The brewing industry in the United States has a history traced back to the colonies built in New Amsterdam four centuries ago. During such period of development, it can be stated that many aspects contributed to the development of the industry, while others largely remained unchanged. In a business context, the brewing industry especially changed, where the dynamic nature of the environment influenced the industry. In that regard, government regulation can be particularly emphasized as an influential factor in shaping the external environment in which the industry operates. As a response to such influence, the industry responded through different pricing strategies, marketing efforts, and other business initiatives. Thus, the present paper will attempt to provide an overview of the brewing industry in the United States and the different strategies used by brewing companies.
Overview of the industry
The brewing industry in the US is represented through more than 1700 breweries all over the country which bring a total of 20 billion dollars in annual revenues. The list of companies in this industry includes such brands as Miller Coors, Anheuser-Busch InBev, and Pabst. Analyzing the industry, it can be stated that the profit margin in individual companies might arise due to several aspects, which include methods of distribution, marketing operations and others. Large companies in this industry, in that regard, have a comparative advantage over small competitors in terms of production, the economy of scale, marketing, and high influence on distributors and suppliers.
The main products around which the brewing industry revolves include malt beverages, primarily beer, and ale. Such products are mostly packed in bottles, cans, and gallons (barrels). Cans and ale case products gather about 50% of the industry’s revenues; 40% for bottles and barrels, while keg and beer collect about 6% (Murray 443). The rest come from other brews, such as porter and stout.
Mergers are common in the brewing industry, which helps the brewing companies to enjoy the economy of scale and accordingly better financial performance. For example, the Anheuser-InBev merger has significantly helped both companies expand their geographic coverage, making the resulting merged company a leader in global markets. Mergers accordingly attract better sources of investments from banks and other credit institutions, due to increased asset rankings (Clerides 409). Additionally, such a form of consolidation not only helps the companies but also the leading financial institutions, through the attractive gains from the investments they have induced in the merger. All of those aspects in turn contribute greatly to the economy of the country in general.
Strategies
There are different strategies applied by companies in the brewing industry, most of which aim at increasing their market share. One of the strategies is product differentiation. Different companies use different products to meet customers’ demands and preferences. The differentiation might be seen even in a single line of products, varying packaging colours, flavours, ingredients, methods of production, and even recipes. The product variation strategy is mostly used in an environment with an intense rivalry, characteristic of industries in which there are many companies with no apparent leader in market share.
Pricing strategies can be used by different brewers as methods to increase market share, utilize opportunities and avoid threats to the environment. Companies normally sell their products to wholesalers, who in turn resell to retailers. The wholesale prices are usually set by brewing companies, with prices varying according to factors like the area of distribution and the demand of the market. The task of wholesalers and distributors is to guarantee a timely supply of the product in sufficient quantity (Clerides 418). The product initially encompasses a small portion of consumer price, while labour and production costs carry about 20% of the total consumer price. The profit margin in the brewing industry stands at merely 4.2%, while tax and shipping expenses account for about 18% of the total price. The prices of imported and super-premium products are relatively high with malt liquor and popular-priced beer having the lowest price. The changes in prices depend on consumer demand, i.e., when consumer demand rises, the price of beer also increases and vice versa. In that regard, the price of imported beer change according to share gains, while the price of liquor and ice beer fall change according to share losses.
Product image and quality play a major role in price determination. Due to consumer belief that premium beer is of higher quality, the brand sells at higher prices. In 1972, the price of 12 ounces container of premium Budweiser was less than half a cent to produce, yet the price of a Budweiser container was 15 cents higher. According to blind tasting researches, it was found out that consumers cannot distinguish national and regional brands of domestic beer and cannot recognize their preferred brands. According to a consumer report released in 2001, some brands are not always consistent across critics, with popular brands normally surpassing premium-priced brands (Arvidsson 242). Such facts might demonstrate the way some consumers, who are not certain of a product’s quality, use price as a sign of quality. Individuals tend to think that highly-priced commodities are of higher quality and vice versa. Accordingly, firms’ pricing decisions might influence consumers’ perception of products and their quality.
