Industry Analysis The Beer Industry

BA 630

Industry Analysis

The Beer Industry

Spring 2010

Beer Industry

The term beer means “…any beverage brewed from a starch (or farinaceous) grain. Because the grain is made into a malt, another term for beer is malt liquor”. (The Beer Industry)

According to the North American Industry Classification System, the beer industry is found in section 312: Beverage and Tobacco Product Manufacturing. NAICS states that “Industries in the Beverage and Tobacco Product Manufacturing subsector manufacture beverages and tobacco products. The industry group, Beverage Manufacturing, includes three types of establishments: (1) those that manufacture nonalcoholic beverages; (2) those that manufacture alcoholic beverages through the fermentation process; and (3) those that produce distilled alcoholic beverages…” Although beer is within the same section as wine and distilled spirits, they do not consider them the same. Within section 312 they have five separate sections: Beer can be found under section 312120 Breweries. Within this section the term Breweries is comprised of “establishments primarily engaged in brewing beer, ale, malt liquors, and non-alcoholic beers”. However, Standard & Poor’s would say that distilled spirits, wine, beer and tobacco are all a part of the same industry the “Alcoholic Beverage and Tobacco Industry”.

The question we must ask is who is right? How do we determine if beer is an industry on its own or if it is the same as the beverage industry as a whole? There are two questions we must ask ourselves in order to answer this question. One, do the consumers view beer and other beverages the same? Two, can the producers of beverages easily switch from producing one to another?

OR OR

I will first look at the consumer point of view. I think that I can easily argue that consumers to do see beer the way they would any other beverage. For example, I cannot imagine that a mother would decide whether or not to give their child a glass of milk or a cold glass of beer. They are not the same product! Whether it is juice, milk, soda, or alcohol they are not the same. Each one has a separate purpose. Therefore, I would say that consumers do not view the beverage industry the same. However, if we only look at the alcohol industry we may get another answer. If we look at the middle diagram above you see three types of beverages: beer, wine, and spirits. We already learned that Standard and Poor’s would group them together and this may be true on a consumer point of view. If you were going to a house warming party and were asked to bring an alcoholic beverage you may or may not have a tough time making your decision. Some people are only wine drinkers and would not think twice about switching from wine to beer or spirits. However, some people may not care. If they were standing in the store and saw that the price of a bottle of wine had gone up significantly, they would consider an alternative to bring to the party. They may decide to look at the price of beer instead. In my opinion, consumers may or may not see beer as an alternative to wine or spirits. I really think it depends on the customers. Everyone has a different opinion especially when it comes to beverages. So to answer our question above, my answer is maybe.

If we look at how producers see the beverage industry we will find that it would be near impossible to just switch from making one type of beverage to another. For example, a wine producer uses grapes and other fruits to produce wine. I am sure that the structure of their factories is very specific to the wine production that there would be no way to just start making beer. Beer is not made from grapes or other fruits; it is made from wheat, barley, and hops. They are completely different products. Not only would you have to basically build or buy a new factory but you would also have to switch suppliers, learn how to produce a new product. This cannot be done easily. Therefore, producers would not see these products as the same.

Now that we have answered our two questions I think we can agree that beer is not in the same industry as wine or spirits or the beverages in general. Beer is within its own industry based on our findings above.

I would consider beer as a separate product. I would say that the beer industry is comprised of three segments: Premium Domestic, Microbrew/Craft, and Imported Beer. I say that it is broken down into three segments because beer is not just beer. There are differences in the type of beer we consume. Although I feel that there are really only three segments to the beer market, author of The Brewer’s Handbook, Ted Goldammer says there are 10 segments in the beer industry: “imports, domestic specialties, super premiums, premium regular, light, malt alternatives, malt liquor, popular regular, and others” (The Brewer’s Handbook). Goldammer says that the light beer segment is the most significant trend in today’s market. In 2008 there were two leading producers that continue to dominate the beer industry in the US. According to the Beer Marketer’s Insights, “Anheuser-Busch Companies Inc. led the pack with a 48.6% share of volume in 2008 (up 0.4% from 2007) and MillerCoors claimed 29.4% (down 0.1%)” (Standard and Poor’s). To determine the Four Firm Concentration Ratio we would look at the top four firms in the beer industry. In 2008, the top four leading brewers held 83% of the market share. Anheuser-Busch is the leader with 48.6%, MillerCoors came second with 29.4%, third place goes to Crown Imports with only 5.3%, and the fourth leading producer is Heineken USA with only 4.0% which is only a fraction of what the first two producers obtained (Standard and Poor’s).

Craft brewery is a small, independent, and traditional market. Most craft brewers are small because they produce less than 2 million barrels of beer per year. Beer production is attributed to a brewer according to the rules of alternating proprietorships. Alternating proprietorships is an agreement between two people to share the physical space of a brewery. According to The Alcohol and Tobacco Tax and Trade Bureau, “…the proprietor of an existing brewery, the “host brewery,” agrees to rent space and equipment to a new “tenant brewer.” Alternating brewery proprietorships allow existing breweries to use excess capacity and give new entrants to the beer business an opportunity to begin on a small scale, without investing in premises and equipment.” They are independent because less

...