AEM 4160 THE BEER INDUSTRY AGENDA. Industry Overview Major Players Primary Pricing Strategies Secondary Pricing Strategies Case Study Recommendations THE BEER INDUSTRY INDUSTRY OVERVIEW. WHY THE BEER INDUSTRY? Undergoing major changes Consolidation Uses pricing strategies that we have focused on in this class Advertising Bulk pricing Beer is an interesting topic, specifically for college students INDUSTRY SNAPSHOT. INDUSTRY STRUCTURE. Life Cycle Stage Regulation Level Revenue Volatility Technology Change Capital Intensity Barriers to Entry Industry Assistance Industry Globalization Concentration Level Competition Level Mature Heavy Medium Low High High Low Medium High Medium INDUSTRY REVENUE. Growth Year Revenue ($ million) Growth % 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 33,162.2 31,991.0 29,991.4 29,355.7 29,773.0 31,275.5 29,460.4 30,742.9 31,163.0 31,060.1 28,308.9 27,393.1 28,115.9 28,783.5 -----3.5 -6.3 -2.1 1.4 5.0 -5.8 4.4 1.4 -0.3 -8.9 -3.2 2.6 2.4 Competition with other Industries Beer Brewers Industry Analysis 11 of 17 Figure 1: Alcohol Sales by Industry 33% Beer 52% Wine Liquor 15% Increasing wine consumption. Currently, beer holds a majority of the market, DEMAND. Continuously increases in industry As time goes on and more people are of legal age, demand increases Stable demand Beer prices are constant Price and Non-Price Rivalry Price Rivalry No real price rivalry Beer price increase due to inflation Industry wide, not company specific Also non-price based rivalry Product Low innovations calories, low carbs, etc. PRODUCT DIFFERENTIATION. Beer Style Term used to differentiate and categorize beers Companies use different styles to meet consumer preferences Can vary depending on the color, flavor, strength, ingredients, production method, recipe, history, or origin of the beer Companies offer different variations of core product PRODUCTS OF THE BEER INDUSTRY. INNOVATION AND TECHNOLOGY. Technology advancements = increase in productivity Reduction of inefficiencies Increase operational effectiveness The level of technology change is low wers Industry Analysis INCREASE IN PRODUCTION = INCREASE IN EMPLOYMENT. y size. The brewing industry is measured by the number of barrels ed per decade. As shown in Table 1 and Figure 1, the beer brewing has been increasing since 1860.1 Table 1: Decennial Production 1860 – 2000 Barrels Year (In Millions) % Difference 1860 3,812 72.5 1870 6,574 100 1880 13,347 106.5 1890 27,561 42.7 1900 39,330 51.2 1910 59,485 -84.4 1920 9,263 -60.3 1930 3,681 1391.2 1940 54,891 61.8 1950 88,807 6.5 1960 94,547 42.4 1970 134,653 39.9 1980 188,373 8.1 1190 203,658 2000* 199,173 *Reflects 2000-2007 2 of 17 barley, hops, corn and yeast) and packaging materials (such as kegs and bottles), as well as equipment (such as grain mills, tanks, yeast propagators, and packaging systems). PRODUCTION AND DISTRIBUTION IN BEER INDUSTRY. Law prohibits restaurants, stores and individuals from buying directly from breweries. There is a required three-tier process in place to prevent alcohol abuse, and to ensure minors are not purchasing or consuming alcohol. Therefore, individuals and retail outlets must purchase from a licensed wholesaler or distributor. Figure 1 shows a picture of the supply chain. Figure 2: Supply Chain Materials: Breweries: Water Corn Yeast Barley Cans Bottles Kegs/barrels Stores Distributors and wholesalers Restaurants “Breweries” encompasses the actual brewing part of the process, as well as the bottling process and the equipment that is used during both of these processes. According to Yahoo finance the beer brewing industry in the United States is estimated to be worth 46 billion dollars. 5 2 3 http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=BUD http://www.molsoncoors.com/investor-relations/business-profiles/ INDUSTRY COSTS. CAPITAL INTENSITY. The level of investment required is high BARRIERS TO ENTRY. GOVERNMENT REGULATION. Bureau of Alcohol, Tobacco Firearms and Explosives (ATF) US Alcohol and Tobacco Tax and Trade Bureau (TTB) State regulations IMPORTS AND EXPORTS. IMPORTS AND EXPORTS. Anheuser-Busch InBev and MillerCoors now control 74.3% of total market share. Exports = increased almost eightfold, from 1.3% of revenue in 2006 to an expected 11.3% in 2011. Imports= 13.0% share of domestic demand in 2011, worth more than $3.8 billion, is above the 2006 import level of 11.3%. Imports and exports continue increasing INDUSTRY TRENDS. Mergers have increased foreign ownership International giant South African Breweries (SAB) acquired Miller Brewing Company to form SABMiller Molson Canada merged with Coors Brewing Company in 2005 to form Molson Coors Three years later, these companies launched MillerCoors, a joint venture of their operations within the United States Combined market share= 29.0% classified as either a lager or ale; which is determined by the production method and which type of yeast is used. INDUSTRY STRUCTURE. 