SAM-1-
Samuel Adams:
Growing Craft Beer in America
Group Project
Steve Clagg
Brennon Crist
Chaille Lemcke
Ken Bauer
Deb Quinby
Andrew McDowell
Ben Flanagan
Gregg Petri
Don VanGilder
University of Denver
November 16, 2007
SAM-2-
Executive Summary .............................................................................................. 4
Core Problem ........................................................................................................ 4
Industry Analysis ................................................................................................... 4
SWOT Analysis ..................................................................................................... 6
Product Market Position ........................................................................................ 6
Alternate Strategies .............................................................................................. 7
Recommendations ................................................................................................ 7
Phase I .............................................................................................................. 7
Phase II ............................................................................................................. 7
Phase III ............................................................................................................ 7
References ........................................................................................................... 8
Appendix A – McKinsey 7 S Model ....................................................................... 9
Structure ............................................................................................................ 9
Strategy ............................................................................................................. 9
Systems .......................................................................................................... 10
Shared Values ................................................................................................. 10
Style ................................................................................................................ 10
Skills ................................................................................................................ 11
Staff ................................................................................................................. 11
Appendix B – Financial Ratios ............................................................................ 12
Liquidity Ratio Analysis .......................... Ошибка! Закладка не определена.
Asset Management Ratio Analysis ......... Ошибка! Закладка не определена.
Capital Structure Ratio Analysis ............. Ошибка! Закладка не определена.
Profitability Ratio Analysis ...................... Ошибка! Закладка не определена.
Appendix C – Macro-Forces ............................................................................... 17
Economic ........................................................................................................ 17
Political/Legal .................................................................................................. 17
Social/Demographic ........................................................................................ 18
Technological .................................................................................................. 19
Ecological ........................................................................................................ 19
Appendix D – Porter’s Five Forces ..................................................................... 20
Entrants ........................................................................................................... 20
Substitutes ...................................................................................................... 22
Suppliers ......................................................................................................... 22
Rivals .............................................................................................................. 24
Buyers ............................................................................................................. 25
Appendix E Growth Related Strategies ............................................................... 26
Porter’s generic strategies ............................................................................... 26
Market based growth strategies ...................................................................... 26
Appendix F – Value Chain .................................................................................. 28
Appendix G ......................................................................................................... 29
Appendix H ......................................................................................................... 30
Appendix I ........................................................................................................... 31
Appendix J - Industry Analysis ............................................................................ 32
SAM-3-
How to define the Industry ............................................................................... 32
312120 Breweries ........................................................................................ 32
Review the Industry History ............................................................................. 32
Analyze Industry Forces .................................................................................. 34
Competitive Structure – Industry Continuum ................................................... 35
Marketing Practices (Industry Marketing Norms)............................................. 38
Identify Industry-wide threats and opportunities .............................................. 39
Opportunities ............................................................................................... 39
Threats ........................................................................................................ 40
Evaluate industry capital requirements ............................................................ 41
SAM-4-
Executive Summary
Core Problem
Industry Analysis
By world standards, the US is a major beer –drinking nation. In 2001, US
per -capita beer consumptions was about 22 gallons. US ranks 11th among
developed countries in beer consumption. Most of the major beer drinking
nations are in Northern and Eastern Europe.
US beer brewing is an important part of the national economy. Beer is
one of the commodities used by the US government to calculate consumer price
index. Beer accounts for about 58% of alcohol consumption in the US. Beer
accounts for $64 billion in sales, employed more than 850,000 US workers, and
paid $8.7 billion in federal and state excise and sales tax. Today there are more
than 2200 beer wholesalers, more than 1800 brewers, and beer importers in the
US.
There are three main features that stand out about the US brewing
industry in the later half of the twentieth century. Tremendous increase in
industry concentration has meant fewer and fewer breweries produce more and
more of the beer. Many smaller beer brands have been consolidated by the
large domestic brewers. Success of the top three, Anheuser – Busch, Miller, and
Coors, is another important feature of the US domestic beer market. These
companies have lots of money for advertising, own large distribution networks,
and yield strong influence. However, these companies do not supply a range of
products that meet all consumer needs, which has allowed for the third important
feature, the emergence of the domestic specialty and import segments of the
market.
There have been considerable technological changes in the post-World
War II brewing industry, although most of the technological advances in brewing
originated outside the industry. For example, the industry has benefited from the
development of faster canning lines by the canning industry, more effective foam
and beer stabilizers by the chemical industry, and faster pumps and larger kettles
by the steel fabrication industry.
The primary contributions from U.S. brewing are the development of new
products like malt liquor and light beer. With the wide variety of beer brands and
new products in brewing today, especially those by the craft brewers, the one
area where the industry appears to be highly creative is in the new brand and
product development.
Since the late 1970’s, three main forces have fostered the domestic
specialty and import segments of the market. Economic prosperity stimulated
demand for brands with social status and an image of quality, including premium
and super-premium beer as well as the domestic specialty. The mass produced
beers continued to consolidate, and the domestic brands that currently remain
SAM-5-
have become lighter and more alike. Consumers began to demand greater
variety that created a niche for domestic specialty and imports. Small domestic
specialty brewers benefited from changes in legislation that have allowed them to
fill the niches created where the large domestic brewers have failed to meet
consumer demand.
“Economies of scale in production, distribution, marketing, and advertising
provided these large players with the ammunition needed to wrest control of the
industry from the once dominant local brewers. The result of this concentration is
apparent in the oligopolistic market structure of the beer industry today” (Tapping
into the Beer Industry, http://www.stumptown.com/articles/mgmtbeer). The
domestic beer industry is a great example of an oligopolistic market. This type of
market is characterized by intense rivalry of just a few major players, with laws
meant to limit anti-trust behavior, and large advertising budgets focused on
product superiority which further intensifies the rivalry.
Conversely, the structure of the craft-brewed beer industry is defined as
monopolistic competition. However, oligopolistic competition may be evident in
the near future as several major players have come to dominate the national
market. Boston Beer Company, Samuel Adams, Pete's Brewing Company, and
Redhook Ale Brewery - have a significant influence on the national pricing
structure of craft-brewed beers. As these players' market shares continue to
grow, this oligopolistic market structure will be enforced.
Several extremely important factors drive market demand and firm cost
conditions in the U.S. brewing industry:
 Price of the beer
 Price of substitutes (other alcoholic and non-alcoholic beverages)
 Consumers’ income
 Demographics
 Level of Consumer additions
 Technological Change
In summary, there are three major domestic beer brewers in the US who
dominate an oligopolitic market. However, there are niches within the beer
market that the big three have not filled. Within these niches domestic specialty
brewers and import beers have found a strong and growing consumer base.
These specialty brewers combined consist of only 10% of the overall beer
consumption in the US, with a handful of brewers dominating the smaller
segment. The specialty beer niche market was a product of US economic
prosperity and favorable legislation, as much as it was spawned from creative
breweries around the country introducing innovative products to meet specific
market segments. While the craft beer industry is growing at 12% per annum,
the entire beer market is constrained by the same factors. These factors, namely
price, socio-economic demographics, and perceived added value, will determine
the continued success of the craft beer niche market. Samuel Adams is currently
well positioned as a leader in this strong and growing niche, but they continue to
be a very minor player in the overall US domestic beer industry.
SAM-6-
SWOT Analysis
Product Market Position
Boston Beer CO, the parent company of Samuel Adams, is the largest
craft brewer and the 6th largest brewer overall in the US. It also holds an
approximate 20% share of the craft beer market.
Boston Brewing/SAM competes with its offering of 20 beers that compete
in the super-premium category, also called the ‘Better Beer’ category, which
consists of craft beers, most imports, and other high-end brews. While the
category of Better Beer is growing, the company’s only Better Beer brand,
Samuel Adams, has remained the third largest brand in this category for the past
five years, behind Corona and Heineken. Conversely, Boston Brewing/SAM
products also compete with the wines and spirits producers, which are also
growing markets that are outpacing the growth of premium domestic brewers.
Additionally, the Better Beer category is highly competitive due to the large
number of craft brewers with similar pricing and target customers, along with
gains in market share achieved by imported beers. Thirty five years ago regular
strength Domestic beers accounted for 98% of the U.S. beer business. Light
beers had not yet emerged. Imports represented only about 2%, and Craft Beers
weren’t even a blip on the horizon. Today, regular strength domestics have come
to represent 33%; Light beers represent 49% of the market; and Better Beers
(which includes imports and Craft beers) have grown to 18%. Samuel Adams has
just ½% of that total U.S. beer market, which gives room for growth in the only
segment of the industry that is on the rise. Overall, the Boston Brewing company
produces and markets a group of niche products and is still very much a leader
within the niche market of craft beer. The company itself has very publicly stated
that they are committed to continue to create the wave of interest in Better Beers
as well as to reinforce its momentum.
Strategic marketing focus for Boston Beer Co is on the Samuel Adams
‘family’ of beers, with an emphasis on Boston Lager, Sam Adams Light, and
seasonal beers. This segmented offering is structured to support long-term
growth. In the past several years, ad expenditures have risen significantly as a
portion of advertising, promotional, and selling expenditures, putting the company
in the lead in terms of advertising and marketing power above a crowded
marketplace of much smaller craft brewing competitors. One interesting fact from
the perspective of Boston Beer Co/SAM much smaller competitors, is that when
Samuel Adams advertisements hit mass mainstream media markets, it is
perceived as an advertising boon for these much smaller players. In essence,
Boston Beer Co/SAM spends a lot on advertising and this actually benefits their
competitors from a promotion of the craft brewing / ‘better’ and premium beer
industry standpoint. Overall, marketing and advertising expenditures for Boston
Brewing/SAM are on the rise and are effectively raising revenues.
From a market position standpoint, the diversification of products for Samuel
Adams is a key focus. SAM/Boston Brewing offers many different kinds of
SAM-7-
seasonal beers, beer ‘style’ varieties and varieties (bocks, lagers, light beers,
etc.), and has also established limited edition beers as well as a ‘Brewmasters
Collection’. Boston Beer also markets malt beverages and cider under the
Twisted Tea and HardCore Cider brands. Products are distributed locally through
a network of about 400 wholesalers and 200 sales people, who then sell to
retailers such as pubs, restaurants, grocery chains, package stores, stadiums,
and other retail outlets.
Alternate Strategies
Recommendations
Phase I
The phase one recommendation is what Harley Davidson should start
doing today.
Phase II
The phase two recommendation is what Harley Davidson should
implement one year from today and last for a couple of years.
Phase III
The phase three recommendation is what Harley Davidson should be
implementing long term, past three years.
SAM-8-
References
Boston Beer Company. (2007). Samuel Adams—Company.
Samueladams.com. Ret. 10/27/07
<http://www.samueladams.com/company.aspx>.
Crouch, Andy. (2006). There May be No More Recognizable Face in the Craft
Brewing Industry Than Jim Koch. Beer Scribe. Ret. 10/27/07
<http://beerscribe.com/jimkoch.html>.
Joe Sixpack Blog. (2007). Sam Adams Gives Nod (& Label) to Wannabes.
Philly.com. Ret. 10/27/07
http://www.philly.com/philly/entertainment/columnists/20071026_Joe_Sixpack___
Sam_Adams_gives_nod____label__to_wannabes.html.
Ledoux, Kim. (2007). Freetown’s Sam Adams Deal Goes Flat. South Coast
Today. Ret. 10/27/07
http://www.southcoasttoday.com/apps/pbcs.dll/article?AID=/20070803/NEWS/70
8030351/1018/OPINION.
Wikipedia. (2007). Porter’s Generic Strategies. Wikimedia, Ltd. Inc. Ret.
10/27/07 http://en.wikipedia.org/wiki/Porter_generic_strategies.
SAM-9-
Appendix A – McKinsey 7 S
Model
Structure




