The US Brewing Industry Analysis Commerce Essay

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The U.S. brewing industry is comprised of establishments that are "primarily engaged in brewing beer, ale, malt liquors and nonalcoholic beer" (U.S. Census Bureau). Its Standard Industrial Classification Code (SIC) is 2082 and the North American Industry Classification System Code (NAICS) is 312120.

History

Brewing in America is dated approximately to the early seventeenth century, when the first Dutch and English communities were established on the east cost of the continent. Dutch immigrants shortly recognized the climate and soil of present-day New York State being extremely suitable for growing malt and hops, beer's two most essential ingredients. Considering the fact of beer's and ale's popularity in Europe, good conditions for the industry's development and expecting high profits, The West India Company built a first brewery on Brewers Street in New Amsterdam, which today is the New York City. The business grew very quickly and a 1660 map of New Amsterdam counted twenty-six breweries and taverns, a clear indication that brewing and selling beer were popular commercial trends in the American colonies.

However, between 1660 and the Civil War the brewing industry didn't change a lot and both brewing and beer consumption remained mainly local affairs. Beer did not travel well, since the colonies and the states were not developed enough for such trade relationships to flourish. Despite the fact that the total amount of produced and consumed beer constantly increased, nearly all breweries were small, serving only local customers. Home brewing was uncommon. The major brewing centers were both New York City and Philadelphia.

During several decades before and after the Civil War, a number of factors influenced the American brewing industry and contributed to its development. First of all, massive immigration of people from strong beer drinking countries as England, Germany and Ireland led to the dramatic increase in demand for beer in all states immigrants came to. Between 1840 and 1860 over 1350000 Germans immigrated to the United States. Desiring to establish themselves in the trades they had pursued in their old country and hoping to drink and eat familiar foods, some Germans started their own brewing businesses. Americans, when they drank beer, usually drank ale (Mittelman, 2008). When Germans brought lager - a totally different product, more pleasing to the American plate, "per capita beer consumption tripled between 1840 and 1860".

In the years after the Civil War, America was becoming increasingly industrialized and urbanized. Many workers (being the main consumers of beer products) began to receive higher wages and their consumption of beer had increased respectively. Also a number of technological developments and advancements were made, making greater beer production and brewing new types of beer possible. "Total beer production increased from 3.6 million barrels in 1865 to over 66 million barrels in 1914" (Economic History Association, 2010).

Year

National Production (millions of barrels)

Per Capita Consumption (gallons)

1865

3.7

3.4

1870

6.6

5.3

1875

9.5

6.6

1880

13.3

8.2

1885

19.2

10.5

1890

27.6

13.6

1895

33.6

15.0

1900

39.5

16.0

1905

49.5

18.3

1910

59.6

20.0

1915

59.8

18.7

3,7

3.4

3,4

1870

6,6

5,3

1875

9,5

6,6

1880

13,3

8,3

1885

19,2

10,

1890

27,6

13,6

1895

33,6

15,0

1900

39,5

16,0

1905

49,5

18,3

1910

59,6

20,0

1915

59,8

18,7

Table 1. Brewing Industry Production and per Capita Consumption, 1865-1915

Source: United States Brewers Association, 1979 Brewers Almanac, Washington, DC: 12-13

Table above proves the fact that the increase in national production of beer was not a mere reflection of America's growing population. While the amount of beer drinkers was definitely rising during these years, the dramatic increase in per capita consumption was a real evidence of the industry's growth and expansion.

It was previously said that until the Civil War all breweries were small, serving only local customers. That explains their huge amount, since practically each community required its own beer producer. As brewing in America evolved in the 1870s-1880s, the average size of breweries grew rapidly in order to satisfy the demand for the product. Many breweries merged. As a consequence, the number of local producers was constantly declining, while the average size of the companies that remained and their total output increased dramatically.

Year

Number of Breweries

Average Brewery Size (thousands of barrels)

1865

3.7

3.4

1870

6.6

5.3

1875

9.5

6.6

1880

13.3

8.2

1885

19.2

10.5

1890

27.6

13.6

1895

33.6

15.0

1900

39.5

16.0

1905

49.5

18.3

1910

59.6

20.0

1915

59.8

18.7

2252

1643

1870

3286

2009

1875

2783

3414

1880

2741

482

1885

2230

8610

1890

2156

12801

1895

1771

18972

1900

1816

21751

1905

1847

26800

1910

1568

38010

1915

1345

44461

Table 2. The number of breweries in America and their average size

Source: United States Brewers Association, 1979 Brewers Almanac, Washington, DC: 12-13

By the late nineteenth century Pabst Brewing Company in Milwaukee and Anheuser-Busch in St. Louis became two nation's first companies, oriented not on local sales, but on whole America's beer market. They were also the two first American brewing companies which surpassed annual production level of one million barrels.

