Title: Alcohol Beverage (Focus on Beer & Breweries)

NAICS Code: 312120

Name: Yonatan Balin

(Reference Format: APA)

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Introduction/Executive Summary:

Beer is a yeast – fermented alcoholic drink prepared from malt, and flavored by adding

hops. According to business insights, there are 85 total companies under NAICS code: 312120.

Allied market research came out with a report regarding certain data in the beer industry, more

than 800,000 employees and an annual revenue of over $224 billion dollars highlight the

economic impact of the industry. The beer market has registered significant growth in the world

marketplace due to various promotional activities, strong marketing strategies, social acceptance

of beer as a drink, and increasing number of the beer-consuming population.

The global beer market is expected to generate about $688 billion dollars in sales by

2020.

However, the global beer market also faces some constraints, such as high taxes in certain

regions, seasonality and climatic conditions, government rules and regulations, health

regulations, and a host of substitute products that offer alternatives to the beer market. The other

big impediment for the global beer market is the high investment it demands for both

manufacturing and selling.

Some of the key players in the beer market are Anheuser-Busch (InBev), Grupo Modelo,

Carlsberg Breweries, Heineken N.V. and Molson Coors Brewing Company.

Porters five forces discussed throughout the semester are very applicable to the beer

industry. A short summary of each force: 1) risk of new potential competitors would be a

company(s) with the capabilities and resources to enter the industry 2) rivalry among established

companies is the intensity of competition amongst the top players in the industry 3) bargaining

power of suppliers is where suppliers are consolidated, no substitutes and high switching costs 4)

bargaining power of buyers is where suppliers are fragmented, vertical integration and low

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switching costs 5) threat of substitutes is the instance when a product from a different company

can satisfy the customers needs.

I found it very interesting that when doing the t-test and comparing the results, my

hypothesis of 2015 being more profitable than 2014 was incorrect when all the research is

showing that there will be a clear profit increase in the beer industry.

Porter’s Five Forces Model:

The goal over the next several pages is to provide an informative essay of Porter’s five

forces model and how the model relates to the beer brewing industry.

The first force is threat of entry by new potential competitors. The beer industry has seen

an increase of brewers enter the marketplace over the last several years. According to an article

published in 2015 by the Brewers Association, the US brewery count has grown significantly

and saw an almost 18% increase from 2014 to 2015. Entering into this market as craft breweries

is very attractive as growth in the beer industry is continuing to rise and to be more profitable.

However, the barriers to entry still remain fairly high. The top beer brewing companies

such as Anheuser Busch, SABMiller, Molson and Boston Brewing have many advantages that

deter potential new entrants from entering the market. For mature companies, economies of scale

provide them great leverage due to large production quantity, which increases their overall

margins. Large amounts of capital gives them the ability to spend more on branding, marketing

and promotions. In addition, they have a hold on the limited shelf space from the retailer as well

as a hold on the distribution channel. Lastly, the alcohol beverage industry is highly government

regulated and taxed on a federal, state and local level. Hoover as well as in an article published

by Market Watch (Notte, 2015) mentions how the top eleven brewing companies in the US own

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a 90% share of the market, very likely another reason why the potential risk level of new

competitors remains at a medium level.

On a positive note for those thinking about entering the world of beer, while there are

strong barriers mentioned above such as economies of scale and government regulation they do

have some advantages in their favor. The beer industry lacks brand loyalty and has low switching

costs. To go from one beer to another beer, is roughly the same price and the consumer doe not

lose any data collected (ex: to switch from a company like Netflix to another media streaming

provider). Beer prices from one company are not going to be much lower or higher than it is

from another company as reported by wineaccess which releases the price list for beers. With

regards to brand loyalty, the typical beer drinker will try more than just one brand of beer

throughout his or her lifetime giving new entrants some hope for success.