SAM is headquartered in Boston,
MA, along with one of its
breweries. Another companyowned brewery is located in Jim
Koch’s hometown of Cincinnati,
OH. Three contracted breweries
are located in Eden, NC,
Rochester, NY, and Lacrosse, WI.
Boston Brewing Company is not
bound by traditional modes of
thought or analysis, a very informal
company, which encourages
creativity across all levels.
SAM has an absence of boundaries or obstacles to communication and
improvement.
The company maintains good working relationships with all three labor
unions.
Strategy







SAM’s business goal is to become the leading brewer in the Better Beer
(BB) category. It is known for the quality of its beers and for creativity and
innovation in developing, brewing and selling those beers.
SAM has only ½% of the total U.S. market, “which gives us room for
growth in the only segment of the industry on the rise. We are not content
to ride this wave however, we are committed to help create the wave and
reinforce its momentum.”
The company is committed to remaining a leading innovator in the BB
category. It continually test brews and markets it new products under
various brands labels.
The company has always been willing to stretch the limits of beer
products.
SAM took two years of tireless research and brewing trials to create their
flavorful Light beer.
BBC was the first brewer to start using freshness codes on its beer.
The company has come up with improved glassware, showcasing aroma
and flavor.
SAM-10-
Systems






SAM now employs over 400 employees, manufacturing 17 different beer
styles available in 50 states and 20 foreign countries.
It sells its products to a network of 400 wholesale distributors. The largest
distributor accounts for 5% of sales, top three account for 10%. SAM has
strong relationships with its distributors.
Products are shipped within days of completion; historically there has
been no significant product order backlog.
The company keeps roughly 1 year of hops inventory in multiple cold
storage warehouses to limit risk.
SAM maintains secure supplies of proprietary yeast products in several
locations. Contract brewers are not allowed to use yeast strains without
permission from SAM.
SAM works closely with its non-owned breweries to minimize any potential
disruptions.
Shared Values







Guiding Beliefs
o
Daily Beliefs
o
SAM has been cited by Boston Magazine as one of the best companies to
work for.
The company is a team of enthusiastic people who are passionate about
beer and who really love coming to work.
SAM is heavily committed to community involvement. It supports
hundreds of smaller organizations and four larger partnerships: Share our
Strength (anti hunger), the Cam Neely Foundation for Cancer Care, The
Denis Leary Firefighters Foundation and the Sean McDonough
Foundation (children’s charities).
The company participates in the sponsorship of cultural and community
events.
The company acted as a collection agency and matched employee
contributions for hurricane Katrina relief efforts.
Style


SAM has won more awards in the last five years in international beer
tasting competitions than any other brewery in the world. This has helped
lead the company to 17% sales growth in 2006, a third year of record
trends.
The company likes to use American patriots in product naming, especially
patriot brewers. BBC uses/used Samuel Adams, George Washington and
James Madison on various products.
SAM-11-
Skills


SAM employs eight head brewmasters at its non-owned brewing
operations to ensure quality controls.
SAM has on-site QC labs at both of its owned breweries.
Staff