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 Table 6 shows, the CR4 of beer brewing is 77%. Table 6: Concentration Ratio of Top Four Competitors Company Revenues (in millions) SABMiller $ 18,620 Anheuser Busch 16,685 Molson Coors Brewing 6,190 Beer Brewers Industry Analysis Boston Brewing Co. 341 CR4* 77% 9 of 17 *$41,836 / $55,000 Table 7: Herfindahl Index Company Revenues (in millions) The Herfindahl Index is another measurement of c oncentration within an SABMiller .10 industry. It Busch is measured by taking the sum of.35 the market share of all firms within Anheuser the industry andBrewing squaring it. A HI greater than Molson Coors .141800 implies significant concentration effects. HI for beer brewing is 2362. Boston Brewing Co. As Table 7 shows, the.20 Others .21 8 HI: 2362 http://www.usatoday.com/money/industries 9 http://en.wikipedia.org/wiki/Beer_style After review of the CR4 and Herfindahl Index, it is apparent that the beer brewing industry is a concentrated industry. THE BEER INDUSTRY MAJOR PLAYERS. MAJOR PLAYERS. ANHEUSER-BUSCH INBEV. Market Share: 42.6% Brand Names: Budweiser, Bud Light, Beck's, Stella Artois, Michelob, Natural Light, Leffe, Hoegaarden, O'Doul's MILLERCOORS LLC. Market Share: 31.7% Brand Names: Miller, Coors, Blue Moon, Mickey's, Pilsner Urquell, Foster's, Keystone, Milwaukee's Best , Steel Reserve, Killian's THE BEER INDUSTRY PRICING STRATEGIES. PRIMARY PRICING STRATEGIES. PRIMARY PRICING STRATEGIES. Collusion Discounting Sub-premium Emergence COLLUSION OF NATIONAL FIRMS. Collusion is an agreement made between firms to: Divide Market Power Set Prices Limit Production Lower Competition Firms choose to collude in order to increase the overall profit margin of their respective firm. WHY COLLUSION IS POSSIBLE. Industry must be controlled by A FEW MAJOR FIRMS. A-B and MillerCoors control 80% of market share (Oligopoly). SIMILAR COSTS among top firms, with respect to production, advertising, etc. Close to EQUAL DEMAND for product. SIMILAR PRODUCTS. COLLUSION ENABLES FIRMS TO: Set prices relatively high. Leads to increased Profit Margin. Change price freely with minimal resistance. Price will then, usually, only changes in a vertical direction. Internally expand. Leads to Economies of Scale. AFFECT ON CONSUMERS. Consumers must pay HIGHER OVERALL PRICE for products in this market. This is the reason why a 12 pack of Miller Lite and Bud Lite are more expensive than most other brands in the same category. Consumers choose beer depending on perceived benefits and qualities other than price. REVENUE GROWTH. YEAR REVENUE $ MILLION GROWTH % 1998 33,162.2 1999 31,991.0 -3.5 2000 29,991.4 -6.3 2001 29,355.7 -2.1 2002 29,773.0 1.4 2003 31,275.5 5.0 2004 29,460.4 -5.8 2005 30,742.9 4.4 2006 31,163.0 1.4 2007 31,060.1 -0.3 2008 28,308.9 -8.9 2009 27,393.1 -3.2 2010 28,115.9 2.6 2011 28,783.5 2.4 Revenues, along with the Price Volatility of key brewing ingredients dropped due to expansion of the CRAFT BREWERY SEGMENT. Profit increased as a percentage of revenue to 11.1% in 2011, compared to 10.8% of revenue in 2006. DISCOUNT PRICING OR BULK PRICING. Sell large quantities of beer at an attractive price. Pay less per unit. Requires consumer to trade down to sub-premium brands. Second-Degree Price Discrimination. SUB-PREMIUM SALES TRENDS. 30 PACKS GREW 18.2% IN US DOLLAR SALES (2009). 18 PACKS GREW 35.5% IN US DOLLAR SALES (2009). Source: Category Focus: 2010 Beer Report: Sub-premium, crafts lead the way PREMIUM SALES TRENDS. 30 PACKS GREW 6.4% IN US DOLLAR SALES (2009). 