The second of the five forces is rivalry amongst competition. According to a recent

article, published by Business Insider (Richter, 2012), although people preferences for beer have

dropped over the years, the brewing industry is hotter then ever. The amount of breweries in the

U.S now tops over 4,000. One may think the rivalry is fierce then, however, it is at a neutral

level. There are several reasons for this but the main one is that the rivalry is really only amongst

the top four or five brewing companies. These other breweries all exist but on a much smaller

level. Outside of the top few, the other breweries cannot compete. Within the beer industry, price

battles are not the determining factors as most beers are priced at a similar cost. The determine

factor within this industry and what separates the top breweries from the smaller one and limits

their potential growth to be a fierce competitor, is capital constraints.

The brewing industry is focused on using their capital to increase brand image and brand

awareness. CNN (O’Neill, 2016) reported that Anheuser-Busch bought a spot for Super Bowl

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2015 for three minutes. Every thirty seconds cost was $4.5million dollars. Another top player in

the market, Miller Lite, in a span of thirty days has over 2,000 national airings and is ranked

number 195 amongst all companies in spending. These factors may it extremely difficult for a

new brewery to compete with these top players. However, this intensity among the top

competitors limits potential profitability in this industry.

The third force that Porter discusses is the bargaining power of buyers. The buyer side in

the beer industry is broken down into three tiers. Weiss in an article he wrote for Fermentarium

describes the tiers as follows; the distributors, retailers and the end buyer, which is the consumer.

Respectively, that is their ranking in terms of significance as well.

Neither breweries nor distributors sell directly to the consumer. The consumers spending

on beer is so minimal it is unlikely they have an impact on the pricing strategy. Hence, the

bargaining power of the buyer in this case, being the consumer, is weak.

Next on the tier working our way from bottom to top are the retailers. In this case,

breweries do not sell to retailers for the most part but the distributors sell to the retailers.

Retailers as opposed to consumers do have bargaining power since shelf space is limited and

there are close to 3000 distributors. With the distributor channel being fragmented, this gives the

retailers increased bargaining power.

On top of the chain, are the distributors who have the most power. All breweries are

required to go through an independent distributor, who then sell to the retailers and then

ultimately the consumer. As mentioned previously, the breweries, although controlled by the

elite few, there are many making the supplier side fragmented which increases buyer power.

Additionally, switching costs to the distributor from one brewery as opposed to another is very

low if there is any at all. The risk of distributors vertically integrating is minimal but they

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ultimately control the product reaching retailers and the end consumer, which increases their

power and their control of pricing. This control puts a dent in the overall profitability of the

brewing industry.

The fourth force discussed is the bargaining power of the suppliers. In the beer industry,

the suppliers are those that provide the brewery with the raw ingredients to produce the actual

product; beer. Although the ingredients are the key element and affect the overall product,

“supplier” power in the alcohol industry is fairly low. There are three main reasons for this. One

is that the suppliers market is fairly fragmented, meaning breweries have several options of

which to purchase the raw ingredients from. Secondly, switching costs are low. For a brewery to

switch purchasing raw ingredients from one supplier as opposed to another is fairly inexpensive.

Lastly, the chance of the suppliers vertically integrating into the industry to act as a brewery is

also fairly low, as they do not possess knowledge of the production portion of the business. On

the other hand, the chance of one the large breweries’ deciding to buy a piece of land and grow

the ingredients and thereby eliminating the middleman is much higher due to their vast amount

of extra capital.

The fifth and final force that Porter discusses is threat of substitutes. Beer is in the

category of being an alcohol beverage and we will stick with the substitutes within that category.

Wine/spirits, liquor such as whiskey and malt beverages are all making a strong move in the

industry and all act as a key substitute to beer. Fortune published an article in February of 2015

written by Kell, provides data of how serious of a threat substitutes are in the alcohol industry

and how they are making a serious move to replace beer as the primary product of choice.