SAM started off as a family owned business. Jim Koch is a 5th generation
brewer and remains Chairman and head brewer.
Jim Koch has been named an “Entrepreneur of the Year” by Inc.
Magazine.
The BBC has an annual company-wide meeting at its headquarters in
Boston. It is a very popular event.
SAM was voted as having the “Best Entry-Level Jobs” by The Princeton
Review.
Martin Roper is currently CEO of Boston Beer Company, Inc., parent of
Samuel Adams. He assumed this position after serving as Vice President
of Operations, Chief Operating Officer and then President. The company
definitely promotes from within and has management succession plans in
place.
SAM-12-
Appendix B – Financial Ratios
The 2003, 2004, 2005, and 2006 Form 10-K filings by The Boston Beer
Company, Inc., contain the five years of data needed to analyze the financial
health of the company. The ratio analysis analytical tool described in
“Understanding and Analyzing Financial Statements” by Norma C. Powell is used
to examine the company’s liquidity, asset management utilization, capital
structure, and profitability.
Liquidity Ratios
The current ratio values show that the short-term solvency of the company
is generally declining, a bad sign. The slope of the line over the last five years is
-0.0811, and the ratio decreased by 12.17% between 2002 and 2006. Although
current assets have increased over the last three years, current liabilities have
increased at a faster rate, and fewer current assets will be available for long-term
growth plans.
2002
3.3588
2003
3.0969
2004
3.3451
2005
3.1034
2006
2.9499
Table 1 Current Ratio: Current Assets ÷ Current Liabilities
The quick or acid test ratios show that immediate liquidity is also declining,
another bad sign. The slope of the line over the last five years is -0.0997, and
the ratio decreased by 16.22% between 2002 and 2006. Inventories have
increased every year during the analysis period, which might not be able to be
converted to cash to satisfy short-term liabilities.
2002
3.0234
2003
2.6453
2004
2.8663
2005
2.6285
2006
2.5331
Table 2 Quick or Acid Test: (Current Assets - Inventories) ÷ Current Liabilities
The average collection period in days has greatly improved over the
analysis period, with only a slight increase in the last year of less than one day.
Because monthly account receivables balances are not available in the annual
reports, average values are calculated by adding the previous year-end balance
to the current year-end balance and dividing by two. Overall the trend is upbeat,
with a slope of -3.1602, and a decrease in the ratio by 44.28% between 2002 and
2006. The company was able to reduce the average collection period by over 12
days, showing improved credit policies.
2002
27.98
2003
22.11
2004
17.47
2005
15.29
2006
15.59
Table 3 Average Collection Period: Accounts Receivable ÷ (Sales ÷ 360)
The inventory turnover ratios are generally declining, a poor sign that the
company is turning over inventory fewer times during the year. Because monthly
inventories are not available in the annual reports, average values are calculated
SAM-13-
by adding the previous year-end balance to the current year-end balance and
dividing by two. Although there is a slight rise between 2005 and 2006, the slope
of the trend is -0.6217, with a decrease in the ratio by 21% between 2002 and
2006. Inventories increase every year during the analysis period, therefore the
company is either building inventory is anticipation of growth, a risky move given
the relatively short product life, or the inventory turnover is a result of the overall
decrease in the company’s liquidity.
2002
10.00
2003
9.39
2004
7.84
2005
7.39
2006
7.90
Table 4 Inventory Turnover: Cost of Goods Sold ÷ Average Inventory During the Period
Asset Management
Asset utilization ratios define how well the company utilizes its assets to
generate revenue. Total asset utilization trends downward, with the only
increase between 2002 and 2003, a negative sign that the company is utilizing its
assets less efficiently every year for generating sales. The slope of the trend is 0.0804, similar to the quick ratio, with a decrease in the ratio by 8.55% between
2002 and 2006. The company is doing a poor job of increasing or maintaining
sales levels using their total assets.
2002
2.2315
2003
2.6341
2004
2.2304
2005
2.2112
2006
2.0408
Table 5 Total Asset Utilization: Sales ÷ Total Assets
The utilization of the company’s net fixed assets is also generally
declining, another poor sign that the company is using their fixed assets less
efficiently over time. Fixed asset utilization increased between 2002 and 2004,
although this ratio dropped off sharply in 2005 but started to recover in 2006.
The slope of the trend line is -0.6621, and the ratio decreased by 12.95%
between 2002 and 2006. In general, the company is not able to consistently
identify efficiencies in using their fixed assets to generate revenues, and see
sharp spikes in this ratio as they struggle to find the right amount of assets
needed for operations.
2002
11.7976
2003
13.4887
2004
13.9171
2005
9.9248
2006
10.2691
Table 6 Fixed Asset Utilization: Sales ÷ Net Fixed Assets
Capital Structure Ratios
The capital structure ratios analyze how well the company uses leverage
to acquire assets that ideally generate a greater return than the borrowing costs.
The debt-to-equity ratios show that the company generally does not employ
much long-term debt. The slope of the trend line, 0.0056, shows conservative
use of debt especially between 2002 and 2004, although debt-to-equity has
increased 256.82% overall between 2002 and 2006 due to the significant rise in
SAM-14-
the use of debt over the last three years to fund capital projects in order to
minimize the risks from contract brewing.
2002
0.0088
2003
0.0117
2004
0.0097
2005
0.0221
2006
0.0314
Table 7 Debt-to-Equity: Total Liabilities ÷ Equity
Times interest earned ratios can only be calculated for 2002 through 2004,
as the cash flow statements do not list interest expenses for 2005 and 2006. The
financial statements are somewhat confusing as values listed as “other long-term
liabilities” in the 2005 annual report are labeled simply as “other liabilities” in the
2006 annual report, perhaps due to redefining what constitutes long-term debt.
For the three years where interest charges are recorded, the times interest
earned ratios steadily increased. This increase shows that the company would
not have any difficulty covering their interest charges, especially given their
conservative use of debt.
2002
174.1493
2003
236.8657
2004
367.6415
2005
N/A
2006
N/A
Table 8 Times Interest Earned: Earnings Before Interest and Taxes ÷ Interest Charges
Profitability Ratios
Several profitability ratios are calculated to determine the company’s
profitability, and how successful the management team’s strategic decisions
turned out.
Contribution margin measures how much revenue remains after paying for
the costs of the product plus debt repayment. The contribution margin has
remained flat with a slope of -0.0023, where improvement was seen in 2004 but
an alarming 2% decline in 2006. The decrease in 2006 might be explained by
the increased use of long-term debt without a corresponding increase in the
efficiency of how well the assets generate revenue.
2002
0.5897
2003
0.5883
2004
0.5950
2005
0.5937
2006
0.5755
Table 9 Contribution Margin: (Net Sales – Cost of Goods Sold) ÷ Net Sales
Profit on sales measures net income after taxes compared to sales. Even
with troubling signs in asset utilization, profit on sales increased significantly
between 2002 and 2004, and has remained generally flat in 2005 and 2006.
During the first three years the company was able to increase profits by keeping
operating expenses flat as revenues increased. Nonetheless, it is troubling that
profit on sales did not increase in 2005 and 2006 given the increased amount of
interest income they received in those years compared to previous years.
2002
0.0359
2003
0.0459
2004
0.0522
Table 10 Profit on Sales: Net Income ÷ Sales
2005
0.0591
2006
0.0577
SAM-15-
Return on assets measures how much income is produced using the
assets. After a strong 4% improvement between 2002 and 2003, return on
assets has remained fairly flat as shown by the slope of 0.0085. The return on
assets is satisfactory, but the 2% drop between 2005 and 2006 raises concerns
about whether this was a temporary decline or the start of downward trend.
Similar to the issues with the asset utilization ratio, the company is not realizing
steady improvements in how well they use their assets to generate revenues,
possibly linked to a strategy for ramping up growth.
2002
2003
2004
2005
2006
0.0801
0.1209
0.1163
0.1307
0.1178
Table 11 Return on Assets: Net Income ÷ Total Assets
Return on shareholders’ equity measures how well the shareholders’
investments have performed. As with the return on total assets, return on
shareholders’ equity sharply increased between 2002 and 2003, and has
remained fairly flat the following years as shown by the slope of 0.0130.
Although return on common equity is satisfactory, the drop in the last year of
analysis is a cause for concern, especially if subsequent years were to also show
similar drops. It would be preferable to see these ratios continue to increase as
the company learns how to effectively utilize their assets, the upward and
downward spikes reveal that the company is making significant changes in their
asset base as they try to grow and mitigate the risks from relying on excess
capacity at other breweries to brew their beer.
2002
2003
2004
2005
2006
0.1085
0.1689
0.1595
0.1810
0.1675
Table 12 Return on Equity: Net Income ÷ Shareholder's Equity
The price per earnings ratios indicate that investors are willing to pay less
for reported profits over the analysis period, with the exception of a large
increase of 5% in 2006. Until the last period investors were losing confidence in
the company. With the company’s direction of investing in property, plant, and
