Module 2 - Craft Beer Industry Case PDF

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Sharon Watson...

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BUAD441-011 January 13, 2021 Module 2 - Craft Beer Industry Case 1. 5 Forces of Industry Competition: for each force, state whether it is strong, moderate, weak, and list the supporting facts about the industry that led to your conclusion. Use For each force, point to the characteristics listed in Figures 3.4-3.8 of the text to bolster your evidence for why each force is strong / moderate / weak. Industry Rivalry: Strength: Strong Rivalry becomes stronger Rivalry becomes weaker ● Buyer demand: growing popularity of craft beers led to about 5% sales volume increase in 2017 ● Buyer costs to switch brands are low: could purchase the globally known brand, purchase the specific beer/brewery, be brand loyal or purchase several styles, purchase based on seasonal taste etc. ● Products are not commodities and are differentiated: industry competitors might target both price point and differentiation and compete across strategy spectrum ● Firms do not have excess production capacity or inventory: Government regulations can vary depending on state and municipality and have been threats in competition from shortages of raw materials ● High fixed cost or high storage costs: Storage can vary based on outlet such as kegs for restaurants and bars but need cans and bottles for retail shelves but not a high fixed or storage cost ● Competitors are numerous as number of US brewers tripled from 2012 to 2017 vary from microbreweries to larger companies taking advantage of consolidations and acquisitions ● Rivals have diverse objectives, strategies and or countries of origin: Yes, breweries are global industries which can have diverse ranges of strategies across the spectrum, tastes based on regional locations and targeting a change in consumer preferences toward unique and high quality beers. ● Rivals have emotional stakes in the business or face high exit barriers: Many small breweries are started very locally and by families creating emotional stakes in business

Threat of New Entrants: Strength: Strong Entry barriers high Entry barriers low

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Incumbents have large cost advantages over potential entrants: more established brewers might compete through marketing and distribution creating a higher value compared to mass production of macrobreweries or compete with economies of scale and established distribution systems for low cost to drive sales volume Customers with strong brand preferences/loyalty to incumbent sellers: can vary but as there is an overall growth in consumers that attract more entrants larger breweries seek acquisitions of successful craft beer brands Patents and other forms of intellectual property protection: trademark infringement and food related are common lawsuits Strong network effects: No High capital requirements: Government regulations for sales and distribution Limited new access to distribution channels and shelf space: Government regulations vary by state and some do not allow self distribution or on premise sales as a barrier Restrictive government policies: TTB is main federal agency regulating this industry and breweries need advertising labels and formulas approved which could have impact on small breweries if it takes several months Restrictive trade policies: Government regulations by state and municipality but industry expanded rapidly with deregulation of intrastate alcohol distribution and retail laws. Exported beer to developed and developing regions helped drive future growth.

Threat of Substitute Products: Strength: Strong Threat of substitute stronger when Threat of substitute weaker when ● Good substitutes readily available and attractively priced: Yes substitutes could include other alcoholic beverages or non alcoholic that are readily available, variety of options and attractively priced ● Substitutes have comparable or better performance features: Varies based on taste and preference of consumer. Substitutes could be healthier, easier to get or cheaper. ● Buyers have low costs in switching to substitutes: no cost to switch Bargaining Power of Suppliers: Strength: Strong Bargaining power stronger when Bargaining power weaker when ● Suppliers’ products in short supply: current and future shortages of hops due to increase of breweries and rising temps in europe diminished yield in 2015 ● Suppliers’ products are differentiated: have specialized ingredients: those who supply grain and hops- could be specialized or organically grown, manufacturers and distributors of brewing equipment

