1. THE BEER INDUSTRY AEM 4160

2. AGENDA.  Industry Overview  Major Players  Primary Pricing Strategies  Secondary Pricing Strategies  Case Study  Recommendations

3. INDUSTRY OVERVIEW. T HE B EER I NDUSTRY

4. WHY THE BEER INDUSTRY?  Undergoing major changes  Consolidation  Uses pricing strategies that we have focused on in this class  Advertising  Bulk pricing  Beer is an interesting topic, specifically for college students

5. INDUSTRY SNAPSHOT.

6. INDUSTRY STRUCTURE. Life Cycle Stage Regulation Level Revenue Volatility Technology Change Capital Intensity Barriers to Entry Industry Assistance Industry Globalization Concentration Level Competition Level Mature Heavy Medium Low High Low Medium High Medium

7. INDUSTRY REVENUE. Growth Year Revenue ($ million) Growth % 199833,162.2 ----- 199931,991.0 -3.5 200029,991.4 -6.3 200129,355.7 -2.1 200229,773.0 1.4 200331,275.5 5.0 200429,460.4 -5.8 200530,742.9 4.4 200631,163.0 1.4 200731,060.1 -0.3 200828,308.9 -8.9 200927,393.1 -3.2 201028,115.9 2.6 201128,783.5 2.4

8. Competition with other Industries

9. DEMAND.  Continuously increases in industry  As time goes on and more people are of legal age, demand increases  Stable demand  Beer prices are constant

10. Price and Non-Price Rivalry  Price Rivalry  No real price rivalry  Beer price increase due to inflation  Industry wide, not company specific  Also non-price based rivalry  Product innovations Low calories, low carbs, etc.

11. PRODUCT DIFFERENTIATION.  Beer Style  Term used to differentiate and categorize beers  Companies use different styles to meet consumer preferences  Can vary depending on the color, flavor, strength, ingredients, production method, recipe, history, or origin of the beer  Companies offer different variations of core product

12. PRODUCTS OF THE BEER INDUSTRY.

13. INNOVATION AND TECHNOLOGY.  Technology advancements = increase in productivity  Reduction of inefficiencies  Increase operational effectiveness  The level of technology change is low

14. INCREASE IN PRODUCTION = INCREASE IN EMPLOYMENT.

15. PRODUCTION AND DISTRIBUTION IN BEER INDUSTRY.

16. INDUSTRY COSTS.

17. CAPITAL INTENSITY.  The level of investment required is high

18. BARRIERS TO ENTRY.

19. GOVERNMENT REGULATION.  Bureau of Alcohol, Tobacco Firearms and Explosives (ATF)  US Alcohol and Tobacco Tax and Trade Bureau (TTB)  State regulations

20. IMPORTS AND EXPORTS.

21.  Anheuser-Busch InBev and MillerCoors now control 74.3% of total market share.  Exports = increased almost eightfold, from 1.3% of revenue in 2006 to an expected 11.3% in 2011.  Imports= 13.0% share of domestic demand in 2011, worth more than $3.8 billion, is above the 2006 import level of 11.3%.  Imports and exports continue increasing

22. INDUSTRY TRENDS.  Mergers have increased foreign ownership  International giant South African Breweries (SAB) acquired Miller Brewing Company to form SABMiller  Molson Canada merged with Coors Brewing Company in 2005 to form Molson Coors  Three years later, these companies launched MillerCoors, a joint venture of their operations within the United States Combined market share= 29.0%

23. INDUSTRY STRUCTURE.

24. MAJOR PLAYERS. T HE B EER I NDUSTRY

25. MAJOR PLAYERS.

26. ANHEUSER-BUSCH INBEV.  Market Share: 42.6%  Brand Names: Budweiser, Bud Light, Beck's, Stella Artois, Michelob, Natural Light, Leffe, Hoegaarden, O'Doul's

27. MILLERCOORS LLC.  Market Share: 31.7%  Brand Names: Miller, Coors, Blue Moon, Mickey's, Pilsner Urquell, Foster's, Keystone, Milwaukee's Best, Steel Reserve, Killian's

28. PRICING STRATEGIES. T HE B EER I NDUSTRY

29. PRIMARY PRICING STRATEGIES.

30.  Collusion  Discounting  Sub-premium Emergence

31. COLLUSION OF NATIONAL FIRMS.  Collusion is an agreement made between firms to:  Divide Market Power  Set Prices  Limit Production  Lower Competition  Firms choose to collude in order to increase the overall profit margin of their respective firm.