equipment to mitigate the risks of contract brewing, investors are willing to pay a
higher premium for the company’s stock. Although the slope of the five year
trend decreased by 0.1498 this large spike is a positive sign that the company is
making sound strategic decisions.
2002
2003
2004
2005
2006
26.98
25.19
23.90
22.73
27.47
Table 13 Price/Earnings: Market Price of One Share ÷ EPS
Overall Interpretation
Reviewing the financial ratios reveals a company that is struggling to
increase operational efficiency as they prepare for major growth. Fortunately
sales are steadily increasing every year; the challenge is to increase revenue
without increasing the assets required to generate those sales at a higher rate.
The company is not showing signs of increasing asset utilization efficiency,
although they are keeping operating costs in line and have sound credit policies.
This is acceptable as they increase long-term debt obligations to make the
SAM-16-
necessary capital expenditures in property, plant, and equipment in order to
mitigate risks for long-term viability. As long as revenue continues to increase
year over year, increasing operating efficiency is not as important as it will be
once the company enters stage four of the business lifecycle and revenue
flattens out.
Nevertheless The Boston Beer Company, Inc. is showing warning signs
that cannot be ignored, and management needs to be careful to not ignore cost
control measures as they struggle to grow into a competitive position against
major brewers. Once management has reduced operational risks, it will be
critical to increase asset utilization and increase profit margins to keep investors
interested in the stock.
SAM-17-
Appendix C – Macro-Forces
Economic
In terms of market consumption and economic cycles, breweries and the
alcoholic beverage industry is typically recession proof – when times are good
people drink and when times are bad drinking consumption goes up. Cost
pressures from rising materials, energy, and freight costs are an increasing
macro force which impacts SAM/Boston Brewing Company’s likelihood of
operating margin expansion despite their ability to increase prices in response to
increased demand and higher overall volume (this taken from S&P Analyst
report). The industry as a whole commands much higher than average costs for
ingredients, aluminum, and energy…. And breweries often obtain raw materials
through contractual agreements and on the open (spot) market. Producer prices
for breweries major raw materials can fluctuate greatly. Grain crops are subject
to adverse weather and fluctuate significantly, so companies have secondary
sources as alternatives, especially for barley. In addition to barley, corn, and
other grains, breweries buy malt and sweeteners, including dextrose, corn syrup,
cane and beet sugar, and sugar substitutes. Packaging materials include
paperboard, aluminum cans, bottles, barrels, and kegs. All of these materials
again, are relatively expensive from a cost of goods sold standpoint, and the cost
of aluminum can ‘sheet’ and packaging materials, for example, can be extremely
volatile. On the other hand, long-term contracts and hedging help manage supply
and costs (currency, commodity, and interest rate risk). Larger breweries also
typically own or have an equity investment in multiple supplier companies but this
macro force does not ensure that any brewer, including the large players can
effectively pass along all of the increased costs of raw materials, energy, and
packaging to customers and still remain profitable.
Political/Legal
Federal, state, and local governments highly regulate the brewery
industry. Regulations apply to brewing, marketing, advertising, sales, distributor
relationships, transportation and environmental protection. Drinking alcoholic
beverages is illegal in the US for people under the age of 21 in almost every
state. Additionally drinking and driving ‘under the influence’ is illegal in all states.
Beer cannot be sold in many states on Sundays or in some dry counties across
the US where it is illegal to sell alcohol. Legal drinking ages can be both a
positive and negative force and can be also be looked at in terms of how legal
forces differ in different parts of the world. For example, there is no legal drinking
age in China. Driving under the influence is an enormous legal force that brings
to light the dangers of consuming spirits. In response to this concern, congress
has lowered legal blood alcohol limits to 0.08 percent and litigation is increasing
against businesses and individuals serving alcohol to drivers. This is a huge
concern for the industry and breweries worry about the business effect of public
concern over drunk driving, underage drinking, and alcoholism. Excessive
alcohol use is also widely known as the number three lifestyle related cause of
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death in the U.S. Also, while not technically illegal, we are on the cusp of legal
forces and penalties, for example with regards to women drinking while pregnant
or nursing. For companies looking to expand internationally, legal drinking age
issues, along with tax and legal considerations relative to each country are an
enormous legal and political macro-force.
As a result of the regulations, breweries need numerous licenses and permits
from a variety of agencies, including the Federal Alcohol and Tobacco Tax and
Trade Bureau, the USDA, the FDA, the EPA, the IRS, and state regulatory
agencies. Federal law sets the national drinking age in the US. States actually
regulate alcohol content levels, distribution and retail sales, and bottle and can
recycling or return programs. Most states (license and “open” state) allow the
private sector to engage in wholesale and retail beer sales, but some state
(control states) allow only alcoholic beverage distribution and/or retail sales
through state-owned channels and stores. Some states tightly restrict changing
distributors, and some have “blue laws” that restrict of prohibit Sunday alcoholic
beverage sales. As a result of all of the regulation and risk, breweries typically
carry considerable levels of liability insurance to cover litigation risks, and are
subject to superfund environment remediation and fines. Additionally, on the
political front, a new US congressional caucus was formed in May 2007 to
advocate for small American brewers (which would be Boston Brewing Co/SAM
competitors).
Social/Demographic
Macro forces for the ‘macro-swill’ beers (Anheuser-Busch, Inc., SAP Miller
PLC, and Molson-Coors) are somewhat different than for the microbrew, craft
beer, or ‘better beer’ category… it is extremely important to be aware of this
distinction while at the same time acknowledging that all three of the top major
brewers have all recently entered the Better Beer category, either by developing
their own beers, acquiring, in whole or part, existing craft brewers or by importing
and distributing foreign brewers’ brands. Health concerns related to the boomer
generation in the US are a factor as well as social stigmas around consuming
alcoholic beverages while pregnant, nursing, or around children at all. There is
also an overall health conscious trend for all generations who drink beer and are
also interested in ‘light’ versions in terms of calories and carbohydrates (carb
craze might me over, however the awareness and desire is out there for at least
perceived ‘lighter’ beer). There is also the demographic trend of post boomer
generations becoming more interested in microbrews versus ‘macroswill’s which
offsets the aging health conscious boomer demographic factors. There is also
the macro force of the ‘craft brew’ industry defining itself and its better beers as a
healthier alternative based on the purity of the natural resources utilized to
produce the beer. While the beer industry is flat as a whole, the better beer
category is growing particularly because of demographic forces. Younger
generations prefer craft/microbrew beer. Socially, consumption trends indicate
that there is an increasing interest in micro/craft beers. Consumer patterns
indicate a willingness to ‘switch’ or to trade up to premium-and-above alcoholic
beverages; quite possibly a function of overall higher disposable incomes.
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Technological
Capitalizing on technological innovation is the lynch pin of phenomenal
success in every industry today. Technical innovations around manufacturing
automation processes, supplier transparency, and biotechnology surely play into
the mix. Companies like Novozymes, for example, are producing biotech agents
and patents specifically for the brewing industry (they create special biological
enzymes that make the brewing process cheaper, and more predictable by
enabling consistent quality). Brewers are more and more constantly looking to
technologically innovate in terms of adopting brewing technology and supply
chain management technology for increased efficiency, competitive advantage,
and economies of scale.
Ecological
Ecological forces are a growing concern and consideration for most
industries, particularly increasing for industries that rely on natural resources and
produce waste. To remain competitive and to avoid risk and liability, many
companies are actively engaging in sustainability strategies and documented
plans that are measurable and quantifiable. Many brewers, including the
SAM/Boston Brewing Co, believe that they benefit economically from washing
and reusing recycled bottles which results in a lower cost than purchasing new
glass, and that this practice benefits the environment by the reduction in landfill
usage, the reduction of usage of raw materials, and the lower utility costs for
reusing bottles versus producing new bottles. The top tier brewers all have
varying degrees of well instituted ‘sustainability’ strategies and reporting.
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Appendix D – Porter’s Five Forces

