer market’s buying strategies in the US. Distributors

2 Sudano, Is Beer Back?

3 The available mix drinks all base on either liquid or beer thus being covered by this segmentation. Cidre, however, is a special form of wine and thus constituting only a subsegment of
wine. Also see: http://en.wikipedia.org/wiki/Alcoholic_beverage; for the decline of alcopops see: http://www.realbeer.com/news/articles/news-003058.php
4 HTBMarketing: Beer Industry
5 http://www.realbeer.com/news/articles/news-003102.php
6 http://www.wikinvest.com/concept/Wine_Consumption and http://winemarketer.com/beer-imports-down-focus-on-wine-spirits.html; Arora: Wine May Become Toast of Alcohol Industry
7 USA Today: Beer has an image crisis
8 See http://en.wikipedia.org/wiki/Beer_consumption_by_country
9 HTBMarketing: Beer Industry

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or wholesalers form the distribution channel connecting the breweries and importer with the
retailers (supermarkets, pubs, others), thus completing a 3 tier distribution model. There are about
2000 distributors1 under the strictly regulated distribution framework, which employ 91,0001 people
to distribute around 13,000 beer brands1. Hence it is this tier of distributors which can exercise
buying power over the breweries/importers.

Dedicated distributors - “The beer distributor market normally contains two to three major brand
distributors in a region. There is one for InBev/Anheuser-Busch, Miller and Coors or a Coors/Miller
combination. Rarely will Coors or Miller be sold under the same house as A/B. Major brand houses
are the largest, most dominant beer distributor within the territory. They have very high levels of
service, are in all retail licensed accounts and are aggressively competitive. They have excellent
contacts within the retail trade including important chain store buyers.”2 These distributors fail to
concentrate on smaller and newer breweries, also not touching upon the fast increasing craft-beer
market.

Heterogeneous distributors - There are a few distributors which sell multiple brands or some
speciality brands. Such a distributor carries many products other than one of the big three such as
regional breweries, popular imports and non-alcoholics. Although they do not dominate the
marketplace like a main brand house, they have a very good level of service and are good
facilitators of smaller brands. As a result of these specialty distributors, the distribution system can
be beneficial for a smaller brewery, because it gives them the opportunity to get established in an
already competitive market, thereby maximizing its potential sales.

Consolidation of distributors - Cut throat competition and the desire to expand, has led to large
brewing companies making exclusive contracts with their distributors thereby prohibiting them to
sell other brands. In the process, US beer industry has seen a sharp decline in the number of
distributors from over 5000 in 1977 to about 2000 today. This negatively affects the beer market as
a whole because the “smaller” and other breweries not under the big flagship brands don’t find a
platform to market themselves in a sustainable way, denying them a level-playing field. Anheuser-
Busch and Miller/Coors houses are examples of such companies, whose distributors have
completely purchased smaller distributors.
Hence, distributors, who are the buyers for the beer market, have great powers in determining the
prices, preferences and also to some extent the players in the brewery industry. This is not a good
sign for a free, fair and competitive market to exist and is diminishing the prospects of newer
entrants into the beer market. Obviously they derive their powers from the US legislation which

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requires a compulsory distributor for beer brands, but big brewing firms also add up to raise these
powers.
1
National Beer Wholesalers of Association - http://www.nbwa.org/userfiles/file/WhoareBeerWholesalers.pdf
2
ProBrewer.com, BEERWeek “Distribution 101: A short course in distribution basics”
http://www.probrewer.com/resources/library/distribution101.php

Bargaining power of suppliers

In short, brewers need the following main resources from their suppliers: The brewing
equipment,cans/bottles/vats, packages and the raw materials to brew beer (water, barley, hops, malt,
yeast and starches). Of course, brewers need constructions to brew the beer and the larger the
brewery is the more expensive the constructions are. All in all the influence of these suppliers is not
very high because the technology required by the brewers is little ambitious and there are a lot of
companies which are able to do this kind of mechanical engineering.

Cans, bottles, vats and packages are needed for transport and marketing but because this industry
sector is large and vast, again there´s little influence or power from these kind of suppliers. For
brewers it is relatively easy to switch from one producer to the other because these products are
standardized in the majority of cases consequently switching costs are relatively low. A new can
supplier for example only has to change the brand logo on the can.

