Competition in the Craft Beer Industry in John D
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Competition in the CraftBeer Industry inJohn D. VarlaroJohnson & Wales UniversityJohn E. GambleTexas A&M University–Corpus ChristiLocally produced or regional craft beers caused aseismic shift in the U.S. beer industry during theearly 2010s with the gains of the small, regionalnewcomers coming at the expense of such well-knownbrands as Budweiser, Miller, Coors, and Bud Light.Craft breweries, which by definition sold fewer than6 million barrels (bbls) per year, expanded rapidlywith the deregulation of intrastate alcohol distributionand retail laws and a change in consumer preferencestoward unique and high-quality beers. The growingpopularity of craft beers led to an approximate 5 per-cent sales volume increase in craft beer in 2017.1Yet, the overall beer industry had remained flatin 2017 with total beer sales dropping by 1.2 percentin the United States.2The craft beer industry, too,had begun to show signs of a slowdown going into2018. While volume sales had increased by 5 percentin 2017 and annual growth had averaged 13.6 percentfrom 2012 to 2017, projections had slowed dramati-cally to 1.3 percent from 2017 to 2022.3Yet there didnot seem to be a slowdown in the number of newcraft brewers entering the market. Industry com-petition was increasing as grain price fluctuationsaffected cost structures and growing consolidationwithin the beer industry—led most notably by ABInBev’s acquisition of several craft breweries, GrupoModelo, and its acquisition of SABMiller—and cre-ated a battle for market share. While the marketfor specialty beer was expected to gradually plateauby 2020, it appeared that the slowing growth hadarrived by 2017. Nevertheless, craft breweries andmicrobreweries were expected to expand in numberand in terms of market share as consumers soughtout new pale ales, stouts, wheat beers, pilsners, andlagers with regional or local flairs.THE BEER MARKETThe total economic impact of the beer market wasestimated to be 2.0 percent of total U.S. GDP in2016 when variables such as jobs within beer pro-duction, sales and distribution were included.4Totalrevenue for the craft beer industry was estimated at$6 billion.5Exhibit 1 presents annual per produc-tion statistics for the United States between 2006and 2017.Although U.S. production had declined since2008, consumption was increasing elsewhere in theworld, resulting in a forecasted global market of over$700 billion in sales by 2022.6Global growth seemedto be fueled by the introduction of differing styles ofbeer to regions where consumers had not previouslyhad access and the expansion of demographics notnormally known for consuming beer. Thus, exportedbeertobothdevelopedanddevelopingregionshelped drive future growth. As an example, Chinarecently saw a number of domestic craft breweriesproducing beer as well as experimenting with locallyand regionally known flavors, enticing the domesticpalette with flavors such as green tea.The Brewers Association, a trade associationfor brewers, suppliers and others within the indus-try, designated a brewery as a craft brewer whenoutput was less than 6 million barrels annually andthe ownership was more than 75 percentindepen-dent of another non-craft beer producer or entity.The rapid increase in popularity for local beers ledto the number of U.S. brewers to reach over 6,000CASECopyright©2018 by John D. Varlaro and John E. Gamble. All rightsreserved.
C-42PARTCases in Crafting and Executing StrategyEXHIBITBarrels of Beer Produced inthe United States, 2006–2017(millions of barrels)YearBarrels produced (in millions)**Rounded to the nearest million.Source:Alcohol and Tobacco Tax and Trade Bureau websiteEXHIBITTop 10 U.S. Breweries in 2017RankBreweryAnheuser-Busch, IncMillerCoorsConstellationHeinekenPabst Brewing CompanyD.G. Yuengling and Son, IncNorth American BreweriesDiageoBoston Beer CompanySierra Nevada Brewing CompanySource:Brewers Association.EXHIBITTop 10 Global BeerProducers by Volume,2014–2016 (millions ofbarrels)*RankProducerAb InBev**HeinekenCarlsbergCR Snow***N/AN/AMolson CoorsBrewing CompanyTsingtao (Group)AsahiBeijing YanjingCastel BGIKirin*Originally reported as hectoliters. Computed usinghL=.barrel for comparison; to nearest million bbl.**Now includes SABMiller; previous volumes for SABMiller in yearsandprior to acquisition wereand, respec-tively, ranking it as second for both years.***Was not in topforand.N/A:Not available.Source:AB InBev-F SEC Document,,,.in 2017—nearly triple the number in 2012. Of thesebreweries, 99 percent were identified as craft brewer-ies with distribution ranging from local to national.While large global breweries occupied the top posi-tions among the largest U.S. breweries, three craftbreweries were ranked among the top-10 largest U.S.brewers in 2017—see Exhibit 2. Exhibit 3 shows theproduction volume of the 10 largest beer producersworldwide from 2014 to 2016. The number of craftbreweries in each U.S. state in 2015 and 2017 arepresented in Exhibit 4.THE BEER PRODUCTIONPROCESSThe beer production process involves the fermenta-tion of grains. The cereal grain barley is the mostcommon grain used in the production of beer. Beforefermentation, however, barley must be malted andmilled. Malting allows the barley to germinate andproduce the sugars that would be fermented by theyeast, yielding the sweetness of beer. By soaking thebarley in water, the barley germinates, or grows, as itwould when planted in the ground. This process ishalted through the introduction of hot air and dryingafter germination began.After malting, the barley is milled to break openthe husk while also cracking the inner seed that hasbegun to germinate. Once milled, the barley is mashed,or added to hot water. The addition of the hot waterproduces sugar from the grain. This mixture is thenfiltered, resulting in the wort. The wort is then boiled,
CASECompetition in the Craft Beer Industry inC-43which sterilizes the beer. It is at this stage that hopsare added. The taste and aroma of beer depend on thevariety of hops and when the hops were added.After boiling, the wort is cooled and then pouredinto the fermentor where yeast is added. The sugarcreated in the previous stages is broken down bythe yeast through fermentation. The different stylesof beer depend on the type of yeast used, typicallyeither an ale or lager yeast. The time for this processcould take a couple of weeks to a couple of months.After fermentation, the yeast is removed. The pro-cess is completed after carbon dioxide is added andthe product is packaged.Beer is a varied and differentiated product, withover 70 styles in 15 categories. Each style is depen-dent on a number of variables. These variables arecontrolled by the brewer through the process, andcould include the origin of raw materials, approach tofermentation, and yeast used. For example, Guinnessreferenced on its website how barley purchased bythe brewer was not only grown locally, but was alsotoasted specifically after malting, lending to its char-acteristic taste and color. As another example of dif-ferentiation through raw materials, wheat beers, suchas German-stylehefeweizen,are brewed with a mini-mum of 50 percent wheat instead of barley grain.DEVELOPMENT OFMICROBREWERIES ANDECONOMICS OF SCALEAlthough learning the art of brewing takes time,beer production lends itself to scalability and vari-ety. For example, an amateur; or home brewer; couldbrew beer for home consumption. There had beenEXHIBITNumber of Craft Brewersby State, 2015 and 2017StateAlabamaAlaskaArizonaArkansasCaliforniaColoradoConnecticutDelawareFloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippiMissouriMontanaNebraskaNevadaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregonPennsylvaniaRhode IslandSouth CarolinaSouth DakotaTennesseeStateTexasUtahVermontVirginiaWashingtonWest VirginiaWisconsinWyomingSource:Brewers Association.