Entry – barrier is low, many new entrants at a small scale.

Suppliers – International monetary risks around value of the Euro. Cost of
Hops dependent on crop success. Only one Glass and label supplier.

Rivals – Competition is high. Many small craft brewers. Importers into the
better beer segment are currently biggest rivals.

Buyers – Control fate of the better beer segment. If taste or perception of
beer/alcohol changes, Samuel Adams would be hurt.

Substitutes - Biggest threats from Wine and Spirits. Beer drinkers being
targeted by marketing campaigns that aim to graduate beer drinkers to more
sophisticated choices.
Entrants
The Samuel Adams brand is one of the strongest among a small group of
dominant players in the self proclaimed “better beer” segment. They label this
category “better beer” as opposed to “microbrews” due to their growth beyond
the required output limitation of 15,000 BBls a year (necessary to be considered
a microbrewery). Still, the big three brewers (Anheuser Busch, SAB Miller and
Coors) account for 80% of beer sales in the U.S. This overwhelming market
opportunity coupled with the rapid growth of the better beer segment make entry
into the category attractive to newcomers. Overall start up costs for a craft
brewer are relatively low, however a large amount of capital is required to
compete with the scale of a Samuel Adams. Due to the combination of strong
brand equity in its segment and economies of scale that rival the big brewers,
competing against Samuel Adams in this category is difficult.
Other brewing brand names on a similar scale with regard to sales and
distribution range tend to focus on a minimum of brand products. Indeed, many
of America’s leading brewers emphasize cost minimization and a simplicity of
flavor, where Samuel Adams instead directs its gaze toward such a great
diversity of products that it tends to withdraw itself from the category of
competition commensurate with its size. Indeed, when compared to Budweiser,
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Coors and other beers of a large corporate scale, Sam Adams provides beer at a
somewhat higher cost.
Simultaneously, the cost of its products compares quite favorably to other
beers in the same ‘craft-brew’ context. Due to its unusual balance of craft-brew
philosophy and large-scale corporate orientation, Sam Adams also stands out as
a great deal more recognizable than the countless independent and small-scale
craft-brew groups that compete for taste and trademark penetration in a dense
market. The result is that Samuel Adams is capable of offering no fewer than 18
separate varieties of beer over the course of each given year, with 11 of those in
perpetual brew and availability. This is a varietal capacity that few large brewers
can match and that few craft-brewers would choose to match. Beyond that, its
ongoing interest in developing new flavors conforms less to its stature than to its
craft-brew ideology. This can be considered advantageous given its already
large size and its capacity to orient such as scale toward effective research,
development and innovation.
In a manner, this is an approach which requires the company to
engage its competition through a very careful balance. Indeed, there are two
segmented markets into which Samuel Adams has entered itself. In the
mainstream brewing sense, it has achieved a great deal of name-recognition and
quality-based notoriety, which does give it a brand advantage over some of the
competition in this category. And though it cannot hope to achieve a competitive
edge over such brands as Coors and Budweiser, which have dominated in their
generic accessibility and trademark appeal, it can nonetheless boast a product
line with greater critical appeal. Placing it in competition in the craft brew market,
where costs are typically higher, cases Samuel Adams in the most favorable
light. Though its sticker price will generally tend to significantly eclipse that of
most mainstream beers, Samuel Adams will typically figure a cheaper craft beer
in competition with shelved independent and small-brewery products. Here,
straddling a middle line, Samuel Adams is a company in a position with few
comparable competitors, with the greatest threat coming from the considerable
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growth of other aspirant craft-brew companies with the facilities and product
quality to compete at a more mainstream level.
Substitutes
The beer industry as a whole is susceptible to substitutions. Wine and
Spirits have seen continued growth as many have marketed directly to the beer
drinking consumer. In particular, wine companies have had great success at
targeting beer drinkers with a message around “graduating to a more
sophisticated/ healthy alcohol choice”. In addition many consumers are moving
away from alcohol all together, proven as the per capita alcohol consumption
continues to decline in the U.S.
The notion of the threat of substitutes is actually directly counterintuitive to the
chosen business model of Samuel Adams, which has instead philosophy
attended to the interest of endorsing other craft brewers such as itself. An
interesting position for a large and competitive brewery, the organization pays
tribute to the American Homebrewers Association which supported its launch in
the mid-1980s by endowing aspirant craft-brewers with opportunities for entrance
into the market.
Such is shown by its 2006 Longshot Brewers Context, which
“opens the doors to outsiders, invites them to make their own version of its
product and then markets it to the rest of the world.” (Joe Sixpack Blog, 1) This
is illustrative of the companies larger position on the threat of substitutes, which
is that there is none. Though competition exists, the organization approaches
craft-brewing philosophically, and thus believes in the positive market impact of
endorsing the growth of independent enterprising.
Suppliers
The main raw ingredients for any beer include wheat or barley, hops,
yeast and a few added extracts. A craft brewer essentially relies on the same
ingredients that a large brewer does. Therefore it can me said that suppliers hold
little power over the craft brewer due to the commoditized ingredients involved in
the brewing process. However due to the beer maker’s reliance on third party
SAM-23-
sources for these materials, there are risks involved. Should any of the above
crops be affected adversely due to climate/weather changes, Samuel Adams
would be negatively affected. In addition they are currently buying the bulk of
their hops from Germany and England This international source for Hops
subjects them to another risk, changing value of the Euro vs. the U.S. Dollar. As
the value of the Euro rises against the value of the Dollar, the relative cost for
Hops goes up.
Samuel Adams utilizes multiple sources for most of its packaging needs,
however they currently only buy their glass and labels from one supplier.
Reliance on one supplier for these two items is a risk. In terms of the actual
equipment needed to make beer - there is a proliferation of manufacturers who
produce the equipment and we do not see this as a risk.
As a craft-beer brand, Samuel Adams enjoys dominance in its supply
capacity due to its relative scale. A company with historical ties to the east cost
of the United States, its charter formula for its Boston Lager would be initially
brewed in Massachusetts in the late 19th century. The family recipe produced at
this juncture would not represent a significant economic force until the original
brewer’s grandson revitalized the company in 1985 by beginning a distribution
deal with a bottler and distributor in Pittsburgh. The result would be that Sam
Adams would quickly become a popular fixture, both on draft and in bottle
throughout the East Coast.
It would develop plants throughout the eastern portion of the United
States, adding facilities in the Philadelphia Region and Jamaica Plain,
Massachusetts. Its Pittsburgh distributor would be relocated to Cincinnati, which
is where the vast majority of its beer is bottled and allotted for distribution.
Due to its significant receipt of recognition as a high-quality craft-brewer,
which would be reinforced by its acquisition of various critical and industry-wide
awards within the first season of its unveiling, Samuel Adams was able to quickly
establish itself as a nation-wide brewer of great acclaim. It supply powers are
considerable as a result, with five of its feature products available by tap at
thousands of restaurants and bars throughout the United States. Indeed,
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Samuel Adams somewhat exclusive relationship with the bars stationed at many
airports have helped to see that its distribution is nationwide but that its
recognition is worldwide. At present, Samuel Adams has not seriously entered
itself into the international market. Its trademark and scope are similarly geared
toward American buyers.
Rivals
Samuel Adams was the first well known brand of craft beer in America,
gaining its momentum in the early 80s and still today growing at a rapid pace.