● Industry members incur high costs in switching their suppliers: Some suppliers are very specialized with types of grain they have which could make it difficult to switch. Having good relationships with suppliers and larger global companies can use economies of scale and demand lower prices making it less likely to switch. ● The supplier industry is more concentrated than the industry it sells to and is dominated by a few large companies: Supplier industry can be more specialized and specific to regions that can grow certain grains and hops. Also specific equipment is also specialized for the craft beer industry. ● Industry members do not have potential to integrate backward in order to self manufacture their own inputs: Very difficult for companies to integrate backward for supply of specialized grain, hop and brewing equipment. ● Suppliers’ products do not account for more than a small fraction of total costs of industry’s products: Can vary based on the brewery as they can compete across strategy spectrum - low price and high volume or higher price and low volume. Can have a big investment to begin brewing and might utilize a niche competitive strategy. ● There are no good substitutes for what the suppliers provide: Many breweries are looking for specialized tastes required by the grains and hops or value of equipment for distribution and driving volume sales. ● Industry members do not account for a big fraction of suppliers’ sales: They are the main suppliers to the industry which accounts for a large usage (ex: hops acreage in US grew almost 80% from 2012-2017 as number of breweries increased) Bargaining Power of Buyers: Strength: Moderate Bargaining power strong when Bargaining power weaker when ● Buyer demand is weak in relation to industry supply: Change in consumer preferences have really increased this market and buyers such as restaurant, bars, and retail stores ● Industry’s products are standardized or undifferentiated: Very differentiated and purchase can be based on specific brewery name/brand loyalty or seasonal/specific tastes ● Buyer costs of switching to competing products are low: No cost to switch to competing products and very big variety of big or small brands as well as beer types and taste ● Buyers are large and few in number relative to the number of industry sellers: Very big variety of buyers as can range from wholesalers or retail outlets to consumers. Distribution through direct sales, two tier systems or three tier systems. ● Buyers pose a credible threat of integrating backward into the business of sellers: No, but many breweries do have their own tours, tastings or bar/restaurant set ups for consumers to directly buy ● Buyers are well informed about quality, prices and costs of sellers: Yes ● Buyers have the ability to postpone purchases: Yes

Conclusions from 5 Forces Analysis (re: industry attractiveness and profit potential): While the beer industry has remained flat, craft beer had signs of slowing down but not a slowdown in the number of new craft brewers entering the market. This demonstrates strong rivalry in the industry as there has been such an increase and variety in types of breweries as popularity tripled the number of US brewers from 2012 to 2017. Threats in competition come from increasing availability, price fluctuations and shortages of raw materials, and bigger more established brewers high value of economies of scale and established distribution systems. There is a strong threat of new entrants as many new craft brewers are entering the market but have found that larger companies have been purchasing many of these successful new entrants through consolidations and acquisitions. There is a somewhat strong threat of substitute products as craft beer is more niche and specific to flairs and tastes of consumers and other alcoholic or non alcoholic beverages can be easily accessible or cheaper. Suppliers have a strong bargaining power as they are more specialized in supplying specific grain, hops and brewing equipment. Threats for the industry come from current and future shortages that could be detrimental to some breweries requiring specific hops or grains. Buyers have a moderate bargaining power as there are so many varieties of craft beers and brewers available to them and the industry has such a large scale of types of buyers. Overall, this is an attractive industry as there is such a large scale of what a brewer will specialize in, a broad strategy spectrum and high consumer preferences towards these unique and high quality beers. However, there is a strong industry rivalry, a strong threat of new entrants, a strong threat of substitutes, strong bargaining power of suppliers and moderate bargaining power of buyers that a company looking to enter must be wary of. There is profit potential here but smaller breweries can face more threats and significant costs compared to larger more global brewers.