Finally, brewers need agrarian raw materials (barley, hops, malt, and yeast) to brew beer by itself.
Large brewing companies are not completely integrated in terms of sourcing malt. Some
companies such as Anheuser-Busch have their own malting facilities, but also purchase malt from
independent maltsters. Maltsters sell malt to brewing companies such as Anheuser-Busch, SAB
Miller, Coors and Molson.
In the case of oversupply and comparable products like in agriculture the suppliers have virtually no
bargaining power but in times of insufficient supply after a crop disease or bad crop season, for
example, things can dramatically change. The next table shows the price evolution of malted barley
from 1983-2003. From 1993-1996 the price has particularly exploded due to a persistent presence
of fusarium head blight, a common fungus that can destroy a whole barley harvest. However these
are extraordinary conditions, therefore in normal conditions, the agricultural suppliers have little
bargain power.

The main problem brewing companies can face is the increasing demand for biofuels. This kind of
fuel can be produced by the usage of starch (corn/maize) and yeast fermentation to produce ethyl
alcohol. This could give the starch and yeast crop suppliers powerful influence over the prices. This
kind of raw material can be produced to several costumers: food manufacturers, animal feeding,

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brewing companies and now as biofuel. In the end this gives the suppliers a lot of bargaining power.
a
Feed and Malt Barley and Corn Prices Over Time, 1983 to 2003 (dollars per bushel)
Fee Malt Corn
1983 d2.32 2.33 2.99
1984 2.43 2.47 3.05
1985 2.06 2.21 2.49
1986 1.64 1.87 1.96
1987 1.66 1.92 1.56
1988 2.04 2.68 2.27
1989 2.15 2.99 2.43
1990 2.00 2.46 2.40
1991 1.90 2.36 2.33
1992 1.92 2.32 2.29
1993 1.80 2.26 2.22
1994 1.85 2.29 2.41
1995 2.30 2.66 2.56
1996 2.87 3.25 3.55
1997 2.15 2.62 2.60
1998 1.73 2.50 2.20
1999 1.58 2.34 1.89
2000 1.73 2.49 1.86
2001 1.75 2.48 1.89
2002 1.96 2.72 2.13
2003 2.28 3.11 2.27
a
US Department of Agriculture National Statistics Service

Summary: There is medium but with possible increase in bargaining supplier power.

Negative Points Positive Points

Increasing demand for biofuels
Current state of economic recession
No available substitutes for the raw materials
Low switching costs
No treat of backward integration
Possible forward integration, the larger brewing
companies have enough capital to buy plots of
land to grow their own hops, malt or barley.

Barriers to entry the U.S. Beer market

Advertising - Incumbent firms can seek to make it difficult for new competitors by spending
heavily on advertising that new firms would find more difficult to afford. Here, established firms
use of advertising creates a consumer perceived difference in its brand from other brands to a
degree that consumers see its brand is a slightly different product. This makes it hard for new
competitors to gain consumer acceptance. Molson Coors spent close to 2.25 billion on advertising
in the last three fiscal years. This tremendous level of advertising expense is very difficult for new
entrants to mimic. Excluding other necessary costs, the amount of money required to be spent on
advertising is staggering. New entrants seeking to compete with the main brands of existing firms
will find it very difficult. The following is an excerpt from the 2007 financial statements of Molson
Coors.

“Marketing, General and Administrative Expenses

our marketing, general and administrative expenses consist predominately of advertising, sales staff
costs, and non-manufacturing administrative, and overhead costs. The creative portion of our

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advertising activities is expensed as incurred. Production costs are generally expensed when the
advertising is first run. Advertising expense was $858.1 million, $906.9 million, and $729.1 million
for years 2007, 2006, and 2005, respectively. …”

Customer loyalty - Large incumbent firms may have existing customers loyal to their products.
The presence of established strong brands within a market can be a barrier to entry as it certainly is
in the case of the U.S. beer market. Many blind taste tests conducted in the U.S. have revealed that
consumers very rarely can distinguish beers from each other on taste alone. The result is that brand
loyalty is highly driven by marketing campaigns which are highly capital intensive. The major
existing beer brands have a very loyal customer base that restricts new entrants by providing a
significant barrier to entry. “Coors and Coors Light Named Top Beer Brands in National Customer Loyalty
Study for Third Consecutive Year. Business Wire, May 9, 2007”

Distributor agreements - Exclusive agreements with key distributors or retailers can make it
difficult for other manufacturers to enter the industry. Distribution is critical to the success of a
brewer. The process of production through consumption involves three steps. The producer uses a
distributor to disseminate large quantities of product and the distributor disseminates the product to
retailers, and lastly the consumer purchases the product from the retail store. A brewer is unlikely to
be successful on a medium or larger scale without effective distribution. New entrants have
difficulties establishing a distribution network necessary for success.

