The brewing industry in 1985 can be analyzed using Porter’s five competitive forces: the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, substitutes and rivalry among existing competitors. All five competitive forces jointly determine the intensity of industry competition and profitability. Furthermore, the five forces narrow in on why the brewing industry became more concentrated and key features defining industry success.
In the brewing industry, barriers to entry were high. Fixed costs increased as a percentage of revenue necessitating brewers to have higher production capacities/minimal efficient production scale to achieve economies of scale. This could be achieved by doubling brewery production, which decreased unit capital costs by 25 percent. In addition, high capital requirements existed since $35-$45 million was required in launch costs and advertising for a new brand. These financial requirements implied a competitive advantage for large brewing companies who were spending approximately $1200 million (about 10 percent of sales) in advertising in 1985. An entering firm had limited access to distribution channels as the wholesalers who served the largest brewers did not carry other brewer’s beer.
Prices start at $12
Prices start at $11
Prices start at $12
The bargaining power of suppliers is medium since the removal of price controls for aluminum led to the sharp increase in can prices and therefore raised the cost of packaging materials and for the brewers. Some companies, like Coors, reduced these costs by starting can recycling programs to decrease their dependence on new raw materials. The bargaining power of buyers was high as the independent wholesalers who purchased the beer, and sold and delivered to retail accounts earned low profits.
The average return on sales for wholesalers had fallen from 3 percent in 1981 to 2.1 percent in 1984. In addition, the increasing production capacity, desire for companies to enter new markets and promote new products and cost reductions led to a 30 percent decrease in beer prices between 1960 and 1980. Pressures from substitute products were minimal as advertising affected consumers’ willingness to substitute among beers. Finally, the rivalry among existing competitors was high as the number of brewers making less than one million barrels per year decreased from 90 percent in 1959 to 45 percent in 1983.
Furthermore, since the domestic beer consumption was flat, rivalry among brewers was intensified because any gains in sales by one brewer resulted at the expense of its competitor rather than through growth of the overall market. Hence, the industry analysis provides an initial explanation for the consolidation of the brewing industry.
Other factors that decreased the number of brewing firms include the increase in the number of baby-boomers. The brewing industry’s capacity utilization had been in the 60 percent range but this changed dramatically in the 1960s and 1970s. Large brewing companies reacted to this new demand by adding relatively large breweries and sold them quickly, which led to smaller breweries being closed. Another factor that decreased the number of small brewers was that wholesalers who supplied to off-premise outlets (supermarkets, grocery and liquor stores) usually carried only one brand.
This caused difficulty for competitors as they were unable to find large wholesalers to carry their product as the lead brand. Big brewers also had greater success in launching new brands as they were able to leverage their existing brand in conjunction with production and distribution capabilities, which were so vast that sales volume was achieved quickly. Finally, the large brewers were increasingly successful by creating another point of differentiation.
They attracted more consumers as the big brewers had the capacity to package beers in different sizes and therefore also appeal to consumers who drank beer in small amounts or slowly as well as packaged in different numbers to cater to the growing population of drinkers who consumed at home.
The analysis presented above using Porter’s Five Forces Model clearly highlights the brewing industry trends where barriers to entry are low, bargaining powers of suppliers is the medium, bargaining power of buyers is high, substitutes are low, and rivalry among existing competitors is high. These trends provide a basis as to why the brewing industry became more concentrated in 1985 and define key success factors in the industry.
Cite this page
This content was submitted by our community members and reviewed by Essayscollector Team. All content on this page is verified and owned by Essayscollector Team. All comments and user reviews are moderated by Essayscollector Team. In the case of any content-related problem, you can reach us through the report button.