Hostility's End Game

The late 80’s and 90’s were hostile times for the beer industry. The period saw constant price wars. All the domestic competitors, except for Anheuser Busch, suffered from relatively low returns. A hostile industry is notable for constant pricing pressure and very low returns in the industry. The brewing industry certainly fit that description for a long period of time.

Then came the 2000’s. This decade brought a great deal of consolidation to the market. InBev bought Anheuser Busch. SabMiller PLC consolidated operations with Molson Coors Brewing Company. These changes, and others, produced a consolidated industry. Today, the two largest companies control 80% of U.S. beer sales. These companies have introduced products at every price point so they dominate the market at virtually all Price Points.

This dominance gives the industry Standard Leaders pricing leverage. Over the last year, the price of beer, ale and other malt beverages grew 4.6%, while overall consumer prices in the U.S. fell 2.1%. The beer makers now have pricing power that looks much like that of the breakfast cereal makers and cigarette manufacturers. The brewers are able to raise prices, even in the face of declining unit volumes, just as the cigarette manufacturers are able to do. Profits in the domestic market are rising at more than 25% a year. (See the Perspective, “What Makes Returns High?” on StrategyStreet.com.)

Hostile markets end in one of two ways. (See the Perspective, “What Ends Hostility?” on StrategyStreet.com.) Either demand bails the industry out or industry consolidation shifts pricing power back to the industry. In our extensive work in hostile markets, we have observed that three quarters of the time demand growth bails out a hostile industry. The demand in the industry grows and gradually sops up excess capacity. As the excess capacity ebbs away, pricing power returns to the industry participants in order to encourage the addition of the capacity that the customers will need in the future. In the other quarter of the cases, the industry consolidates until four or fewer competitors own at least 75% of the market. And, all remaining competitors must have reached the conclusion that trying to gain share with low price is an exercise in futility. The beer industry has consolidated far more than the average industry. In the average domestic industry, four competitors to own 85% of the total industry market share. In brewing, it only takes two to approach that concentration. (See more on StrategyStreet.com/Tools/Benchmarks/Market Share)

Not many industries succeed at reaching this degree of consolidation. But once they do, the world is their oyster.

The Power of Low-End Products for Industry Leaders

Low-end products can save an industry’s bacon when the industry falls on hard times. Most low-priced products are what we call Price Leaders (see Audio Tip #83: Price Leader Products and Companies on StrategyStreet.com). These products offer less Function or Convenience than do the industry’s more important Standard Leader products, for common pricing savings of 25% or more. (See Audio Tip #81: Standard Leader Products and Companies on StrategyStreet.com.)

These Price Leader products are helping the domestic beer industry today. In the domestic beer industry, Price Leader products are called “sub-premium brands.” These brands saw sales gains of 8% over the last year. In contrast, the industry Standard Leader products, called “premium” beers, saw sales fall 1.4%. “Sub-premium” beers are keeping the industry moving forward. These “sub-premium” beers cost about 25% less than the premium beers, so they offer drinkers an attractive price alternative when the economy gets tough.

Most of the “sub-premium” beer volumes are products of the big brewing companies, including Anheuser-Busch InBev NV, SABMiller PLC, Molson Coors Brewing Company. (See the Perspective, “When Product Mix Matters” on StrategyStreet.com.) So the industry’s Standard Leader competitors have closed the door on erstwhile Price Leader, private label, suppliers of cheaper brews.

These Price Leader products also have a few cost advantages over the Standard Leader products. Most importantly, the big brewers rely on word-of-mouth and price-based impulse buys to generate sales. They spend very little on advertising these brands. On the other hand, they spend a great deal to advertise the “premium” Standard Leader brands. So, while profits are lower on the Price Leader products, the lower margins are no where in proportion to the lower prices these products seek.