Us Beer Industry Overview Essay Example for Free

Us Beer Industry Overview Essay The beer industry is widely known for been an oligopoly. However, in our approach, we will explore the possibility of analyzing microbreweries in particular from a monopolistic competition market structure perspective. The beer market oligopoly is composed by three big players: Anheuser-Busch which holds 48 % of the market share, Miller Brewing Co. , with 18% and Coors Brewing Co. with 11%. Please refer to the below graph and table for information regarding the market share held by the remaining companies. (Market shares are shown based on shipments of 205. 6 million cases in 2005 and 210 in 2006). Based on the above market shares, we calculated the concentration ratio of the three big players and the Herfindahl Hirshman Index for the industry. Both measures confirm that the Beer Industry is indeed a highly concentrated one as the concentration of the big three players is almost 80% and the HHI is well above the 1,800 threshold. Market Analysis The demand in the beer market is characterized by flat consumption trends although we can currently identity two growing markets: First, a domestic niche market for microbreweries, and second, the international market that is currently been targeted by our big national brands. Another very strong market trend is the consolidation of many national brewers. This consolidation has been driven by the increased regulatory burdens and taxation in the industry as well as by changes in demographics: greater alcohol awareness, slow population growth, aging population, etc. Through consolidation, brewers can accomplish economies of scale and other supply chain synergies. Parallel to this trend, there has also been an expansion of specialty brewers (microbreweries) that target more sophisticated and knowledgeable beer drinkers. The players in this market focus on differentiation and therefore can afford to charge premium prices for their products. This is actually the niche market on which we will focus our analysis on in the later part of this paper. Barriers to Entry Standard and poor label the barriers to entry in the beer industry as relatively minimal; however, once firms enter the market, it is really difficult for them to remain competitive. The high barriers to entry are partially due to the fact that the beer industry is a relatively mature industry and that the market is dominated by very well established leaders. Other factors constituting barriers to entry are: an increased tendency for vertical integration (i. e the three largest brewers each own subsidiaries to perform non-brewing functions like grain elevators, milling, can manufacture, labels, etc), advantages of economies of scale and a very intense price competition. As a result, the new entrants are mainly microbrewers which are focusing on a new type of demand. Production Inputs Big or small, companies in the beer market are competing for the same resources and are affected by the prices’ fluctuations of their inputs. In the beer market, some of the key inputs to consider in any economic analysis are grains, hops and yeast. Strategy to succeed: ? Market Leadership ? Expanded market share (internationally) ? Price Increase ? Production efficiencies ? Recent differentiation – Premium Price i. e. Anheuser-Busch – Michelob Ultra for â€Å"Atkins† taste Industry niche markets Smaller micro brews ? Highly fragmented but growing ? Only growing market segment in the domestic beer industry ? Target small consumer market segments with high price inelasticity ? Rely on regional brewers for production to avoid high entry costs ? Market Trends: Consolidation of National Brewers: Flat Consumption trends Regulatory Burdens High Taxation Greater alcohol awareness Slow population growth Aging population Expansion of Specialty Brewers: Uniqueness and high price points High demand in category Constant high prices to attract sophisticated drinker [pic]. ? Although the barriers to entry are classified by SP as relatively minimal, it is still extremely difficult for firms to remain profitable once they enter. Barriers may include: The market is a relatively mature Industry The market is dominated by well established leaders Increasing vertical integration Economies of scale advantages (i. e. the three largest brewers each own subsidiaries to perform non-brewing functions like grain elevators, milling, can manufacture, labels, etc) High price competition New entrants are niche markets – microbreweries ? Grains (i. e. barley, wheat, rice, malt, sugar, etc. ) ? Hops (cascade) ? Water (H2O) ? Yeast FORECAST o Reduced market shares for national brands o Weak domestic consumption trends = Price increases to improve margins for sustained profitability However, o Signs of competitive pricing o Potential decreases in industry-wide pricing levels / decreased operating margins. C3 (2006): 77. 70 % HHI (2006): 2,831. 79.