Craft Beer Case

1. What are the strategically relevant components of the U.S. and global craft beer industry macro-environment? Do a PESTEL analysis in support of your assessment 1. Political factors: as we know, alcohol beverage industry is heavily taxed by state and federal governments. Craft beer breweries should pay extra attention on tax policies when producing and distributing products to different states. Also for the large breweries need to beware of age and religion restrictions of target market, when trying to start international business. 2. Economic conditions: The total economic impact of beer market was almost 2% of U.S.GDP in 2018; total revenue of crafted beer industry was almost 8 billion dollars in 2020. The popularity of craft beers led to an around 4% growth rate annually in industry revenue between 2015 and 2020 in U.S. But with the total beer sales dropping, crafted beer industry growth rate was projected about 2% for next 5 years. Forecasting global beer market, 700 billion dollars in sales will be achieved in 2022. 3. Sociocultural forces: U.S customers trend have shifted toward low calorie alcoholic beverages and beer/wine alternatives. Global consumers are more likely to taste different styles of beer which they have not tasted before. 4. Technological factors: social media and mobile phone applications could help craft beer industry gain exposure and distribution channels. 5. Environmental forces: temperature changes could affect hops yield. In 2018, a reduction of hopes yield occurred in Europe due to temperature rise. 6. Legal and regulatory: craft beer industry is subject to many regulations which can vary by state and municipality. Regulations can greatly affect sales and distribution, such as direct sales, two-tier and three-tier distribution systems, and labels regulation. 2. What is competition like in the craft beer industry? Which of the five competitive forces is strongest? Which is weakest? What competitive forces seem to have the greatest effect on industry attractiveness and the potential profitability of new entrants? Show your full 5-forces analysis of the craft beer industry. Home brewers compete through attending beer festivals, or host tastings and “tap takeovers” at local restaurants. Larger craft breweries compete through marketing and distribution, while offering a higher value compared to macrobreweries. Macrobreweries competed using economies of scale and established distribution systems. From my point of view, competition from producers of substitute products, competition from rival sellers, and supplier bargaining power, are the strongest force. Competition from producers of substitute products Good substitutes are readily available and attractively priced. Low-calorie alcohol and beer/wine substitutes are normally can be found next to beers in the same shelf, and because of these products are created targeted to compete with regular beers, they normally come with a lower price. Buyers view the substitutes as comparable or better in terms of quality, performance, and other relevant attributes. With an increasing demand of healthier lifestyle, more customers are switching to low-calorie alcohol and beer/wine alternatives. They view substitutes are healthier products compare with craft beer. The costs that buyers incur in switching to the substitutes are low. Switching to low-calorie alcohol and beer/wine basically generate no monetary costs, but change in consumption habit. Competition from rival sellers Rivalry increases when buyer demand is growing slowly or declining. Due to the total beer sales has been dropping since 2019, but the growth of craft beer market is increasing. More companies will switch to offer higher amount of craft beer products, this lead to an increasing competition in craft beer industry. Rivalry increases as it becomes less costly for buyers to switch brands. Buyers switching to other brands cost nothing from but change in consumption habit. Rivalry increases as the products of rival sellers become less strongly differentiated. Craft beer, regular beer, low-calorie beer all belongs to same category: alcoholic beverage. Most of customers only seek to enjoy relaxation from consuming alcohol, craft beers are not irreplaceable. Therefor craft beer products are weakly differentiated, rivalry is increased. Supplier bargaining power Demand for suppliers’ products is high and the products are in short supply. Grain and hops are two main ingredients of beer industry, therefor demands on them are never low, and supply of good quality grain and hops are always in shortage. Suppliers provide differentiated inputs that enhance the performance of the industry’s product. Some special types of craft beer are highly relying on certain types of grain and hops to embody its special performance. Thus particular input makes rivalry increase. Industry members are not major customers of suppliers. Beer industry companies may be not the major customer of some hop farms. Hop farms may dual purposed, they serve both breweries also produce their own beer for