Overall, retail sales of distilled spirits in the U.S. is nearly $70 billion dollars. The spirits

industry’s market share stood at 35.2% in 2014, up from 34.7% a year ago, while beer’s

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market share for the alcohol business stood at 56% in 1999, but slipped below the 50%

threshold in 2010 and now stands at 47.8%. Total whiskey volume has also been on the

rise now over the past several years and according to trends that growth will keep rising.

It is evident from the data that while beer is still the leader in the alcohol business,

there are viable threats that can act as a substitute for it.

t-Test:

For the t-test my goal is to analyze the performance of the beer industry market between

the years of 2014 and 2015. My initial conjecture was that 2015 performed better than 2014.

Hence, my hypothesis is the following: Ho: Miu2015=Miu2014

Ha: Miu2015>Miu2014.

In my initial conjecture I stated that 2015 performed better than 2014. I defined

performance with regards to ROE % (net). The industry was defined by the NAICS code,

312120 which is the beer brewing industry. The database used to collect the data was Mergent

Online. This tool spit back 146 companies located in the US that play a role under this NAICS

code. Additionally, I decide to disregard outliers since only a few powerhouses control the

industry and including outliers would skew the data in my opinion.

The P-Value given for the t-test without outliers is 0.15497. In the sample mean 2014 has

higher mean than 2015 therefore, making my hypothesis incorrect. So we take the P-Value and

subtract 1 from it. The equation looks like this: 1-0.15497=0.84503, 0.84503 is great then .05 so

we cannot reject Ho and did not find strong evidence that 2015 is better than 2014.

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T-Test Without Outlierst-Test: Paired Two Sample for Means

  ROE % (Net) - 2015 ROE % (Net) - 2014Mean 9.5836 10.176Variance 57.38936567 91.52681667Observations 25 25Pearson Correlation 0.971101458Hypothesized Mean Difference 0df 24t Stat -1.037257939P(T<=t) one-tail 0.154977015t Critical one-tail 1.71088208P(T<=t) two-tail 0.30995403t Critical two-tail 2.063898562  

T-Test With Outlierst-Test: Paired Two Sample for Means

  ROE % (Net) - 2015 ROE % (Net) - 2014Mean 4.616785714 7.4725Variance 498.0623263 335.0729083Observations 28 28Pearson Correlation 0.833857652Hypothesized Mean Difference 0df 27t Stat -1.22629889P(T<=t) one-tail 0.115337003t Critical one-tail 1.703288446P(T<=t) two-tail 0.230674007t Critical two-tail 2.051830516  

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References:

https://www.alliedmarketresearch.com/beer-market

http://0-bi.galegroup.com.liucat.lib.liu.edu/essentials/industry/312120?u=nysl_li_liu

https://www.brewersassociation.org/statistics/number-of-breweries/

Jason Notte (2015, July 28). “These 11 brewers make over 90% of all U.S. beer”. Retrieved

from http://www.marketwatch.com/story/these-11-brewers-make-over-90-of-all-us-

beer-2015-07-27

http://0subscriber.hoovers.com.liucat.lib.liu.edu/H/search/simpleSearchResults.html?

searchValue=+312120+&&updateSimpleSearchResults=true&modName=addrcountryid&

modValue=76

http://www.wineaccess.com/file/store/totalwine/beer-corridorwine.pdf

Wolf Richter (2012, March 29). “The American Beer Industry By The Numbers”. Retrieved

from http://www.businessinsider.com/the-beer-war-on-american-soil-2012-3

Maggie O’Neill (2016, February 5). “Anheuser-Busch: King of the Super Bowl”. Retrieved

from http://money.cnn.com/2016/02/05/news/anheuser-busch-super-bowl-advertising/

http://www.ispot.tv/brands/dN1/miller-lite

DJ Speiss. “How the three-tiered beer distribution system works”. Retrieved from http://www.fermentarium.com/industry/how-the-three-tiered-beer-distribution-system-works/

John Kell. (2015, February 3). “Spirits stole more market share from the beer industry last

year”. Retrieved from http://fortune.com/2015/02/03/whiskey-tequila-spirits-2014/

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