The industry continued to expand until the ratification of the Eighteenth Amendment on January 29, 1919, which along with the Volstead Act prohibited the production, distribution, transportation, importation or exportation of any beverages with more than one-half of one percent alcohol. In fact, the amendment did not ban the consumption of alcohol, it made it hard to get one.

After the amendment was ratified, some of the breweries got rid of their equipment, while others modified their process of production to deliver related products as near beer - a beverage with very low or no alcohol content. This enabled companies such as Schlitz, Blatz, Pabst, and Anheuser-Busch to stay on the market and keep their current beer brewing skills. "While estimates of alcohol activity during Prohibition's thirteen year reign - from 1920 to 1933 - are imprecise, beer production and consumption almost certainly fell, though spirit consumption may have remained constant or actually even increased slightly" (Rorbaugh, 1979). Since small breweries were forced to close their business during the years of Prohibition or to consolidate their position to compete on the market, large beer brewing conglomerates emerged.

When Congress ratified the Twenty-first Amendment, which officially repealed Prohibition, the brewing industry struggled to regain its old fortunes. Large beer producers did not face competition they had seen before and this enabled them to enter new markets. From 1935 to 1940 many breweries closed, being unable to withstand rivalry. The number of breweries fell by ten percent.

During the World War Two American economy boomed and per capita beer consumption grew by 50 percent between 1940 and 1945. Throughout the next five decades total beer production "continued to grow, but at a slower rate than overall population".

Major factors currently affecting the industry

Nowadays brewing industry is one of the major on the U.S. market. As any other contemporary industry, it is influenced by lots of factors that ultimately change its trends, strategies of the businesses that operate in it and a great number of other important aspects.

Demand for a product is one of the main characteristics that shape an industry and affect the behavior and efficiency of all individuals and companies that perform on the market. On the demand side, producers who are unable or unwilling to comply with customers' needs, wants and requirements will certainly fail.

The U.S. brewing industry's market demand is driven by several factors. Such factors include but are not limited by the price of beer, price of close substitutes and complements, consumers' total income, consumers' addiction, etc. At the market level, demographic factors also influence the demand for beer. That includes gender, age, nationality and the region of the country the consumer is from.

Figure 1. Total U.S. consumption of domestic beer, 1950-2000

Analyzing graphic above, we can observe an increase in the total U.S. consumption of domestic beer, which basically means the demand for it. Since any restrictions from the government were not imposed, we can say that Figure 1 demonstrates an aggregate U.S demand for domestic beer at a given period of time at market prices.

The availability and cost of resources, necessary for the production of particular goods also affect the industries. In our case, it is malt and hops. If the price of resources goes up, the breweries will cut their production and vice versa. Since the cost of resources depends on their availability, so do the companies that operate on the market.

On the supply side, technological change has been the most important factor that influences brewing industry. The main question here is efficiency. Striving to reduce the cost of production and to obtain higher profits, brewers are constantly searching for new ways to improve the existing brewing technologies.

The U.S. beer market is divided by price, type and quality of beers. Beers are usually divided into such segments as Super Premium, Premium or Popular Priced beer. The main types are ale, lager beer and dark beer. The total amount of breweries is 300. The market shares of the nation's three major producers which clearly dominate the industry are high: Anheuser-Busch (45%), Miller Brewing (23%) and Adolph Coors (10%). Total revenues of the industry exceed US $295 billion in 2006, constituting an account for "approximately half of all alcohol sales in U.S. in dollar terms". More than 133 billion liters of beer are sold annually. The fastest growing craft beer sector is microbreweries, which has grown 31.5% over the last 3 years. However, 77.7% of beer is still produced by the top 50 brewing companies.

An authority which is responsible for administering breweries, brewery application approval, excise tax collection and homebrewing is the Alcohol and Tobacco Tax and Trade Bureau (TTB). "The current federal excise tax on beer, in effect since January 1, 1991, is $18 per barrel for 31 gallons" (Federal Beer Regulations). According to the current legislation, "any adult may produce beer, without payment of tax, for personal or family use and not for sale".