32. WHY COLLUSION IS POSSIBLE.  Industry must be controlled by A FEW MAJOR FIRMS.  A-B and MillerCoors control 80% of market share (Oligopoly).  SIMILAR COSTS among top firms, with respect to production, advertising, etc.  Close to EQUAL DEMAND for product.  SIMILAR PRODUCTS.

33. COLLUSION ENABLES FIRMS TO:  Set prices relatively high.  Leads to increased Profit Margin.  Change price freely with minimal resistance.  Price will then, usually, only changes in a vertical direction.  Internally expand.  Leads to Economies of Scale.

34. AFFECT ON CONSUMERS.  Consumers must pay HIGHER OVERALL PRICE for products in this market.  This is the reason why a 12 pack of Miller Lite and Bud Lite are more expensive than most other brands in the same category.  Consumers choose beer depending on perceived benefits and qualities other than price.

35. REVENUE GROWTH.  Revenues, along with the Price Volatility of key brewing ingredients dropped due to expansion of the CRAFT BREWERY SEGMENT.  Profit increased as a percentage of revenue to 11.1% in 2011, compared to 10.8% of revenue in 2006. YEAR REVENUE $ MILLION GROWTH % 199833,162.2 199931,991.0-3.5 200029,991.4-6.3 200129,355.7-2.1 200229,773.01.4 200331,275.55.0 200429,460.4-5.8 200530,742.94.4 200631,163.01.4 200731,060.1-0.3 200828,308.9-8.9 200927,393.1-3.2 201028,115.92.6 201128,783.52.4

36. DISCOUNT PRICING OR BULK PRICING.  Sell large quantities of beer at an attractive price.  Pay less per unit.  Requires consumer to trade down to sub-premium brands.  Second-Degree Price Discrimination.

37. SUB-PREMIUM SALES TRENDS.  30 PACKS GREW 18.2% IN US DOLLAR SALES (2009).  18 PACKS GREW 35.5% IN US DOLLAR SALES (2009). Source: Category Focus: 2010 Beer Report: Sub-premium, crafts lead the way

38. PREMIUM SALES TRENDS.  30 PACKS GREW 6.4% IN US DOLLAR SALES (2009).  36 PACKS GREW 15.8% IN US DOLLAR SALES (2009). Source: Category Focus: 2010 Beer Report: Sub-premium, crafts lead the way

39. WHY BUY IN BULK?  Consumers now realize that buying a large number of beers for a discounted price is efficient for our wallets. AND…  Buying in bulk is convenient, saving us both time and effort.

40. 72 OZ SHARES OF PREDICTED ANNUAL SALES BY VOLUME PACKAGE SIZE. PACKAGE SIZE 288 OZ 144 OZ PERCENTAGE OF TOTAL SALES 50% 0% 100% Source :RTI International, Research Triangle Park, NC, USA

41. BUYING IN BULK.  You can expect to pay about $11.99 for a 12-pack of 12-ounce cans at a typical grocery store  BUT, at Costco, a 30-pack of 12-ounce cans sells for $19.99!  About 67 cents per can versus about $1 per can at a supermarket. Source: MSN.com 10 bulk-buying bargains

42. EMERGENCE OF SUB-PREMIUM BRANDS.  Several factors caused shift from premium brands towards sub-premium brands :  Current economy  Price of national premium brands held constant  Sub-premium dominate bulk market  Improved image of sub-premium brands Perceived “coolness ALL LEAD CONSUMER TO TRADE DOWN!