Government regulations - It makes entry more difficult or impossible. Requirements for licenses
and permits raise the investment needed to enter a market, creating an effective barrier to entry.
Government regulations are widespread throughout the brewing industry. In the U.S., the Bureau of
Alcohol Tobacco and Firearms regulates the brewing industry. Brewers are also influenced by
National, State and local governments. Government agencies regulate the equipment and location
used in the brewing process. The multiple levels of regulations imposed by the government serve as
a deterrent to new entrants.

Supplier agreements - Exclusive agreements with key links in the supply chain can make it
difficult for other manufacturers to enter an industry. Major beer producers receive preferential
treatment from supplies. This fact is based on consistent normal business characteristics. The more
revenue a customer represents to a supplier the more likely the supplier is to give preferential
treatment. This is true across many industries and not just in the U.S. beer market.

Critique of Porter`s Five Forces

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Porter’s 5 Forces model is a framework for industry analysis and business strategy development,
which focuses on the Micro-environment of a firm within an industry and tries to gauge the
competitiveness and profitability of the industry. However, being developed 3 decades ago, it does
not touch upon macro factors such as technological advancements, government regulations,
environmental and socio-cultural issues which can be decisive forces for any industry today. The
US brewing industry has evolved a great deal over the years with major policy amendments from
time to time, and also the mutual agreements and consolidation between different breweries and
buyers/suppliers has a lot of advantages to be taken out of. On the other hand the rapidly changing
ownership & control structure of US breweries and distribution channels, as a result of the mergers
and amalgamations, cannot be adequately emphasized within any of the 5 forces. Hence, we feel
that Porter’s 5 forces model gives us a good ground to start analyzing the US Beer Market’s
attractiveness, but in order to develop a robust and all-pervasive strategy to fit with the dynamics of
the current industry scenario, we need to broaden our perspective and perhaps include few other
metrics to analyze.

Summary
The U.S. beer industry is multi-ambiguous. While generating a high profit for most of the players
involved, the market entry barriers are very low for small, local companies as can be seen from the
enormous growth of draft beer. However, to compete nation-wide is extremely difficult since four
major companies are already competing for market share and international firms are also expanding
their exports to the U.S. . Those firms established a tight net of wholesalers and distributors in
which new entrants will face high difficulties.
Therefore, the industry does not face an unusual power of suppliers or threat of substitutes. This
might change however, with biofuel getting more popular. A steep increase in the demand of biofuel
will result in a natural shortage of beer's ingredients, making them and the beer more expensive.
The more expensive the beer gets, the higher the threat of substitutes will be, especially of wine
because currently berries are not used for biofuels.
To protect the success of the U.S. beer industry, it should prepare for its future. For example, large
brewing companies could invest in their own growing farms to be more independent from market
changes.
However, at this time, it must be concluded that be U.S. beer industry is healthy and generates high
profit to its main players. It cannot be expected to significantly shrink within the next years, making
additional investments reasonable.

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Bibliography

 Rutherford, Donald: Routledge Dictionary of Economics, 1992, London and New York
 Sudano, Brian: Is Beer Back?, found at
http://www.bevindustry.com/Archives_Davinci?article=1784
 HTBMarketing.com: Beer Industry Overview 1st Quarter 2008, found at
http://www.progressivegrocer.com/progressivegrocer/profitguides/beer/images/pdf/Industry
Overview.pdf
 USA Today: Beer has an image crisis; wine and spirits gain, 2005,
http://www.usatoday.com/money/industries/food/2005-01-11-beer-market-share_x.htm
 Arora, Raksha: Wine May Become Toast of Alcohol Industry, 2004,
http://www.gallup.com/poll/12670/Wine-May-Become-Toast-Alcohol-Industry.aspx


National Beer Wholesalers of Association -
http://www.nbwa.org/userfiles/file/WhoareBeerWholesalers.pdf
 ProBrewer.com, BEERWeek “Distribution 101: A short course in distribution basics”
http://www.probrewer.com/resources/library/distribution101.php

 HTBMarketing: Beer Industry

 http://www.realbeer.com/news/articles/news-003102.php
 http://www.wikinvest.com/concept/Wine_Consumption and http://winemarketer.com/beer-
imports-down-focus-on-wine-spirits.html; Arora: Wine May Become Toast of Alcohol
Industry
 USA Today: Beer has an image crisis
 http://en.wikipedia.org/wiki/Beer_consumption_by_country
 Adams Handbook Advance 2007 & Beverage Scape Jan-Dec 2006
 http://www.destination360.com
 http://www.destination360.com
 http://www.business.uiuc.edu
 http://www.allbusiness.com
 http://www.usatoday.com/money/industries

 http://en.wikipedia.org/wiki/Beer_style

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