retail. Competition from potential new entrants to the industry is the weakest forces. Competition from potential new entrants to the industry There are sizable economies of scale in production, distribution, advertising, or other activities. Compare with large macrobreweries, new entrants normally start with home brewery. They do not have an advantage on mass production, strong distribution network, advertisement budget, or other activities. Customers have strong brand preferences and high degrees of loyalty to seller. It is hard for buyers switch to another brand, once the discovered the brand satisfy their tastes most. Incumbents have other hard to replicate cost advantages over new entrants. Incumbents have hard to replicate cost advantages. Macrobreweries have their own laboratory to find out the flavor demanded by the market; also some of them established own distribution systems. These advantages cannot be replicated by new entrants. There are difficulties in building a network of distributors/dealers or in securing adequate space on retailers’ shelves. Building network of distributors is most difficult for new entrants. Beer productions are highly labor intensive, owner of microbreweries need to heavily invest on human capital to achieve breakeven point. New entrants are mostly home brewers with limited budget, thus mass produce and distribute through wholesalers are nearly impossible. Customer bargaining power has the greatest effect on industry attractiveness and the potential profitability of new entrants Customer bargaining power Buyer demand is weak in relation to the available supply. In craft beer industry, buyer demand is weak to the supply. When a product is out of stock or price is increased, buyers will simply switch to another brand or not drinking it. Industry goods are standardized or differentiation is weak. Craft beer differentiation is weak; they are all in beer category, with a slight taste difference. Buyers’ costs of switching to competing brands or substitutes are relatively low. It costs nothing for buyers pick another brand’s beer on the shelf. Buyers are well informed about the product offerings of sellers (product features and quality, prices, buyer reviews) and the cost of production (an indicator of markup). Beer industry is a low entrance barrier industry; buyers can gain information from other brewers or online, and compare prices and quality with other companies based on their own experiences. 3. What does your strategic group map of the craft beer industry look like? Which strategic groups do you think are in the best positions? The worst positions? Create a strategic group map of the craft beer industry. From my point of view, AB inBev is in the best position. High geographic coverage means products can be distributed to more customers and with a wide price range, which means its products can be accepted by customers in multiple social classes. In contrast, micro and nano breweries sit in the worst position. Low geographic coverage means less exposed to the market and low demand. Also it has a narrow but relatively high price range, which means low customer diversity. 4. What key factors may determine the success of a start-up or smaller, craft brewery? Be sure to identify at least 5 key success factors and provide a brief explanation of each one (1 or 2 sentences). 1. A strong network of wholesale distributors: stocked and favored by distributers to let customers have easy access to make a purchase. 2. Good advertising: increase a demand pull to add more sales through large distributers. 3. Product differentiation: microbreweries need to focus on the market nich to offer specialized beers to customers who have special demands. 4. Superior firm size and branding capabilities: macrobreweries need to establish its own distribution system to offer worldwide customers its mass produced beers with low distribution costs. 5. Full utilization of brewing capacity: breweries need to keep its manufacturing costs low to compensate other costs. 5. What recommendations would you make to a smaller, craft brewery to improve its competitiveness in the market while mitigating any current and future risks? Microbreweries should utilize a niche competitive strategy. Focus on producing better quality craft beers with unusual flavors then offer them to local restaurants and bars. Further, microbrewery owners can attend local festivals, host tastings, and “tap takeover” at local shops. 6. Identify the strategic issues facing craft brewers in 2020. What effects may these issues have on the industry? Total beer sales are in a decline trend but craft beer sales is still growing in 2020. This might lead to large breweries switch their production capacity to produce more craft beer, and a growing number of new entrants enter the market. This could cause an increase of competition For the small, local craft brewers, COVID-19 is the biggest threat in 2020. Regulations like travel restricts and social distancing greatly impacted microbreweries’ distribution, such as local bars, tasting events, and beer festivals.