43. BEER SALES & THE CURRENT ECONOMY.  As the unemployment rate has gone up, beer sales have plummeted at the exact same time.  Consumers more cost efficient. Source: IBIS World: Beer Production in the US

44. PREMIUM PRICES HELD CONSTANT.  A-B and MillerCoors have held prices constant and cut costs of production and marketing instead.  Consumers enticed to trade down to sub-premium level in order to save money

45. Source: Anheuser-Busch Companies, Inc. TOP BRANDS STILL DOMINATE BUT CONSUMERS DETERMINE WHICH SEGMENT IS MOST POPULAR.

46. IMPROVED IMAGE.  Keystone Light beer, the top share grower in the convenience store channel  Keystone recently embarked on National advertising campaign  Keith Stone Commercials  One of the most preferred drinks for college kids nationwide.  Keystone Light is a hot brand for beer drinkers looking for value in today's economy

47. OVERVEIW.  National brands able to manipulate price due to high market share  A-B and MillerCoors hold prices constant during recession.  Drops in sales and revenue  Consumers shifting towards buying in bulk to save money  Leads to a shift in preferred segment  Premium light Sub-premium light  Customers haven't stopped drinking. They just want to pay less for a buzz.

48. SECONDARY PRICING STRATEGIES.

49. A WORD ON COMPETITION. HOW IS COMPETITION IS EVOLVING PRICES IN THE DOMESTIC BEER INDUSTRY?

50. INCREASINGLY COMPETITIVE!  Four largest corporations generate 81.8% of the revenue.  Same four corporations also produce 74.3% of all the beer in the United States.  However, domestic beer companies are facing increased competition.  High market concentration.

51. WHY IS THIS IMPORTANT?  Affects the way beer companies strategically price their beer.  Second-Degree Price Discrimination.  Consumers self select into different beer consumption categories.

52. WHY IS COMPETITION INCREASING?  Target Market  Social Trends  Consumer Loyalty  Evolution of Drinking Habits

53. TARGET MARKET.  Major beer companies now try to advertise primarily to the age group of 21-35.  Underage drinking?  How do beer companies keep their aging consumers loyal to their product?  Younger demographic wants to pay a lower price for substantial volume!

54. CONSUMER LOYALTY.  Older Demographic  Ages 35+  Have a beer they grew up with and prefer.  Less Likely to be influenced by price fluctuations.  Younger Demographic  College Students  Those interested in buying in bulk.  Those influenced by current social trends.  Price Influenced Easily Loyal ConsumersNot Loyal Consumers

55. SOCIAL/DRINKING TRENDS.  Especially for primary target market, drinking habits have evolved.  Binge Drinking  Pre-Gaming  Underage drinking has become commonplace on college campuses.  Emergence of other options that promote quick inebriation. (Ex: Four Loko)

56. INDUSTRY COSTS AFFECT PRICES.

57. So what are some pricing strategies that domestic beer companies have used to evolve along with consumers? How Do We Get More?

58. SECONDARY PRICING STRATEGIES.  Two Primary Strategies  1. Advertising less on the basis of price.  2. Incorporate common craft beer practices into major company practices.

59. ADVERTISING TRENDS.  Major beer companies rarely advertise on the basis of price.  Consumer Benefits are now the focus.  Taste, Quality, Intangibles.  THINK- Can you even remember the last time you saw a beer commercial that mentioned prices?

60. I DO/DO NOT BUY THIS PRODUCT BECAUSE…  I feel nostalgic when drinking it. (Intangible)  I like the taste. (Taste)  The beer is not too filling. (Intangible)  My friends also enjoy the beer. (Intangible)  The product triggers no social feelings inside an individual. (Intangible)  Bad taste. (Taste)  Unhealthy. (Quality)  Lots of calories. (Quality)  I’m the only one who likes this beer among my group of friends. (Intangible) ProsCons

61. EXAMPLES/TRENDY SLOGANS.  “Great taste, less filling” – Miller Lite  “Drinkability” – Bud Light  “The King of Beers” – Budweiser  “The Banquet Beer” – Coors  “Cold as the Rockies” – Coors Light

62. WHY IS THIS CONDUCIVE?  Allows major beer companies to keep prices are a relatively high, stable level. (Collusion)  Also, less attention is paid to potential price fluctuations.  They want you to focus on perceived consumer and social benefits!

