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The consumption of beer is a weekend ritual and pastime for many college students and sports fans alike, but few think about where their favorite beverage comes from and what’s happening in the market. Paying attention to developments in the brewing industry can help both beer connoisseurs and casual drinkers become more informed consumers.

This comprehensive research report introduces the brewing industry and breaks down its structure, firm conduct, industry performance and trends to watch going forward.

Industry introduction 

The brewing industry is made up of firms mainly engaged in producing beverages made from malted grains and hops such as beer, ale, malt liquor and nonalcoholic beer. 

The production process starts with second-tier suppliers harvesting sugarcane and farming grains such as wheat and barley as the raw materials that go into the beverages, which then moves to the first-tier suppliers who process and wholesale these ingredients. First-tier suppliers also consist of metal can and glass bottle manufacturers that produce the vehicle in which the beverage is distributed in. 

Breweries then convert the grain to malt, ferment the beverage to produce alcohol and flavor it with hops. The beverage is then distributed to first-tier buyers such as liquor stores and supermarkets, and second-tier buyers such as restaurants and bars.  

Brewing in America dates back to the English and Dutch settlers in the early to mid-1600s. However, the industry didn’t start to expand until the 1800s and became a mass-produced and mass-consumed beverage in the decades after the Civil War. 

By the late 1800s, several companies began to increase the scope of their operations by making use of the growing railroad system and started shipping their products all over the country, with Pabst Brewing in Milwaukee and Anheuser-Busch in St. Louis becoming the largest. Although these firms were large and powerful, they didn’t control the pre-Prohibition market for beer. 

With the start of Prohibition in the 1920s, breweries were faced with an uncertain future. Many got rid of their equipment at great losses, but some started to offer alternate products that catered to the law. Many firms also made important investment decisions, expanding their inventories of trucks and automobiles that proved to be very important after the repeal of the 18th Amendment, which ended Prohibition. 

Laws were put in place after Prohibition that required breweries to distribute to retailers through middlemen like wholesalers, which still stand and impact the industry today. Additionally, many smaller local breweries ceased to be profitable, which left the larger shipping breweries with little to no competition and continued opportunities for growth. 

The period following World War II involved great industry consolidation, and the market for beer was radically altered as the number of breweries operating fell and consumer demand simultaneously rose. 

The decline in the number of breweries operating was reversed beginning in the 1980s, and hundreds of new firms began operating by the late 1990s. However, the overall industry remained very concentrated with a three-firm concentration ratio of 81% in 2000, meaning the three largest firms in the industry earned about four-fifths of sales in the market.

Looking forward from the 2000s on, there’s a general move toward increased global integration in the beer market with interesting developments such as South African Breweries (SAB)’s acquisition of Miller, the second largest brewery in the U.S. 

Industry structure

The structure of the brewing industry is most notably defined by the demand elasticity, or how sensitive demand is to changes in price, and level of concentration, which shows how many competitors there are. The nature of demand in the market is especially impacted by demographics, as it differs geographically and depends on the size of the population that can drink beer. 

The market demand for beer is inelastic, meaning that the demand isn’t strongly affected by changes in price. But the demand for individual brands of beer is elastic, meaning that it’s sensitive to price changes, as there are many different substitutes for brands, which limits the market power of any single brewer. For example, if Busch raises its prices, people will buy Miller instead, but if the market as a whole raises its prices people won’t stop buying beer altogether.

The brewing industry is fairly concentrated, as shown by the Herfindahl-Hirschman Indices (HHI) — a metric used by economists to measure market concentration. From 2016-19, the HHI in the brewing industry was steadily above 1800, a relatively high mark that means the distribution of market share over the industry is uneven, with a few top firms holding much larger shares than the rest of the industry. 

Although the market shares of the top firms have decreased over time, the decrease isn’t significant and the industry is relatively stable. This could be attributed to the industry’s high barriers to entry that result from the cost of introducing consumers to a new product.

Industry conduct

Brewing industry concentration has been able to remain high through the merger activity that defines the structure of the industry. 

The largest players in the market have increased their domestic and international presence through megamergers like Anheuser-Busch and Belgium’s InBev in 2008 as well as Coors with SABMiller in October 2016. 

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Those actions were taken to offset the fall in sales among wealthier countries, as the merger helps the breweries enter new markets and cut costs in the process. SABMiller even had to relinquish its majority hold in MillerCoors to the Molson Coors Brewing Company to abide by antitrust laws. 

Industry market type

Although the brewing industry is concentrated, it hasn’t resulted in a lack of competition among firms, but just the opposite. There’s little evidence of price collusion in the industry, and the strong competition is shown as the larger firms compete with new technology, product innovation and advertising campaigns. 

Although key players in the market have the benefit of efficient production and larger promotional budgets, they’re slowly but consistently losing market shares as imports and craft breweries grow in popularity with consumers. 

Because of these factors, the brewing industry could be classified as a loose oligopoly, which is an industry with a couple of large firms, some smaller firms and competition present with collusion unlikely. 

Industry analysis

Porter’s Five Forces Model, named for former Harvard Business School professor Michael Porter, is used to analyze competitive forces that shape industries: threat of entry, bargaining power of suppliers, bargaining power of buyers, substitute products in the market and intensity of competition.

Threat of entry is somewhat limited in the brewing industry due to high barriers to entry as a result of the capital requirements needed to start brewing beer. Large amounts of equipment and machinery are required that can’t be used for any purpose other than brewing, often resulting in a sunk cost if the firm fails. 

Larger firms are able to exploit economies of scale, meaning that the cost of production goes down the more that they produce. Smaller firms don’t receive this benefit to the same extent and often have trouble offsetting the high starting cost of capital with their lower profits. 

Bargaining power of suppliers is limited, as suppliers can’t credibly threaten to integrate forward and enter the market for beer as the capital requirements of the inputs, like grain and hops farming, are very different from the capital requirements for brewing. 

Although beer can be made from different types of grains, the inputs are unique in that each firm has a specific recipe they stick to. Because of these factors, the bargaining power of suppliers is low. 

Bargaining power of buyers is also constrained, due to the Prohibition-era laws that prevent producers from acting as wholesalers of their product, meaning buyers can’t credibly threaten to integrate backward. Additionally, it’s more cost-effective for buyers not to switch and get their product from the same manufacturers due to transportation costs, so overall buyers do not have much power in the brewing industry. 

Substitute products in the market are present, even though the market demand for beer is inelastic. The industry is threatened by substitutes such as wine and spirits, and the growing marijuana market as the government moves further to legalization can be seen as a substitute. 

Intensity of competition among existing firms is significant, although the market for beer is concentrated. Stiff competition exists as microbreweries grow in popularity and offer a different experience that the consumer may prefer over the large players’ main product lines. 

Industry performance

Despite the high levels of concentration and inelastic market demand of the brewing industry, price setting and collusive behaviors aren’t a risk and the market remains competitive, with the market driven toward economic efficiency. 

Even the largest producers are threatened as demographics change and younger consumers’ tastes shift toward products that smaller craft breweries have to offer with premium brands experiencing a decline in demand and revenue

This will most likely prompt Big Beer to begin acquiring more craft breweries, such as AB InBev’s acquisition of Goose Island, to expand their product lines and cater to the changing tastes while increasing the scope of the craft breweries. 

Looking to the future, the industry is expected to earn less than normal profits as a result of the current events surrounding the coronavirus pandemic with restaurants and bars shutting down for a second wave of lockdowns and the increased unemployment rate.

Dana El-Zoobi is a junior computer information systems major. Contact Dana at elzoobdn@dukes.jmu.edu.