Beer Market Essay Example for Free

Beer Market Essay The Market. How should one think about market definition in the U.S. beer industry? Is there a single â€Å"beer market,† or are there several markets? If there are two or more markets, how would you identify them? How does demand substitutability and/or supply substitutability affect market boundaries in the industry? How high is demand substitutability and supply substitutability across segments of the industry, and in particular across the different markets you have identified? We find two markets in the beer industry: Alcoholic beer market and Nonalcoholic beer market. The demand substitutability heavily affects the market boundary in the industry. People who cannot consume alcohol can never try alcoholic beer. On the other hand, people who can drink alcoholic beer generally do not like nonalcoholic beer because they want to enjoy drinking â€Å"alcohol†. It means that the demand substitutability between alcoholic beer and nonalcoholic beer is low. In the alcoholic beer market, the demand substitutability is high. There are difference of the taste between the products (lagers, ales and etc.), but we believe people can switch the product easily. There is price difference, but still the range is $3-$7 and people can try other products easily. I can imagine if lagers decreased the price by $2, people having ales would try lagers. People can get almost all types of beer in USA, so there is no geographical boundary. In terms of the supply substitutability, it does not affect the market boundary. All beer companies can produce any types of beer. If a beer company earned a lot of profit in the nonalcoholic beer market, others would jump in the market. There is no geographical boundary, neither. In summary, the demand substitutability and the supply substitutability are high, except for the demand substitutability between non-alcohol and alcohol. Large Firms. Anheuser-Busch and SAB-Miller/Coors use advertising as their main tool in fighting for market share. It has been argued that they advertise too much. (See â€Å"Beer: Price and Advertising Elasticities of Demand† in the reading package.) Do high levels of advertising make sense, or should they be scaled back? Should SAB-Miller/Coors rely more on pricing to compete with A-B? Why or why not? Spending a lot of expenses make sense in the beer industry. First, the demand substitutability is very high. Beer is relatively cheap though there is the $2-3 price difference. Beer has different tastes, but still it tastes beer. People can try another type of beer easily, seeing the advertisement. Second, the advertisement of beer can increase the pie of the demand. For example, if we was an advertisement of beer in summer, we just feel like drinking beer. An advertisement can not only get the customers of a competitor, but also can increase the pie of the demand. Finally, an advertisement is effective to make a long lasting brand. Branding and penetration in the market is important and the companies cannot build them in short-run. An advertisement helps the company to make the prestigious brand in long-run. 3. Antitrust Issues. Some economists opposed the Miller-Coors U.S. merger. They argued that it would create too much concentration in the industry, and lead to more market power and higher prices for consumers. Do you agree and think the merger should have been blocked by the DOJ? Why or why not? Explain briefly but clearly. [pic] According to Steven Newborn, an antitrust attorney with Weil Gotshal Manges in Washington, D.C. said, â€Å"Normally, a 30% market share would not create a problem, but when you have two companies controlling almost 80%, the government may think there is potential for anti-competitive effect.†1 Others have different opinion. I can see a price war breaking out if MillerCoors starts to gain share from Budweiser, says Roman Shuster, a research analyst in Chicago with Euromonitor International PLC. InBev is known to push back, and what they do will have a huge impact on the market.2 I believe the merger shouldn’t have been blocked by DOJ because of below two reasons: †¢ To avoid monopoly: If the merger is blocked by DOJ, then Anheuser-Busch may even capture more market share due to its cost advantages as the result of economies of scale. This may result in a monopoly. Merger gives MillerCoors more than 30% of the market share and a chance to fairly compete with Anheus er-Busch. †¢ Consumers may benefit customers due to price war: Joint venture of MillerCoors was expected to reduce the production and transportation cost of the company. Now both the companies can brew beers at the combined locations and save on transportation and other costs. When the operations merged then hundreds of employees may be laid-off which is expected to reduce employee-related costs.3 Reduced cost will enable MillerCoors to reduce price in the hope to gain market share. Consequent price decreases by Anheuser-Busch may start a price war which will benefit customers. 4. Small Firms. Craft brewing has been the fastest growing segment of the beer industry, but very few craft brewers have reached annual sales levels of 50,000 barrels or more. Magic Hat, however, has reached annual sales of over 150,000. Why has Magic Hat been relatively successful, and does it have the potential to keep growing? If you were to enter the craft brewing market next summer, what would be your sales objective over the following 5 years? What strategy would you use to achieve that objective? Key success factors of Magic Hat potential of growing: As Co-founder of Magic Hat, Alan Newman, says Magic Hat has gone from making kegs for a few Burlington bars to being the number 10 craft brand in the country4. Mainly there are two reasons for its success: †¢ Quality Product Delicious Taste: Magic Hat products are known for its uniquely delicious beers. They have understood taste of their customers. They provide quality product and respect their customer choices. †¢ Quirky Branding: Magic Hat is having a different way of advertising. Its webpage doesn’t ask whether you are 18 or above. But says – Splendor and glory are yours if you can answer one riddle: when were you born? They associate their product to Splendor and glory. Their commercials are equally quirky. Instead of showing people drinking beer and having fun, they show the brewing process and end the commercial by saying â€Å"A performance in every bottle†. Branding is very important to attract customers and their different way of advertising has given them a unique brand name. I believe that Magic Hat has the potential of growing further by focusing on innovation. In Magic Hats Vision and Values Statement, the company focusses on innovation, stating that †¦ideas cannot be limited by current perception. 4 They are expanding in new places and also in long-term markets. Sales Objective and Strategy: Currently total brewery market in U.S. is $27.6B. And it is expected to increase at the rate of 1.9% per year for the next five years to reach $30.3B. But much of this increase is expected to be in craft and premium beer segments. So I believe a growth target of 5% per year I reasonable. So starting at 50,000 barrels, my objective will be to at least increase sales by 5% per year. I will adopt below strategy to be competitive in the market: 1) Select geographic areas where it is appropriate and profitable to sell products. 2) Keep optimum debt level. 3) Establish a brand name by effective advertising and public relations. 4) By optimally utilizing capacity. 5) By controlling distribution arrangements so that they are optimal. By carefully planning links to wholesale stores, bars and nighclubs. 6) By achieving economies of Scale. If required, acquire or merge with another brewery. References 1http://www.beer-universe.com/beer-education-article/2012-07-06/Beer-Wars-Is-Big-Beer-Getting-Too-Big-/ 2http://www.stltoday.com/business/columns/lager-heads/price-war-coming-in-the -beer-industry/article_44619cea-1fb5-5d76-b55c-e7dcc0ee3722.html 3IBISWorld Industry Report 31212 Breweries in the US 4http://www.legalzoom.com/business-management/success-stories/microbreweries-found-macro-suc