However there are many rivals who are already competing in that space and
selling their products at similar costs. Counted among these rivals are the
hundreds of local, regional and national craft brewers who are looking for growth.
In addition the big brewers are producing “craft” beers of their own in an effort to
quell some of the growth from craft brewers and diversify their offering. Imports
from the likes of Corona and Heineken also pose as substantial competition, both
of which outsell Samuel Adams in the U.S. market.
For Samuel Adams, its greatest benefit is also its greatest challenge. As a
brewer which identifies itself as being somewhere between 25 to 50 times
smaller than Budweiser, and yet, which also has postured itself as a national
brand, it is a company which has straddled a line between craft-brewing and
mainstream brewing for the course of its existence. The result is that, within the
context where it defines itself as a craft-brewer—which is its primary choice of
image and approach—Samuel Adams faces the potential of intense segment
rivalry by craft-brewers whose small operations and product foci offer them
opportunities for a deeper mode of distribution. For example, as we will
elaborate upon in the Supplier section, “its distribution is wide, but not as deep as
other up-and-coming craft brands, such as New Belgium Fat Tire, Sierra Nevada
Pale Ale, and Yuengling Lager.” (Crouch, 1) Though many of these companies
do not yet have the national name recognition that is Sam Adams,’ many of these
may be able to parlay a more precise market concentration into an even more
affordable and desirable craft-product in a mainstream context.
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Buyers
The continued growth of Samuel Adams is dependent upon the taste
requirements and overall perception of beer by the alcohol buying public. There
is concern that due to tighter regulations against drunk driving and the overall
slow down in alcohol consumption per capita - Samuel Adams and other beer
companies are at risk. Should the government impose tighter regulations or
higher taxes on beer companies, Samuel Adams would be negatively affected.
In addition Samuel Adams must be concerned with the changing tastes of the
alcohol buying public. Substitutions (including non-alcoholic choices) remain a
significant threat.
Recent economic conditions—facing the industry as opposed to Samuel
Adams in particular—are illuminated in the capacity of Samuel Adams to expand
its brewing operations to facilitate its continued growth in size. However, its
growth is not the only factor which must be factored. Indeed, though at 1.2
million barrels of sold product for more than $200 million in sales in 2003,
Samuel Adams remains a dark-horse middler in an industry that has flattened
due to saturation on both the craft and mainstream ends. (Crouch, 1)
This is demonstrated in a recent economic decision made by Samuel
Adams, irrespective of its own economic success. With costs for steel and other
important resources skyrocketing, the company balked at purchasing and
building a new $200 million facility in Freetown's Campanelli Business Park, MA,
instead buying a facility in Latrobe, PA from the relocated Rolling Rock brewery.
(Ledoux, 1) The cost of $50 million for an existent facility would a more plausible
move given current economic realities, illustrating that its independent growth is
not without its relationship to the larger industry and economy, which both impact
its buying power.
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Appendix E Growth Related Strategies
Cost Leader
Approach
Broad
Differentiation
Approach
Budweiser
Coors
Miller
Market
Sam Adams
Narrow
Corona
Heineken
Microbrews
Price
Porter’s generic strategies
Samuel Adams (Boston Breweries) brews beer, malt and cider products.
Founded in 1984 by Jim Koch, the son of a 5th generation brewer, Samuel
Adams was one of the early entries into the craft beer industry. The premise was
that patrons would pay more for beer with more flavor and freshness than the
mass-produced American beers. Today Boston Breweries brews beer in Boston
and Cincinnati, and soon in Pennsylvania, is available nationwide and in 20
foreign countries. In 2006, while Samuel Adams revenues were a small fraction
of their mass-produced competitors’, growth was a healthy 17% over 2005, and
the “Better Beers” of which Samuel Adams is one, captured 18% of the beer
market.
Market based growth strategies
1. Niche - Niche was Samuel Adams first strategy. It is hard to get more
“niche” than the founder selling pub door to pub door. Today Boston
Brewery has a complete Sales and Distribution structure, but continues
the niche with products such as its $100 bottle “Utopias” beer, said to be
the most expensive and strongest beer in the world, redefining “beer”.
2. Offensive - The brewing industry is very mature and highly concentrated.
SAM, with its offering of 20 beers that compete in the super-premium
category, also sometimes called the “better beer” category. The better
beer category has experienced strong growth over the past 10 years.
Samuel Adams has diversified it products with various flavors derived from
seasonal beers, differing beer types including bocks, lagers and light
prices. It also has limited edition beers and brew master’s collections with
SAM-27-
varying price ranges. They have also diversifies with malt beverages and
cider under the “Twisted Tea and Hard-Core cider “brands. Competition
will continue to be strong in this market and SAM needs to continue to
focus on differentiating the Samuel Adams brand.
3. Branch Plan – There are at least a couple variations on how SAM can
continue to grow its share of the world’s beer market.
a. Acquire local craft breweries and apply SAM’s quality techniques
and marketing, while continuing to brew under the local name to
overcome resistance to the New England look and feel. Craft beers
tend to have local followings. Given the choice between, say, a
Colorado craft beer and one that looks like it was shipped from
Boston, a Coloradan will most likely choose the Colorado brand.
SAM entered Cincinnati by purchasing Hudepohl, but after a time
stopped using the venerable Ohio Valley brand name.
b. Capitalize on the Samuel Adams brand “tradition” and perceived
uniqueness to customers in geographic locations where prestige is
attached to items that appear to have “tradition.” Some Chinese
drink Jack Daniels because of the perceived prestige or exclusivity
of that flagship Tennessee whiskey. Perhaps affluent Koreans will
attach some prestige value to a foreign brand and switch from their
OB beer to Sam Adams Honey Porter®.
SAM-28-
Appendix F – Value Chain
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Appendix G Product / Market Matrix
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Appendix H BCG Matrix
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Appendix I GE 9 Cell Matrix
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Appendix J - Industry Analysis
How to define the Industry
The American brewery industry includes about 1,400 breweries with
combined annual revenue of about $18 billion. It is dominated by three
producers who command a nearly 80 percent market share -- Anheuser-Busch
(45%), Miller Brewing (25%), and Coors (10%). These three breweries account
for 90 percent of revenue, and the top 50 breweries account for 98 percent of the
revenue. Most breweries are small, with a single location and fewer than five
employees.
“The major driver of demand is consumer leisure activity. The profitability
of individual companies depends on marketing, distribution, and operational
efficiency. Large companies have advantages in marketing and sales, production
economies of scale, and influence with distributors. Small companies can
compete effectively by developing specialty products and serving a local or
regional market. Average annual revenue per worker is $625,000, but is typically
around $140,000 in small companies. Competition among beers is with national,
regional, and local brands, and imported brews. Competition also comes from
other alcoholic beverages, especially lower-priced wine, and from non-alcoholic
drinks” (First Research Industry Profile. 8/13/07).
312120 Breweries
This industry comprises establishments primarily engaged in brewing
beer, ale, malt liquors, and nonalcoholic beer.
2007
NAICS
2002
NAICS
1997
NAICS
312120
312120
312120
312120
312120
312120
312120
312120
312120
312120
312120
312120
312120
312120
312120
312120
312120
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312120
312120
312120
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312120
312120
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312120
312120
312120
312120
312120
312120
312120
Index Entries for this Industry
Ale brewing
Beer brewing
Beverages, beer, ale, and malt liquors, manufacturing
Breweries
Grain, brewers' spent, manufacturing
Lager brewing
Malt liquor brewing
Near beer brewing
Nonalcoholic beer brewing
Porter brewing
Stout brewing
Review the Industry History
SAM-33-
Archeological evidence indicates that beer is as old as civilization and may
predate the invention of bread (Modern Brewery Age, September – October 1983