Another strategy can be seen through mixed pricing. Such strategy is normally applied by firms that set their premium price, discount price, and price setting in respect to prices set by competition. Mixed pricing might explain the way firms set prices according to demand and competition (Pluta ‘a’ 32). An example of such a strategy can be seen in the case of premium brands adjusting their prices to influence the loyalty of customers to popular priced products. In that regard, a temporary price cut of a premium brand might attract customers away from popular priced products.
Anheuser-Busch, a leader in the brewing industry, triggered the mixed pricing strategy by offering short-term concession on its premium Budweiser brand. Such strategy caused the competition to rethink their pricing strategy and generally can be seen as a factor that increases rivalry in the industry (Clerides 403). The sudden change in prices is an influential factor in making a mixed strategy successful. However, random discounts might often indicate inferior products and consequently tarnish the brand image, driving the product out of the premium-priced category. Such rationale made Coors refuse to lower its prices, claiming that it would tarnish its image in the early 1970s.
A trigger strategy can be applied in market segments in which companies are offering homogenous products. For example, in an imperfectly competitive market in which products are uniform with companies competing in prices, this method becomes the only solution. Each firm sets a monopoly price in a specific period as long as rival firms had set the same price in the preceding period. Such a strategy encourages collaboration as long as the benefits are sufficient to make the present value of discounted future profits greater for cooperative, rather than for non-cooperative behaviour (Arvidsson 243). At the same time, the leaders of the market might enforce such a strategy on competitors. For example, Anheuser-Busch threatened to use considerable price reductions in case competitors refused to cooperate. Various sources indicate that Anheuser-Busch is the price leader in the brewery industry. Such a position leads to that the competitors who rejected the move to raise the prices (following the Anheuser-Busch initiative) were punished through price cuts.
Advertisements
Beer drinking can be associated with an unhealthy lifestyle in society, and thus, many brewers have to counterattack such association so that product demand is not reduced. With many advertisements focusing on health and attractive lifestyles, the brewing industry found it appealing to associate their products with such a positive image. In that regard, concern with cognitive dissension could contribute to the close correlation between beer and sports, utilizing athletes as spokesmen in beer commercials. For example, Budweiser connected itself with sports as early as 1909, when one of its ads stated that ballplayers use beer while training. It can be stated that such a move contributed to the popularity of the brand. Coors, another brewing company, encompassed the actor Mark Harmon an ex-UCLA quarterback as its spokesman (Arvidsson 239).
Advertising can be used as a persuasion tool to help consumers focus their attention on the product. The influence of advertisement can be seen through the way James Vicary, a market researcher, experimented on movie fans. With little knowledge from moviegoers, the words “EAT POPCORN” and “DRINK COCA-COLA” flared for a fraction of a second in the middle of a film, leading to a reported 58% rise in popcorn demand and an 18% increase in Coca-Cola demand. Those observations could never be replicated, although subsequent researches indicated that the effectiveness of concealed advertisement in a restricted setting is minimal. Effective advertisement can create a yearning image of the product. Such a strategy is normally used in the premium cola market. For Coke and Pepsi, having largely similar tastes, such advertisement strategy is applied to create images that appeal to different customers. Coke advertisements portray a symbol of traditional family ethics while Pepsi presents a more youthful and rebellious image. Such a strategy benefitted both companies through strengthening brand loyalty and subsequently reducing price competition.
Beer companies normally apply this strategy as well, where they use such a form of advertisement to segment their brand images along white-collar lines. In a Fortune study, 100 beer drinkers between 21 and 50 years of old were shown pictures of 99 men and asked to match the photos with a brand the individual would probably drink from a list that included Budweiser, Coors or Miller High Life. The final results showed that Budweiser drinker was viewed as tough, grizzled, and blue-collar. Miller drinker, on the other hand, had a lighter blue-collar image, while Coors drinker as having more of a white-collar image (Pluta ‘b’ 129).
