AEM 4160

THE BEER

AGENDA.

Industry Overview Major Players Primary Pricing Strategies Secondary Pricing Strategies Case Study Recommendations

THE BEER INDUSTRY

INDUSTRY

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

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

INCREASE IN PRODUCTION = INCREASE IN EMPLOYMENT.

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). 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

PRODUCTION AND DISTRIBUTION IN BEER INDUSTRY.

Materials:
Water Corn Yeast Barley

Breweries:
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. 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% *$41,836 / $55,000

INDUSTRY STRUCTURE.

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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 market share of all firms within the Anheuser the industry and squaring it. A HI greater than 1800 implies significant Molson Coors Brewing .14 concentration effects. As Table 7 shows, the.20 for beer brewing is 2362. HI Boston Brewing Co. 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

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 1998 1999 2000 2001 2002 REVENU GROWTH E$ % MILLION 33,162.2 31,991.0 29,991.4 29,355.7 29,773.0 -3.5 -6.3 -2.1 1.4

2003
2004 2005 2006 2007 2008 2009

31,275.5
29,460.4 30,742.9 31,163.0 31,060.1 28,308.9 27,393.1

5.0
-5.8 4.4 1.4 -0.3 -8.9 -3.2

Revenues, along with the Price Volatility of key brewing ingredients dropped due to expansion of the CRAFT BREWERY SEGMENT.

2010
2011

28,115.9
28,783.5

2.6
2.4

Profit increased as a percentage of revenue to 11.1% in 2011, compared to 10.8% of revenue in

DISCOUNT PRICING OR BULK PRICING.

Sell large quantities of beer at an attractive price. Pay less per unit. Requires consumer to trade down to subpremium 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.

100%

PERCENTAGE OF TOTAL SALES

50%

0% 72 OZ 144 OZ 288 OZ

PACKAGE SIZE
Source :RTI International, Research Triangle Park, NC, USA

BUYING IN BULK.

You can expect to pay about $11.99 for a 12pack 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 subpremium 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.

Drops in sales and revenue

Consumers shifting towards buying in bulk to save money Leads to a shift in preferred segment

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

Not Loyal Consumers

Older Demographic Ages 35+ Have a beer they grew up with and prefer. Less Likely to be influenced by price fluctuations.

Younger Demographic College Students Those interested in buying in bulk. Those influenced by current social trends. Price Influenced

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

Cons

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.

The product triggers no social feelings inside an individual. (Intangible) Bad taste. (Taste) Unhealthy. (Quality) Lots of calories. (Quality) Im 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

Results

Beer Tasting Opportunities. Brewery Tours. Consumer Appreciation Events.

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.

Obtains the First-Mover advantage in the Lite Beer market.

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).

Not until 1994, do sales of Bud Light surpass those of Miller Lite.

SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/

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.

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.

19501986: 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.

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.

1987-1995: The total number of firms rises, and there is an expansion of microbreweries

Market share of the top three firms rises from 75% in 1990 to 80% in 1995.

19962003: Stroh goes out of business and sells brand names to Miller and Pabst.

SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: South African and social costs. 2002, Miller Brewing sold by Philip Morris to structure, conduct, Breweries Ltd. http://www.springerlink.com/content/g6774l01385x5p37/ (SAB).

AVERTISING AND STRUCTURAL CHANGE:

MARKET SHARES AND ADVERTISING BY THE THREE LEADING BREWERS FOR THE PERIOD 19752003.

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. Anheusers 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. 19902003, 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. 19932003: Among the top 10 brands, three were able to successfully enter the market:

Corona Extra, Busch Light, and Heineken.

Today: Top four brands=almost half (48.5%) of U.S. beer sales

Top10 brands= two-thirds of the sales.

2003: The top four brands also accounted for 46% of beer advertising.

DOL SUM
100000000 150000000 200000000 250000000 300000000 50000000 0

RAW DATA ANALYSIS.

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

BRAND

RAW DATA ANALYSIS.

BRAND NAME SUM OF DOLS

Anheuser-Busch

6962500

Television Advertising Data: Beer IndustryTop Four Firms.

Bud Light
Budweiser Coors Coors Light Miller Genuine Draft 64 Miller Lite

277952000

156336000 13836500 133489300 9264500 121165300

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 RELATIONSHI P TO DOL SUM FOR TOP FOUR FIRMS.

RAW DATA ANALYSIS.

ANALYSIS: DOW AND DAY PART RELATIONSHI P TO DOL SUM FOR TOP FOUR FIRMS.

RAW DATA ANALYSIS.

ANALYSIS: DOW AND DAY PART RELATIONSHI P TO DOL SUM FOR TOP FOUR FIRMS.

THE BEER INDUSTRY

RECCOMENDATIO

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,

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?