The industry's market structure

Even though much has changed in recent years in brewing industry trends, all brewing companies are still divided into national, regional, and specialty craft brewers regarding their scale of production. The first (and the largest) segment includes national brewers who are oriented on an average consumer, brew beer on a mass scale and sell nationwide. This group includes Anheuser-Busch InBev SA, SAB-Miller, and Molson Coors Brewing Company.

The next segment is local brewers which perform in their geographical region (usually one or several states, where breweries are situated). Among the regional brewers are distinguished Pittsburgh Brewing Company, High Falls Brewing Company, Yuengling, Latrobe Brewing Company, etc.

Finally, the third segment consists of brewpubs and microbreweries which distribute their products to a single metropolitan area, single county or even city.

In economics, market structure is the state of a market with respect to the degree of competition among consumers on one side and among suppliers on the other side.

Considering the number and size of producers in the U.S. brewing industry and a number of other factors, it can be said that this industry is an oligopoly. It is characterized by the few major breweries which serve a great number of consumers. The level of competition among the companies is very high and seller entry barriers exist.

Leaders in the beer brewing industry changed periodically. Nowadays they are Anheuser-Busch, Miller Brewing and Adolph Coors with 52%, 23% and 10% of market shares respectively.

Figure 2. America's top-three largest breweries in 1950-2002

Market leaders have achieved their dominance over the market by great marketing campaigns, efficient manufacturing process and integrating the raw material procurement. The most popular trademarks are Bud Light, Budweiser, Miller Lite, and Coors Light, which were brought on the top of the market by means of innovative strategy planning, merchandising, branding and extremely developed supply chain.

Figure 3. Domestic market shares of leading U.S. beer producers, 2000-2002

Products and marketing practices of firms in the industry

Each of the Big Three American breweries is represented on the market by its own beer brand, which has its own peculiarities and distinguished features.

The success of Anheuser-Busch mainly depends on orienting on consumer preferences for beer consumption. "It brews the world's two best-selling beers (Budweiser and Bud Light) and generates two-thirds of beer sales in the U.S" (Anheuser-Busch InBev). Making beer for an average American consumer, it made an emphasize on thorough studying of the individual preferences, age, spending habits and requirements of people who usually drink beer. Staying abreast of such demand patterns enabled Anheuser-Busch to become the nation's larges brewery. Moreover, diverse product line empowers it to offer beer for different demographic groups of people, mainly orienting on the premium segment of the market.

South African Breweries' Miller (SAB-Miller), formerly known as Miller Brewing Company is the second largest company on the U.S. beer market. It was initially purchased by Philip Morris in the 1970s and since that time continuously expanded its production capacity, paid lots of attention to advertising and initiated a brand-proliferation strategy. Nowadays its main brand is Miller Lite, which holds approximately 20% of the market.

Since beer drinkers as individuals are tend to demonstrate a low level of loyalty to the purchase of beer products, market leaders pay much attention to their marketing and advertising efforts. As a whole, the U.S. brewing industry spent about $975 million in 2007 on advertisement and promotion of its brands in mass media, major TV-channels, magazines, etc. It is not surprising that most expenditure were accounted by the Big Three with "Anheuser-Busch leading the pack at $378 million, followed by SAB-Miller at $175 million and Molson Coors Brewing Co. at $151 million". The majority of resources that Big Three spend on their advertisements go on promotion of premium and light beers.

One of the most important places in the U.S. brewing industry takes beer distribution, which "is organized into a so-called "three-tier" distribution system: brewers and importers, wholesalers, and retailers" (The Brewers' Handbook, 2008). According to this system, firms that brew beer (brewers and importers) sell their products to wholesalers, which later distribute it among the retailers. Retailers, in their turn, turn beer to the public.

However, this conception is valid only for national and regional companies, which need their goods to be available in stores, cafes, pubs, etc. Since brewpubs and microbreweries brew beer mainly only for local needs, they do not need wholesaler to resale their beer. Moreover, "brewers" and "retailers" links of the system merge in the face of the brewery itself.

Opportunities and threats facing firms in the industry

Nowadays the U.S. beer market and the industry overall is lacking in innovation. "Only 31% of industry experts rated their market as highly innovative" (Business Insights, 2009). Due to this fact, the company which comes with a new product may capture a great market share and have a total control over it.

Recent research revealed that the volume of beer

of alcoholic drinks consumed in western Europe is forecast to decline over the period 2007-2012 by an average of 0.2% per annum.

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