Although the preferences of most customers cannot be easily manipulated, advertising might still boost demand through propagating product information. Such information might be used to create awareness of products’ discounts and/or products’ features and characteristics. Considering that beer features can be difficult to evaluate before the purchase, advertisements can be used to clarify such information. US brewing companies mostly apply persuasive and informative forms of advertisements.
Persuasive forms of beer advertisements might reveal that prices of beer will increase. A marginal increase in advertisements leads to higher equilibrium prices, which in turn signifies the effects on price and the rise in demand for heavily advertised products. In that regard, beer advertisements normally focus on capturing market share from competitors, rather than increasing market size. For an advertisement to be effective, it must capture the attention of potential buyers and convince them to purchase the product.
Marketing success can be influenced by the actions of a single company or its competitors. For instance, the success of Miller Lite in the middle of the 1970s made the marketing focus of Coors beer, which was termed then as America’s fine light beer, become outdated (Pluta ‘b’ 136). After more than 100 years of advertising, which reflected the way Coors beer was brewed with pure rocky mountain spring water, the company later decided to stop this claim and embarked on using Virginia water at a new plant to make the company’s beer in the early 1990s.
Anheuser-Busch was the first company to invest heavily in marketing research to establish how it would increase its market share. One of the researches conducted revealed that different brands appeal to different personality segments of the beer-drinking population. The report further revealed that advertising becomes effective only if it targets the segments that would appreciate the advertised brand. As a result of these research findings, Anheuser-Busch adjusted its advertising tactics. Such adjustments made the company increase its sales volume, whereas advertisement expenditures decreased by 3.2 dollars per barrel (Pluta ‘a’ 126). In 1970, Phillip Morris brought sophisticated marketing policies to the industry after purchasing Miller. He tried to employ techniques from the cigarette market which used to be successful in the tobacco industry. Morris focused on market segmentation, target marketing, and image advertising. Such strategy aggravated war among leading brewers, during the 1980s.
Aggressive dealings contracts have also been found to be good methods in highly competitive markets. These contracts exist between manufacturers and distributors, assisting the former to receive a return on general training offered to distributors, helping distributors maintain product quality. Several types of exclusive dealings have been used by brewing firms. Nowadays, all brewing companies hold contracts that specify exclusive territories for their distribution, apart from areas where they are termed illegal. Anheuser-Busch has initiated a program that provides financial incentives to distributors that exclusively sell the company’s brands (Pinske & Slade 631).
Brewers commonly engage in many different strategies and strategic choices, such as mixed pricing, predatory pricing, preemptive advertising, mergers, devolution strategies, etc. Such actions are consistent with game theory as they might result in a war of attrition, making competitive pricing at risk in the future.
Conclusion
The present paper provided an overview of the brewing industry and the strategies used by its participants to win the market. The paper analyzed different pricing strategies, advertisement techniques, and mergers. It can be stated that the brewing market in the US is highly competitive, and thus, changes in the environment might lead to using different strategies by brewing companies.
Works Cited
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Clerides, Sofronis. Price Discrimination with Differentiated Products: Definition and Identification. Economic Inquiry, 2004. 42,402-412.
Murray, Alexander. Brand Loyalties: Rethinking Content within Global Corporate Media. Media, Culture and Society, 2005. P 415-435.
Pluta, Joseph (a). Industry Life Cycle Characteristics and Advertising Strategy in a Tight-Knit Oligopoly: The Case of the U.S. Brewing Industry. Southern Business and Economic Journal, 1989 p123-144.
Pluta, Joseph (b). Mergers, Leading Firms, And the American Brewing Industry in the 1980s. 1984. Review of Business, 1984, p.133-141.
Pinske, Jorn., & Slade, Mathew. Mergers, Brand Competition, and the Price of a Pint. European Economic Review, 2004. 48, 617-643.