US Beer industry analysis? Introduction and Conclusion

Please help me to write the Introduction and Conclusion (Conclusion of your analysis as the CEO of a firm in this industry: a) summarizing the major opportunities and threats your firm and other existing firms in the industry commonly face, and b) what actions this analysis suggests you to implement in order to strengthen your competitiveness. Recommendation for a new venture that has interest in this industry: whether you would recommend it to enter this industry and why.) for this project in APA style. Here is the body of this project:

Industry Overview

The US Beer market ranks in the top five in the world and is the largest contributor of the adult beverage space.Total beer sales at the end of 2016 exceeded $105.5 billion, as Americans consumed more than 6.431 billion gallons of beer. The number of breweries rose from 1,619 in 2007 to 4,981 in 2016 (Progressive Grocer, 2017). However, despite the enormous consumption and the increase breweries, sales have declined by more than 7MM barrels between 2007 and 2016 (Progressive Grocer, 2017). Rivalry is partly to blame, as the top ten brewers are fiercely competing for shelf and tap space. According to a report by MarketWatch, the top ten controls 90% of all beer sales (Notte, 2015). But it is the new entrants to the industry, mainly independent small brewers that account for the bulk of the declining sales, as they too compete for space. However, the future of the US beer industry looks flat, as large brewers will most likely continue to lose volume. Bart Watson, the chief economist of the Brewers Association, said during a media presentation that “having huge growth rates in an industry of this size is impossible going forward. As a result, the strategy of large producers will be to focus on acquiring the independent craft brewers” (Kell, 2017). Consequently, 97 craft brewers closed their doors in 2016, up from 78 in 2015 and 75 the year before (Kell, 2017).

Porter’s Five Forces Model

Five Forces analysis is an important strategic technique. It allows companies to grasp the competition within an industry. By considering the threat of new entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing firms, companies develop a better understanding of profitability within the U.S. brewing industry.

The threat of new entrants within the industry is low. As companies try to enter, they are faced with barriers to entry. One barrier is the economies of scale caused by large companies spreading their fixed costs over units using efficient technology. An article in Edie Newsroom confirms that AB InBev, the largest company in the industry, saved about $60 million in the last four years by improving energy efficiency through renewable electricity (Edie, 2018). Large existing companies also have the additional capital to pursue mergers and acquisitions. In 2016, two of the largest beer companies in the United States finished a $107 billion merger (Forbes, 2018). In 2017, four of the Top 50 Craft Brewers were bought by larger firms, with two of those four acquired by AB InBev SA (Fortune, 2017). Overall, the threat of new entrants is low.

The suppliers’ power within the industry is medium. Overall, there are many suppliers to the brewing industry. US Industry Report on breweries lists some key suppliers to be packaging/container manufacturers, wheat farmers, and sugar processors (IBISWorld, 2017). Because there are many suppliers, the lower concentration of brewing companies decreases the power of suppliers. Nevertheless, suppliers do offer differentiated products that increase the power of suppliers. An article written by Value Line reveals that the packing/container industry provides products not only for food-and-beverage, but also for the household and pharmaceutical industries (Value Line, 2018). In general, the suppliers’ power within the industry is moderate.

The bargaining power of buyers is medium. The industry’s major buyers are wholesalers. Due to the three-tier system in the United States, it is federally mandated that beer travel from producers (breweries) to wholesalers and distributors, then to retailers (The Brew Enthusiast, 2018). This general structure increases the power of wholesalers since wholesalers get to choose which producers to buy from. However, wholesalers focus primarily on major producers like AB InBev SA and MillerCoors due to their large market power and high demand for their products. This relationship shifts some power to the major producers. Overall, the regulation of the producer-wholesaler relationship creates a moderate bargaining power for buyers.

The threat of substitutes is high in the U.S brewing industry. There are many products that can constitute as substitutes to beer based on its characteristics. Because beer is an alcoholic beverage, common substitutes include liquor and wine. According to an article by Pamela Deloatch of FoodDIVE, MillerCoors is offering fruit flavored beer to appeal to wine drinkers (Food DIVE, 2018). With wine consumption increasing in the United States, brewing companies are finding ways to deal with this substitute. With many substitutes offered, the threat of substitutes is high in the industry.