and March 2001; Robertson 1984; Glover 2001, www.beerhistory.com.).
Scholars have traced the origins of brewing back more than 6,000 years and
have established that ancient Assyrians, Babylonians, Chinese, Egyptians,
Greeks, and Romans all made beer. In the ruins of a 5,500-year-old Syrian City
there was evidence of the world’s oldest brewery recently discovered(Modern
Brewery Age, March 26, 2001: 12). The building housed a bakery and a
brewery with ovens for charring grain and large vats for fermenting. Several
examples of ancient beer recipes indicate that these brews tasted quite different
than the beers of today.
The first recorded brewery in the American colonies was built in New
Amsterdam in 1612, but brewing as we know it today in the United States
emerged in the middle of the nineteenth century when German immigrants began
making German-style lager beer instead of English-styles ales, porters, and
stouts. The American consumer took to the lighter lagers.
Between the years of 1880 – 1919, some of the states and counties began
prohibiting the sale of alcoholic beverages. “In 1914 the US Congress passed
the Webb-Kenyon Act, which made it illegal to mail or ship alcoholic beverages
into any state that banned alcohol consumption. The Eighteenth Amendments to
the Constitution, effective in 1920, outlawed production, transportation, and sale
of alcoholic beverages in the United States. The Amendment put 1,568 firms out
of the beer-making business” (The U.S. Brewing Industry: Data and Economic
Analysis, Victor & Carol Tremblay, pg.1). Some brewers stayed in business by
making soft drinks, malt syrup and dairy products, others closed theirs doors for
good.
Although alcohol consumption was then illegal, it did not cease. People
violated the law by making beer, wine and distilled spirits at home or visiting the
local “speakeasies.” By 1933 concerns arose that Prohibition was ineffective,
encouraged crime, and that people in general disregarded the law. Prohibition
was ended in 1933 with the Twenty-First Amendment. Breweries that had
survived by pursuing other business activities quickly returned to brewing beer.
The number of brewers of lager grew to about 700 by 1938, but the
number has declined dramatically since then. Of the top ten brewers in 1947,
only two survive today: Anheuser-Busch and Pabst. Although Pabst is currently
the fourth-largest firm it is no longer a true brewer; all its beer is produced under
contract by Miller. These post–Prohibition brewers specialized in large–scale
production of lager beer. To distinguish Budweiser, Miller and Coors from import
and smaller domestic micro-brewers, they are now called “traditional”, “macro”, or
“mass-producing” brewers of “regular domestic beer”.
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While the mass producers were exiting the industry in the second half of
the twentieth century, several entrepreneurs began “crafting” beer on a smaller
scale. In contrast to the traditional brewers, the microbreweries returned to the
brewing practices of the past by making ales, porters, stouts and darker lagers.
The success of the smaller brewers has been dramatic. From 1979 to 2001, the
new market segment grew from two firms to more than 1,400. “Craft beer sales
rose 17.8 percent in 2006 compared to 2005, according to The Brewers
Association. Microbreweries were the fastest growing craft beer sector in 2006,
with sales rising 16 percent. Total craft beer sales have grown 31.5 percent since
2003, according to The Brewers Association, and early 2007 indicators point
toward accelerating sales growth” (First Research Industry Profile. 8/13/07).
Analyze Industry Forces
There have been considerable technological changes in the post-World
War II brewing industry, although most of the technological advances in brewing
originated outside the industry. For example, the industry has benefited from the
development of faster canning lines by the canning industry, more effective foam
and beer stabilizers by the chemical industry, and faster pumps and larger kettles
by the steel fabrication industry. The primary contributions from U.S. brewing are
the development of new products like malt liquor and light beer. With the wide
variety of beer brands and new products in brewing today, especially those by
the craft brewers, the one area where the industry appears to be highly creative
is in the new brand and product development.
“Consumer preferences evolve along with social trends and styles. Light
beers are now the biggest-selling brands (about 50 percent of sales); more
women are drinking beer; and craft beers are growing faster than the overall US
market. Consumers earning over $50,000 spend almost 50 percent more on beer
yearly than do lower earners, and contribute to the growth of the more costly
beer segments. Brewers address changing preferences by introducing brands,
often with trendy names and premium prices. Brewery production depends on
consumer demand, which reflects current tastes, social trends, and demographic
shifts. Domestic demand for US beer has been declining for a decade,
decreasing US brewery industry revenue 30 percent. Brewery production fell 10
percent over the same period and per capita consumption was flat. Growth in the
population of US males between 20 and 44, the heaviest consumers of beer, is
projected to be flat from 2000 to 2010” (First Research Industry Profile. 8/13/07).
Federal, state and local governments play an important role in the beer
industry. Brewers must comply with extensive laws and regulations relating to
state and regulatory approval and licensing requirements, trade and pricing
practices, permitted and required labeling, advertising and marketing practices
and relationships with distributors. “At present, the United States government
imposes an excise tax of US$18 per barrel of beer produced for domestic
consumption. A small brewers’ Excise Tax Credit in the amount of US$11 per
SAM-35-
barrel on the first 60,000 barrels produced per year is granted to brewers with
production under 2,000,000 barrels per year. ” (Tapping into the Beer Industry,
http://www.stumptown.com/articles/mgmtbeer. Amazingly, taxes account for 44
percent of the price of every retail beer purchased in the U.S.
“Federal, state, and local governments highly regulate the brewery
industry. Regulations apply to brewing, marketing, advertising, sales, distributor
relationships, transportation, and environmental protection. Breweries need
numerous licenses and permits from a variety of agencies, including the federal
Alcohol and Tobacco Tax and Trade Bureau, the USDA, the FDA, the EPA, the
IRS, and state regulatory agencies. Federal law sets the national legal drinking
age, currently 21. Breweries carry considerable levels of liability insurance to
cover litigation risks, and are subject to superfund environment remediation and
fines. States regulate alcohol content levels, distribution and retail sales, and
bottle and can recycling or return programs. Most states (license and “open”
states) allow the private sector to engage in wholesale and retail beer sales, but
some states (control states) allow only alcoholic beverage distribution and/or
retail sales through state-owned channels and stores. Some states tightly restrict
changing distributors, and some have “blue laws” that restrict or prohibit Sunday
alcoholic beverage sales” (First Research Industry Profile. 8/13/07).
Employment in the brewing industry has declined by 18 percent in the last
five–year period. Advanced technical skills are instrumental to the success of a
brewery. A segment of the staff typically has graduate degrees in subjects such
as biochemistry, food science, and quality control. Average pay at US breweries
is about 25 percent above the national average wage. Fringe benefits account for
almost 30 percent of total compensation.
Competitive Structure – Industry Continuum
“The post-WWII years saw immense consolidation in the beer industry.
The migration of the American population towards urban centers and the
consumer acceptance of metal cans contributed to the emergence of national
and super-regional brewers. Economies of scale in production, distribution,
marketing, and advertising provided these large players with the ammunition
needed to wrest control of the industry from the once dominant local brewers.
The result of this concentration is apparent in the oligopolistic market structure of
the beer industry today” (Tapping into the Beer Industry,
http://www.stumptown.com/articles/mgmtbeer).
The structure of the craft-brewed beer industry is defined as monopolistic
competition. However, oligopolistic competition may be evident in the near future
as several major players have come to dominate the national market. Boston
Beer Company, Samuel Adams, Pete's Brewing Company, and Redhook Ale
Brewery - have a significant influence on the national pricing structure of craft-
SAM-36-
brewed beers. As these players' market shares continue to grow, this oligopolistic
market structure will be enforced.
Several factors drive market demand and firm cost conditions in the U.S.
brewing industry:






Price of the beer
Price of substitutes (other alcoholic and non-alcoholic beverages
Consumers’ income
Demographics
Level of Consumer additions
Technological Change
Since the late 1970, there have been three main forces that have fostered
the domestic specialty and import segments of the beer markets.
1. Economic prosperity simulated demand for brands with social status and an
image of quality, including premium beers as well as the domestic specialty
and imported brands
2. The mass producers continue to consolidate; the domestic brands that remain
became lighter and more alike. At the same time consumers began to
demand greater variety which created a niche for domestic specialty beers.
3. Microbreweries benefited from changes in legislation, ex. the federal excise
tax on beer produced by microbreweries and brew pubs was lowered – today
the rate is 61% below the rate paid by mass producers.
The authors of “The U.S. Brewing Industry” drew the following conclusions
around advertising:

In Brewing, advertising causes firm demand to increase but has little or no
effect on market demand.

Most beer advertising is devoted to persuasion and image enhancement.
The important exception occurs when a firm introduces a new brand and
must inform consumers of the brand’s presence in the market and its
attributes.

A marginal increase in advertising generally leads to higher beer prices

Successful beer advertisement focus on humor, emphasize the quality
and lightness of the product and feature and animal or a healthy and
robust spokesperson.
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
Advertising intensities are likely to be lower for low-priced brands, for
products with fickle consumers and for brands are well established.
Thus, the general pattern is that new and premium brands receive
intensive advertising support, mature products receive moderate advertising
support, and generic or declining brands are advertised little.
High Quality
and Taste
Microbrews
Brewpubs
Perceived Quality
and Taste of Beer
Craft Brews
MolsonCoors
Import Beers
Better Beers
SABMiller
Anheuser Busch
Lower Segment Market
Low Quality
and Taste
Low
Price of Beer
High
Figure J1. Competitive Structure – Possible Dimensions for Strategic Group Maps
Better Beers
These import competitors may have substantially greater financial
resources, marketing strength, and distribution networks than the Company.
Large domestic brewers have developed or are developing niche brands within
the Better Beer category and have acquired interests in or are exploring
ownership or partnerships with small brewers to compete with craft brewers or
acquired interests in import brands to compete with imported beers.
Domestic Beers
There are three major players in this market: Molson-Coors, SAB-Mille,
and Anheuser-Busch.
Lower segment
Keystone and malt-liquor.
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Marketing Practices (Industry Marketing Norms)
Brewers appear to use a mixed strategy to market their premium brands.
These brands generally sell at a regular price but are discounted occasionally for
short periods of time (Beverage World, January 1977:18; Keithahn 1978). To
compete in this environment each company must set a premium and discount
price base on the expected behavior of it rival. Consumers of premium brands
tend to be more brand loyal than consumers of popular priced brands, so a
temporary price cut of a premium brand can attract customers away from popular
priced brands. In the brewing industry Anheuser-Busch pioneered the mixedpricing strategy offering temporary discount on it premium Budweiser brand
(Fortune, November 1992). The price cuts occur at random, making a rival
response difficult.
The brewing industry is organized into a three-tier distribution system;
mass-producing brewers sell their beer to wholesalers, who then sell to retailers.
In general, a brewer sets the wholesale price at the brewery but may vary price
by region of the country in response to differences in demand and levels of
competition. Depending on the state, breweries may own distributors and
distributors may own retailers, but most states prohibit breweries from owning
retailers. In 2002 U.S. brewers spent more than $1 billion on advertising, which
includes TV, radio, print, and billboard advertisements, and sponsorships of
sports and music events. Consumer Reports reported that the advertising and
management makes up 8.2% of the price cost breakdown.
“Beer makers are also one of the largest advertisers on TV. Brewers also
build their images through public service programs against drinking and driving.
Discount promotions and coupons are common when price competition at the
consumer level intensifies. Breweries use a sales force to recruit distributors,
maintain relationships, and provide marketing support. Breweries often grant
distributors exclusive distribution rights to specific products within a certain
market area, if the wholesaler won’t carry competing brands. Through
cooperative advertising, breweries share costs with distributors for regional or
local ads. Typical producer beer prices are between $100 and $200 per barrel.
The industry generally prices according to three main categories: above-premium
(also called “super-premium”); premium; and value (“budget”). Above-premium
beer accounts for about 5 percent of industry sales; premium, for about 20
percent. Companies typically have multiple brands and price points in their
product portfolios. Breweries often use sales promotions and discounts to attract
consumers, while keeping their regular or frontline prices constant” (First
Research Industry Profile. 8/13/07).
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Identify Industry-wide threats and opportunities
Opportunities

Niche Market Development - Brewers are beginning to develop specialty
beers for narrower consumer segments, such as for the allergic and
health-conscious. Among specialty niches recently introduced are wheatand gluten-free and organic beer. Energy beer may become a category,
according to the Beer Institute. Market potential is relatively small for any
one segment, but the opportunity exists for a brewery to dominate niches

Product Innovation - Innovation in products, packaging, and marketing are
important to attract today’s consumers, who are more willing to try new
products. Innovation broadens the appeal and “usage occasions” of beer.
Newer products have lime, tequila, vanilla, and fruit flavors. New
packaging includes mini-kegs and cooler packs. More upscale marketing
appeals to higher-income beer aficionados. Molson Coors has an
“innovation manager” and top craft brewer Boston Beer, owner of Samuel
Adams, brands itself as a leading innovator. Smaller breweries
differentiate themselves by developing and evolving products.

Bilingual Packaging - US brewers are beginning to use bilingual packaging
to appeal to large ethnic groups domestically. Spanish language
packaging helps brewers compete with popular Mexican imports.

Craft Brewers' Influence - The quality, variety, and success of products
from small, independent craft brewers have influenced larger brewers to
follow suit. Quality ingredients, unique flavorings, small runs, and clever
branding appeal to beer-savvy and higher-income consumers. Craft
breweries have developed local and regional followings, and some, like
the Samuel Adams brand, have reached national distribution. Larger
brewers have launched their own craft-like brands and some firms are
unpublicized backers of new craft breweries.

Seasonal, Holiday Brews - Popularity is growing for seasonal and holiday
brews. Seasonal products include summer ales and winter lagers; holiday
products include special Oktoberfest and Christmastime brews. Some
breweries create special brands for seasonal and holiday products and
introduce variations yearly.

Distribution Rights for Imports - US breweries are contracting for
distribution rights to bring international brands to the domestic market.
These distribution agreements enable US companies to benefit from the
growing popularity of imported beer. Brewers represent the imports, in
addition to their own core brands. Developing these distribution
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relationships makes partners out of would-be competitors, and broadens
the portfolios of US breweries.

Expansion into International Markets - The export market is currently
underserved, providing an opportunity for selling abroad. Exports account
for only 2 percent of US brewery revenue. China is the largest and fastestgrowing beer market, increasing about 6 to 7 percent yearly. Breweries of
various sizes are beginning to target the Chinese market, which has the
world’s largest population.
Threats

Competition from Wine - Beer manufacturers are taking a hit from the
winery industry, most notably new low-priced wines aimed at capturing
market share from breweries. Beer manufacturer revenue has declined, as
winemaker sales have increased. US brewery revenue dropped 3 percent
in a recent five-year period, while wine manufacturer revenue increased
50 percent. Total brewery industry revenue has been double that of
wineries, but the lead is narrowing.

Competition from Imports - Imports constitute a growing share of the
market for brewery products. US imports of malt and beer more than
doubled in a decade and grew over 30 percent in only five years. Imports
now account for 15 percent of the national market for malt and beer, up
from 8 percent a decade ago. Total US imports of malt beverages and
beer increased 5.5 percent in the first four months of 2007 compared to
one year prior.

Competition for Distributors - Competition for distributors can challenge
smaller and midsize breweries, due to the difficulty of getting and
maintaining accounts. The distributor channel is fragmented, making sales
coverage more difficult for small breweries. Of the approximately 1,000
beer distributors, the 50 largest ones represent only about a third of the
US beer market. Many distributors limit the number of brands they handle.
Large breweries often award exclusive geographical contracts to
distributors, monopolizing their sales efforts

Volatile Raw Material Costs - Producer prices for breweries major raw
materials can fluctuate greatly. Average annual barley costs can vary as
much as 20 percent a year, and corn, 45 percent. Monthly price changes
for barley can swing over 40 percent, and corn, 30 percent. Prices for
aluminum sheet and paperboard used in packaging also vary widely
monthly and yearly. Fuel dependency affects transportation, freight, and
other operating costs.
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Evaluate industry capital requirements
“The brewery industry is somewhat seasonal with sales peaks in second
and third quarters. The business is capital-intensive, with high fixed assets in
brewery machinery and equipment. Capital expenses equate to about 5 to 10
percent of industry revenue, but can account for 30 to 50 percent of a company’s
gross assets in a year of heavy investment. A typical large brewery has gross
profit margin approaching 40 percent, and minimal accounts receivable, because
payments are via electronic funds transfer according to prior agreement. In
contrast, a typical small brewery has gross profit margin of about 35 percent and
a collection period of 25 to 30 days. Inventory in a typical small brewery turns
about 14 times yearly. Net revenue per barrel is an industry financial metric and
varies yearly per company, depending on product mix and price promotions”
(First Research Industry Profile. 8/13/07).
Material costs equal about 40 percent of industry revenue. Costs for key
raw materials, like barley and corn, can fluctuate significantly. Breweries engage
in long-term contracts for crops and materials that are subject to price volatility,
like aluminum can sheet for cans and lids. Breweries are large users of
electricity. In times of rising fuel costs, breweries may pass a portion of fuel
surcharges to customers. Breweries engage in hedging activities to help manage
currency, commodity, and interest rate risk.