63. ARE WE INFLUENCED BY SOCIAL NORMS?

65. CRAFT STYLE IMPLEMENTATION.  Major beer brands are starting to implement more consumer friendly practices that craft beers have always provided.

66. CRAFT BEERS GROWING.  From 2003-2011, production of craft beer as risen from 5,137 million barrels per year to 10,097 million barrels per year.  Almost Doubled!  Demand Increase

68. MAJOR BEER COMPANY ACTIONS.  Beer Tasting Opportunities.  Brewery Tours.  Consumer Appreciation Events.  Potential to attract new consumers.  Increase overall consumer base.  Potential demand increase for their product as a result.  Can manipulate prices in their favor when demand and their market share is high. ActionsResults They do not want to lose their consumers to smaller craft beer companies!

69. CASE STUDY. T HE B EER I NDUSTRY

70. CASE STUDY. BEER ADVERTISING AND MARKETING UPDATE: Structure, Conduct, and Social Costs. By: Jon P. Nelson

71. BEER AVERTISING: AN OVERVEIW.  The U.S. brewing industry is dominated by three firms, who together account for about 80% of beer shipments.  Anheuser- Busch  SAB-Miller  Coors SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/

72. SAB-MILLER.  1970: Philip Morris acquires the Miller Brewing Company.  First to launch a “Lite” beer in 1975.  Obtains the First-Mover advantage in the Lite Beer market.  Miller Lite advertising expenditures had grown from $15 million in 1975, to $67 million ($0.33 per case) in 1986.  1988: Rival Bud Light hits peak advertising at $70 million ($0.51 per case).  Not until 1994, do sales of Bud Light surpass those of Miller Lite.  First-mover advantage and the success of the light beer category, means “light beer war” affects all subsequent advertising and marketing decisions by leading brewers. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/

73. NEW COMPETITION PROSPERS.  New Competition: Specialty Brewers, Microbrewers, and Brewpubs.  Sell at super-premium prices.  With the exception of a few, many abstain from heavy national advertising.  Rivalry among industry leaders has spilled into the market for Flavored Malt Beverage-  Evokes new forms of competition, and new strategies for marketing and advertising. This recent product innovation presents the consumer with a variety of choices may spark a renewed advertising rivalry amongst industry leaders.  Marketing reflects consumer tastes for lighter beverages.  Might be the next runaway product category. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/

74. AVERTISING AND STRUCTURAL CHANGE.  1950–1986: Intense advertising rivalry among the top three brewers: Anheuser-Busch, Pabst, and Schlitz. Followed by by an intense advertising rivalry between Anheuser-Busch and Miller during the “light beer war.”  Successfully exploited the new medium of television and the economies of scale associated with national advertising and distribution.  Structural change marked by increased size of individual and multi-plant operations by the industry leaders.  Schlitz and Stroh merged and Pabst dropped out of the top group.  Independent mass-market brewers declines to 33 in 1986.  1987-1995: The total number of firms rises, and there is an expansion of microbreweries  Market share of the top three firms rises from 75% in 1990 to 80% in 1995.  1996–2003: Stroh goes out of business and sells brand names to Miller and Pabst.  2002, Miller Brewing sold by Philip Morris to South African Breweries Ltd. (SAB). SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/

75. AVERTISING AND STRUCTURAL CHANGE: MARKET SHARES AND ADVERTISING BY THE THREE LEADING BREWERS FOR THE PERIOD 1975–2003. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/

76. AVERTISING AND STRUCTURAL CHANGE.  Anheuser-Busch and Miller demonstrate remarkable output growth between 1975 and 1990.  Anheuser’s average spending per case is below that of its smaller rivals.  Reflects advantages of size, a broader product line, and superior marketing skills.  Advertising intensities rose during1976-1985, and then stabilized for Anheuser and Miller.  Coors’ advertising continued to increase as outsiders entered the ranks of its management.  1990–2003, the leaders increase nominal spending by an additional $0.05 to $0.09 per case. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/