Lastly, the threat of rivalry is high. The industry overall acts oligopolistic as it is dominated by few firms that have pricing power. As mentioned before, the industry is dominated by two companies, AB InBev SA and MillerCoors. Due to the small number of dominate players in the market, there is a greater inclination to flight between the companies. Through mergers and acquisitions, the companies are increasing their market share. Smaller craft breweries are offering differentiated beer choices using an array of spices and herbs, however, as this niche within the industry begins to mature, differentiation will decrease and rivalry amongst these companies will increase. In general, the industry has a high threat of rivalry.

Through the analysis of the five forces model, the overall potential of profitability is unattractive. The industry is dominated by two companies and is highly competitive. Through recent mergers and acquisitions, the two companies are getting larger and leveraging their power over smaller companies. The bargaining power of buyers and suppliers is moderate, however, the threat of substitutes is high. These forces are amplifying the competition within the industry, thus threatening profitability. The assessment of the industry leaves it looking unappealing and containing a low potential for profitability.

Strategic Groups

Two main important strategic group models for the beer industry are low expense and quality. The five major competitors are Anheuser-Busch InBev, MillerCoors, Heineken USA, Constellation Brands, and Pabst, with market shares of 43.5%, 25.1%, 3.9%, 7.4%, and 2.5% (Beer Marketer’s Insights, 2016). Although, these five major beer industries have a large effect on US market they all have one common competitor which are craft brewers.

The first strategic group focuses on reducing expense. One of the important ways of reducing expense is merging. In 2008, the US Department of Justice (DOJ) allowed Miller and Coors to merge with third largest beer industry. According to the article Efficiencies brewed: pricing and consolidation in the US beer industry by Orley C. Ashenfelter “The merger reduced the average distance between a local market and a Coors brewery . . . this reduced the average price of all lager-style beers by approximately 1.8%”. As a result, the merger had decreased the costs of making beer while allowing profits to remain constant.

The second strategic group focuses on the quality of beer. As mentioned above, craft breweries are rising and they are a direct threat to the beer industry. According to Ashenfelter, “Craft beers have their unique taste and likeness, which come from the traditional slow brewing styles and recipes that have been perfected over the years.” Beer industry should focus on their beer taste and introduce different beers with different tastes to be able to compete with craft brewers.

General Environment

Demographic/Political/Legal – The drinking age is a highly controversial topic that can also have effects on the U.S. brewing industry. It is possible that some areas of the United States may be able to lower the drinking age as “some New Jersey lawmakers are considering dropping the drinking age to 18 again” (Conlon, 2016). Although there are many implications involved with lowering the drinking age that affects society, the U.S. brewing industry would be able to have access to a younger demographic of individuals that they would not normally have been able to.

Political/Legal – Excise taxes are taxes on certain goods that are imposed onto the producers by the government (Spilker et al., 2018). These taxes impact the U.S. brewing industry as the costs can impact business operations. A major brewing organization within the United States, Brewing Association, “represents more than 70 percent of the brewing industry, and its members make more than 99 percent of the beer brewed in the U.S.” (Brewers association, 2015). The Brewing Association had supported raising the benchmark of production required for imposing excise taxes (A brewing fights; taxes, 2013). This method of reducing taxes will prove to be an opportunity for large companies in the industry. However, the rivalry in the industry will be affected as smaller companies will likely lobby against this form of tax that only benefits large scale production companies.

Legal – As of 2013, “the Alcohol Tobacco Tax and Trade Bureau issued 948 new brewery permits . . . bringing the total of active breweries to 3,699” (Beer, 2014). The overall increase of active breweries in 2013 shows that the industry itself is still expanding and will most likely continue to see growth in the number of breweries. This factor poses a threat to existing companies as it will impact how individual companies interact and brand themselves from the new entrants.

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