36 PACKS GREW 15.8% IN US DOLLAR SALES (2009). Source: Category Focus: 2010 Beer Report: Sub-premium, crafts lead the way WHY BUY IN BULK? Consumers now realize that buying a large number of beers for a discounted price is efficient for our wallets. AND… Buying in bulk is convenient, saving us both time and effort. SHARES OF PREDICTED ANNUAL SALES BY VOLUME PACKAGE SIZE. PERCENTAGE OF TOTAL SALES 100% 50% 0% 72 OZ 144 OZ PACKAGE SIZE Source :RTI International, Research Triangle Park, NC, USA 288 OZ BUYING IN BULK. You can expect to pay about $11.99 for a 12-pack of 12-ounce cans at a typical grocery store BUT, at Costco, a 30-pack of 12-ounce cans sells for $19.99! About 67 cents per can versus about $1 per can at a supermarket. Source: MSN.com 10 bulk-buying bargains EMERGENCE OF SUB-PREMIUM BRANDS. Several factors caused shift from premium brands towards sub-premium brands: Current economy Price of national premium brands held constant Sub-premium dominate bulk market Improved image of sub-premium brands Perceived “coolness ALL LEAD CONSUMER TO TRADE DOWN! BEER SALES & THE CURRENT ECONOMY. As the unemployment rate has gone up, beer sales have plummeted at the exact same time. Consumers more cost efficient. Source: IBIS World: Beer Production in the US PREMIUM PRICES HELD CONSTANT. A-B and MillerCoors have held prices constant and cut costs of production and marketing instead. Consumers enticed to trade down to sub-premium level in order to save money TOP BRANDS STILL DOMINATE BUT CONSUMERS DETERMINE WHICH SEGMENT IS MOST POPULAR. Source: Anheuser-Busch Companies, Inc. IMPROVED IMAGE. Keystone Light beer, the top share grower in the convenience store channel Keystone recently embarked on National advertising campaign Keith Stone Commercials One of the most preferred drinks for college kids nationwide. Keystone Light is a hot brand for beer drinkers looking for value in today's economy OVERVEIW. National brands able to manipulate price due to high market share A-B and MillerCoors hold prices constant during recession. Consumers shifting towards buying in bulk to save money Leads to a shift in preferred segment Drops in sales and revenue Premium light Sub-premium light Customers haven't stopped drinking. They just want to pay less for a buzz. SECONDARY PRICING STRATEGIES. A WORD ON COMPETITION. HOW IS COMPETITION IS EVOLVING PRICES IN THE DOMESTIC BEER INDUSTRY? INCREASINGLY COMPETITIVE! Four largest corporations generate 81.8% of the revenue. Same four corporations also produce 74.3% of all the beer in the United States. However, domestic beer companies are facing increased competition. High market concentration. WHY IS THIS IMPORTANT? Affects the way beer companies strategically price their beer. Second-Degree Price Discrimination. Consumers self select into different beer consumption categories. WHY IS COMPETITION INCREASING? Target Market Social Trends Consumer Loyalty Evolution of Drinking Habits TARGET MARKET. Major beer companies now try to advertise primarily to the age group of 21-35. Underage drinking? How do beer companies keep their aging consumers loyal to their product? Younger demographic wants to pay a lower price for substantial volume! CONSUMER LOYALTY. Loyal Consumers Older Demographic Ages 35+ Have a beer they grew up with and prefer. Less Likely to be influenced by price fluctuations. Not Loyal Consumers Younger Demographic College Students Those interested in buying in bulk. Those influenced by current social trends. Price Influenced Easily SOCIAL/DRINKING TRENDS. Especially for primary target market, drinking habits have evolved. Binge Drinking Pre-Gaming Underage drinking has become commonplace on college campuses. Emergence of other options that promote quick inebriation. (Ex: Four Loko) INDUSTRY COSTS AFFECT PRICES. So what are some pricing strategies that domestic beer companies have used to evolve along with consumers? How Do We Get More? SECONDARY PRICING STRATEGIES. Two Primary Strategies 1. Advertising less on the basis of price. 2. Incorporate common craft beer practices into major company practices. ADVERTISING TRENDS. Major beer companies rarely advertise on the basis of price. Consumer Benefits are now the focus. Taste, Quality, Intangibles. THINK- Can you even remember the last time you saw a beer commercial that mentioned prices? I DO/DO NOT BUY THIS PRODUCT BECAUSE… Pros I feel nostalgic when drinking it. (Intangible) I like the taste. (Taste) The beer is not too filling. (Intangible) My friends also enjoy the beer. (Intangible) Cons The product triggers no social feelings inside an individual. (Intangible) Bad taste. (Taste) Unhealthy. (Quality) Lots of calories. (Quality) I’m the only one who likes this beer among my group of friends. (Intangible) EXAMPLES/TRENDY SLOGANS. “Great taste, less filling” – Miller Lite “Drinkability” – Bud Light “The King of Beers” – Budweiser “The Banquet Beer” – Coors “Cold as the Rockies” – Coors Light WHY IS THIS CONDUCIVE? Allows major beer companies to keep prices are a relatively high, stable level. (Collusion) Also, less attention is paid to potential price fluctuations. They want you to focus on perceived consumer and social benefits! ARE WE INFLUENCED BY SOCIAL NORMS? CRAFT STYLE IMPLEMENTATION. Major beer brands are starting to implement more consumer friendly practices that craft beers have always provided. CRAFT BEERS GROWING. From 2003-2011, production of craft beer as risen from 5,137 million barrels per year to 10,097 million barrels per year. Almost Doubled! Demand Increase MAJOR BEER COMPANY ACTIONS. Actions Beer Tasting Opportunities. Brewery Tours. Consumer Appreciation Events. Results They do not want to lose their consumers to smaller craft beer companies! Potential to attract new consumers. Increase overall consumer base. Potential demand increase for their product as a result. Can manipulate prices in their favor when demand and their market share is high. THE BEER INDUSTRY CASE STUDY. CASE STUDY. BEER ADVERTISING AND MARKETING UPDATE: Structure, Conduct, and Social Costs. By: Jon P. Nelson BEER AVERTISING: AN OVERVEIW. The U.S. brewing industry is dominated by three firms, who together account for about 80% of beer shipments. Anheuser- Busch SAB-Miller Coors SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/ SAB-MILLER. 1970: Philip Morris acquires the Miller Brewing Company. First to launch a “Lite” beer in 1975. Miller Lite advertising expenditures had grown from $15 million in 1975, to $67 million ($0.33 per case) in 1986. 1988: Rival Bud Light hits peak advertising at $70 million ($0.51 per case). Obtains the First-Mover advantage in the Lite Beer market. Not until 1994, do sales of Bud Light surpass those of Miller Lite. First-mover advantage and the success of the light beer category, means “light beer war” affects all subsequent advertising and marketing decisions by leading brewers. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/ NEW COMPETITION PROSPERS. New Competition: Specialty Brewers, Microbrewers, and Brewpubs. Sell at super-premium prices. With the exception of a few, many abstain from heavy national advertising. Rivalry among industry leaders has spilled into the market for Flavored Malt Beverage Evokes new forms of competition, and new strategies for marketing and advertising. This recent product innovation presents the consumer with a variety of choices may spark a renewed advertising rivalry amongst industry leaders. Marketing reflects consumer tastes for lighter beverages. Might be the next runaway product category. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/ AVERTISING AND STRUCTURAL CHANGE. 1950–1986: Intense advertising rivalry among the top three brewers: Anheuser-Busch, Pabst, and Schlitz. Followed by by an intense advertising rivalry between Anheuser-Busch and Miller during the “light beer war.” 1987-1995: The total number of firms rises, and there is an expansion of microbreweries Successfully exploited the new medium of television and the economies of scale associated with national advertising and distribution. Structural change marked by increased size of individual and multi-plant operations by the industry leaders. Schlitz and Stroh merged and Pabst dropped out of the top group. Independent mass-market brewers declines to 33 in 1986. Market share of the top three firms rises from 75% in 1990 to 80% in 1995. 1996–2003: Stroh goes out of business and sells brand names to Miller and Pabst. 2002, Miller Brewing sold by Philip Morris to South African Breweries Ltd. (SAB). SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/ AVERTISING AND STRUCTURAL CHANGE: MARKET SHARES AND ADVERTISING BY THE THREE LEADING BREWERS FOR THE PERIOD 1975–2003. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/ AVERTISING AND STRUCTURAL CHANGE. Anheuser-Busch and Miller demonstrate remarkable output growth between 1975 and 1990. Anheuser’s average spending per case is below that of its smaller rivals. Reflects advantages of size, a broader product line, and superior marketing skills. Advertising intensities rose during1976-1985, and then stabilized for Anheuser and Miller. Coors’ advertising continued to increase as outsiders entered the ranks of its management. 1990–2003, the leaders increase nominal spending by an additional $0.05 to $0.09 per case. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/ CONSUMER PREFERENCES AND ADVERTISING. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/ CONSUMER PREFERENCES AND ADVERTISING. Consumer preferences and advertising interact to determine success at the brand level. 1993–2003: Among the top 10 brands, three were able to successfully enter the market: Today: Top four brands=almost half (48.5%) of U.S. beer sales Corona Extra, Busch Light, and Heineken. Top10 brands= two-thirds of the sales. 2003: The top four brands also accounted for 46% of beer advertising. Anheuser-Busch Anheuser-Busch Corporate Becks Bud Light Bud Light Lime Budweiser Budweiser American Ale Budweiser Corporate Budweiser Select Busch Busch Light Coors Coors Light Corona Corona Extra Corona Extra Sponsorship Corona Light Dos Equis Fosters Guinness Guinness Draught Heineken Heineken Draughtkeg Heineken Premium Light Keystone Light Michelob Michelob Amberbock Michelob Ultra Fruit Infused Michelob Ultra Light Mikes Hard Lemonade Miller Chill Miller Genuine Draft 64 Miller High Life Miller High Life Light Miller Lite Natural Light Peroni Nastro Azzurro Samuel Adams Samuel Adams Boston Samuel Adams Light Samuel Adams Octoberfest Samuel Adams White Samuel Adams Winter Smirnoff Ice Stella Artois DOL SUM RAW DATA ANALYSIS. 300000000 250000000 200000000 150000000 100000000 50000000 0 BRAND RAW DATA ANALYSIS. BRAND NAME Anheuser-Busch Bud Light SUM OF DOLS 6962500 277952000 Budweiser Coors Coors Light Miller Genuine Draft 64 Miller Lite 156336000 13836500 133489300 9264500 121165300 Television Advertising Data: Beer Industry- Top Four Firms. Of the top four industry leaders, Bud has the largest Market Power, as it incurs the most DOLS. RAW DATA ANALYSIS. ANALYSIS: DOW RELATIONSHIP TO DOL SUM FOR TOP FOUR FIRMS. RAW DATA ANALYSIS. ANALYSIS: DOW AND DAY PART RELATIONSHIP TO DOL SUM FOR TOP FOUR FIRMS. RAW DATA ANALYSIS. ANALYSIS: DOW AND DAY PART RELATIONSHIP TO DOL SUM FOR TOP FOUR FIRMS. RAW DATA ANALYSIS. ANALYSIS: DOW AND DAY PART RELATIONSHIP TO DOL SUM FOR TOP FOUR FIRMS. THE BEER INDUSTRY RECCOMENDATIONS. THE INDUSTRY NOW. 2008 Merger activity between Anheuser-Busch InBev and MillerCoors led to industry shift. Anheuser-Busch InBev and MillerCoors control 74.3% of total market share. Allowed the international companies InBev and SABMiller higher levels of control over breweries that originated domestically. Trade has heavily influenced industry revenue. Imports and exports fell drastically when unemployment worries stalled booming global consumption and trade. THE INDUSTRY NOW. Supply and demand shifts in recent years, induced by unpredictable ingredient prices and changing consumer preferences, are created turmoil in the Beer Production industry. Faces increasing competition from other beverages, namely wines and spirits Increase wine and spirit demand (consumer taste expansion/shift), leads to a decrease in the demand for beer. RECOMMENDATIONS. ADVERTISING. Maintain consistent and strategic marketing messages, and building and preserving a high level of trust with customers. Consumers know what to expect from both the company and their products. Promote The the brand that is beer. four fundamental strengths of beer: 1) Beer is genuine. 2) Beer is real. 3) Beer lacks the pretenses often associated with wine or liquor. 4) Beer brings people together; beer is about refreshment, enjoyment and fun. Reaffirm these four strengths in both developing and loyal consumers. RECOMMENDATIONS. PRODUCT DEVELOPMENT. The use of technology and continued innovation to make product personalization easier and product upgrades more accessible to the consumer. A shift in consumer expectations, attitudes and preferences to things such as satellite TV, smart phone, and Internet connections. Constant access to information has led a dramatic shift in consumer culture, ideas and lifestyles. Must must meet the new consumer demand for People more variety, more novelty, more sophistication in the products offered in the market. Example: New Trend Low Calorie Beers Budweiser Select 55 (55 calories) Miller Genuine Draft 64, MGD 64 (64 calories) RECOMMENDATIONS. PRODUCT DEVELOPMENT (continued). Brand Expansion. Capitalize on the success of a solid brand by breaking into different product categories under the same brand name. Allows firm to increase and leverage the brand equity, increase product portfolio, and grants a company a larger hold over the market; thus generating greater revenue. THE BEER INDUSTRY QUESTIONS?