77. CONSUMER PREFERENCES AND ADVERTISING. SOURCE: Nelson, Jon. (2005). Beer advertising and marketing update: structure, conduct, and social costs. http://www.springerlink.com/content/g6774l01385x5p37/

78. CONSUMER PREFERENCES AND ADVERTISING.  Consumer preferences and advertising interact to determine success at the brand level.  1993–2003: Among the top 10 brands, three were able to successfully enter the market:  Corona Extra, Busch Light, and Heineken.  Today: Top four brands=almost half (48.5%) of U.S. beer sales  Top10 brands= two-thirds of the sales.  2003: The top four brands also accounted for 46% of beer advertising.

79. RAW DATA ANALYSIS.

80.  Television Advertising Data: Beer Industry- Top Four Firms.  Of the top four industry leaders, Bud has the largest Market Power, as it incurs the most DOLS. BRAND NAMESUM OF DOLS Anheuser-Busch6962500 Bud Light277952000 Budweiser156336000 Coors13836500 Coors Light133489300 Miller Genuine Draft 649264500 Miller Lite121165300

81. RAW DATA ANALYSIS. ANALYSIS: DOW RELATIONSHIP TO DOL SUM FOR TOP FOUR FIRMS.

82. RAW DATA ANALYSIS. ANALYSIS: DOW AND DAY PART RELATIONSHIP TO DOL SUM FOR TOP FOUR FIRMS.

83. RAW DATA ANALYSIS. ANALYSIS: DOW AND DAY PART RELATIONSHIP TO DOL SUM FOR TOP FOUR FIRMS.

85. RAW DATA ANALYSIS. ANALYSIS: DOW AND DAY PART RELATIONSHIP TO DOL SUM FOR TOP FOUR FIRMS.

87. RECCOMENDATIONS. T HE B EER I NDUSTRY

88. THE INDUSTRY NOW.  2008 Merger activity between Anheuser-Busch InBev and MillerCoors led to industry shift.  Anheuser-Busch InBev and MillerCoors control 74.3% of total market share.  Allowed the international companies InBev and SABMiller higher levels of control over breweries that originated domestically.  Trade has heavily influenced industry revenue.  Imports and exports fell drastically when unemployment worries stalled booming global consumption and trade.

89. THE INDUSTRY NOW.  Supply and demand shifts in recent years, induced by unpredictable ingredient prices and changing consumer preferences, are created turmoil in the Beer Production industry.  Faces increasing competition from other beverages, namely wines and spirits  Increase wine and spirit demand (consumer taste expansion/shift), leads to a decrease in the demand for beer.

90. RECOMMENDATIONS.  ADVERTISING.  Maintain consistent and strategic marketing messages, and building and preserving a high level of trust with customers. Consumers know what to expect from both the company and their products.  Promote the brand that is beer. The four fundamental strengths of beer: 1) Beer is genuine. 2) Beer is real. 3) Beer lacks the pretenses often associated with wine or liquor. 4) Beer brings people together; beer is about refreshment, enjoyment and fun. Reaffirm these four strengths in both developing and loyal consumers.

91. RECOMMENDATIONS.  PRODUCT DEVELOPMENT.  The use of technology and continued innovation to make product personalization easier and product upgrades more accessible to the consumer. A shift in consumer expectations, attitudes and preferences to things such as satellite TV, smart phone, and Internet connections. Constant access to information has led a dramatic shift in consumer culture, ideas and lifestyles.  Must must meet the new consumer demand for People more variety, more novelty, more sophistication in the products offered in the market. Example: New Trend  Low Calorie Beers Budweiser Select 55 (55 calories) Miller Genuine Draft 64, MGD 64 (64 calories)

92. RECOMMENDATIONS.  PRODUCT DEVELOPMENT (continued).  Brand Expansion. Capitalize on the success of a solid brand by breaking into different product categories under the same brand name. Allows firm to increase and leverage the brand equity, increase product portfolio, and grants a company a larger hold over the market; thus generating greater revenue.

93. QUESTIONS? T HE B EER I NDUSTRY