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The brewing industry in 1985 can be analyzed using Porter's five
competitive forces: 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.
The bargaining
power of suppliers is medium since the removal of price controls for
aluminum led to sharp increase in can prices and therefore raised 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. 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 was 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 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 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.
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