2. Driving Forces of Change and Their Effects on Firms in the Industry: ● Changes in industry growth rate ○ If the rate is dropping, not all breweries can grow, which makes competition fiercer. The number of barrels of beer produced since 2008 has been steadily decreasing (from 200 in 2008 to 186 in 2017), while the number of craft breweries in each state has increased. This tells us that this market is becoming even more saturated with a steady increase of new entrants, coupled with a declining consumption in the United States (however, consumption is increasing in other parts of the world). ● Societal changes ○ People are tending to eat healthier in the United States, meaning that they are looking for healthier options that are filled with less sugar and calories in terms of

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alcoholic beverages. This is why it is so important for breweries to understand these trends, in order to adequately create different products to satisfy them. Regulatory changes ○ Government regulations can vary depending on state and municipality and have been threats in competition from shortages of raw materials. Different regulations can also dictate how much beer can be sold by volume in each state, and therefore restrict breweries in terms of their sales/distribution. Product Innovations ○ As consumer’s tastes change, or different trends appear in the market (i.e. low calorie, low sugar, low fat), we will see a continuation of new beer products to hit the market. These new innovations are needed in order to keep the breweries relevant, and to keep customers coming back. This can also be seen through the change of the seasons, as some regard beer drinking as seasonal (i.e. Oktoberfest), and then create different products around it. Marketing Innovation ○ Social media marketing has helped these breweries to reach a larger audience, while simultaneously marketing the products and generating sales. Social media can be used as a free tool to help breweries reach success, and if done correctly, can continue to bring in new customers while helping the business grow and scale up. Industry Consolidation or Fragmentation ○ We have seen that in many cases smaller, successful breweries will be acquired by larger brewing companies. This is important to keep in mind, as many of these breweries have the potential of being bought out and taken over in order to maximize their production and to be able to sell their products on a national level.

3. Industry Key Success Factors (explain why each is a KSF) ● Price - keep cost low ○ Breweries in the industry must keep their manufacturing costs low, in order to maximize profits and utilize the entirety of their resources. ● Distribution - develop strong network of distributors ○ It is crucial that breweries create strong relationships with their distributors, as this is an important factor in gauging how much they will be able to grow/how successful they can be. By creating these relationships, breweries can expand their reach to consumers by being able to distribute their products efficiently and improve their span of reach geographically, therefore increasing demand and brand exposure. ● Brand Awareness - advertising, marketing capabilities ○ Because breweries can be quite niche, marketing plays a huge role in helping to establish brand name and awareness. Without it, consumers will not know that

these products from different brands/breweries even exist. This proves how important it is to build strong brand awareness, as it will help to generate a following of loyal customers, and create a more stable pathway to success for the brewery. ● Product Selection - unique varieties of products ○ Because there are thousands of breweries across the United States, it is especially important for breweries to differentiate themselves through unique products. By offering a variety of unique, memorable products, consumers will likely return and seek out that specific brewery in the future when looking to make a purchase (if the product(s) are not memorable, they will not return and easily go look for another product to replace it). ● Reputation - strong with both consumers and business partners alike ○ It is crucial to keep a strong, positive relationship with both consumers, suppliers, distributors, etc. Having a strong reputation can only help a brewery in reaching success, and will keep customers coming back (as they know they will receive high quality products/experiences). Likewise, business patterns will be happy to stick around if they are also treated extremely well.

Industry Opportunities and Threats

Opportunities (for increased firm growth & profitability)

● Entering into new niche markets/offering new products in the market (innovation) ● Social media/online marketing, can greatly help in creating brand exposure/awareness, while also being able to interact with customers ● Growing popularity for craft beers in the United States ● Can take advantage of the “experience” side, with tours, tastings, and providing a memorable experience for the customers ● Create strong following of loyal customers ● Grow customer base through different outlets, creating partnerships with local restaurants, offer different events on site, etc. ● Create sales through online presence/platforms

Threats (against firm growth & profitability)

● Larger brewing entities dominating the market/acquiring successful craft breweries ● Beer consumption steadily dropping in the United States ● Differing laws and regulations from state to state, that can restrict how breweries conduct business ● Innovation - constantly occurring by different businesses, and if you do not keep up you will fail ● Social media - if poor reviews or poor experiences are shared, they can quickly decimate a business ● Constant stream of new entrants into the market, that increase competition and further saturate the market ● Lawsuits are common, due to patents and intellectual property ● Substitutes are readily available, usually at the same or even lower price...