Industry Trends and Cost Management Issues: Micro-brewing
and Beer
Daniel
J. Stone
Managerial Economics
Ohio
Dominican University
August 15th, 2013
Industry Trends
Demand Factors
Customers and key market segments. Micro beers, considered a normal good,
have a growing preference and taste among those that consume beer (Keat, Paul G. and Philip L.Y. Young). This
statement is supported due to globalization and the varying degree of people's
incomes. While it is debated that
globalization is good or bad for mankind, one thing that globalization has done
is make it less restrictive in giving
and sending of information (Street, M and Street, V., 2010).
As such, mankind has become
better informed over the years and as a result, it is projected that the micro beer sector will remain dynamic providing
that there is economic prosperity coupled with competition from beers from
abroad, other micro breweries and super premium brands of macro breweries such
as Michelob. (Iwasaki,
N.; Tremblay, C.H.; and
Tremblay, V. J., 2005).
Since
a micro beer, also known as a craft beer, is a normal product, substitutes are
produced in mass are known as macro beers and are considered an inferior
product. Whether a beer is normal or
inferior is contingent on the price.
Those at the lower economic income area prefer macro beers because this
is all that can be afforded. Therefore,
from a product development
standpoint, normal and inferior beers are substituted based on the cost (Iwasaki,
N.; Tremblay, C.H.; and
Tremblay, V. J., 2005).
The
customers of micro beers comprise of what is known as the convenience
store class-of-trade, aka "c-store
channel" who are advocates for natural food grocers that sell micro beers. For example, characteristics of micro beer
customers are those that prefer quality and variety. Suppliers of micro beers tend to be proactive
with these customers by creating cross-merchandising promos with gift cards,
fuel cards, phone cards, and food tie-ins.
Themes such as summertime, St. Patrick's Day, sporting events and ethic
holidays such as Cinco de Mayo are offered at the point-of-sale, (Covino,
R.
M., 2009). The key market segments of the micro beer
industry are Microbrewery, Brewpub, and Contract Brewing Companies, and Regional Craft Breweries. Some of
these examples are Elevator Brewery in Columbus, OH (Microbrewery), Columbus
Brewing Company Restaurant in Columbus, OH
(Brewpub), Japanese beer,
Kirin being made exclusively for the North American market by the Anheuser-Busch brewery
in Los Angeles (Contract Brewing Companies), and Great
Lakes Brewing Company (Regional
Craft Breweries), (Brewers
Association, 2013).
Pricing issues. Demand factors for the craft brewing at
home or for commercial distribution have pricing issues due to the
provision for excise taxes, higher package material and ingredient costs and
the potential costs that come from a temporary shutdown of a brewery's
system (The Boston Beer Company, Inc., 2013). Also, in
many cases, craft-brewed beer is priced in a way that only the more affluent
consumers can afford on a regular basis.
While on the one hand, the price is set because of the status that comes
with micro beers, but on the other hand, prices are set due to having an
equilibrium price high enough to cover production on the small scale that
microbreweries tend to operate. (Iwasaki,
N.; Tremblay, C.H.; and
Tremblay, V. J., 2005).
Supply Factors
Suppliers
and vital supply components. The
suppliers of micro beers have challenges due to the growth of the craft brewing
industry in 2012 of 15% volume and 17% dollars whereas in 2011 it was 13%
volume and 15% dollars. To continually
improve and evolve to meet the demand, Brewers Supply Group (BSG) has expanded
to serve breweries, wineries, distilleries, and homebrew stores instead of only
brewers when BSG was first formed (Morgan, J. 2013). While there were 43 microbreweries and brewpubs
that closed in 2012, there were 409 sites that opened in the same year (Brewers
Association, 2013).
Vital supply components for micro beers
comprise of water, malt, hops, yeast and various adjuncts such as grains, sugars,
spices, and processing aids. The
capability of these vital supply components being continued with minimal
long-term effects on the environment relies upon brewers keeping supply levels
that are in sync with demand by looking at their needs and making those needs
known in the form of supply agreements will ensure that supplies that are very
specific to brewing are maintained. This
is because these supplies are in competition with non-brewing crops which are
increasing (Morgan, J. 2013).
Pricing
issues. Supply factors for the craft
brewing at home or for commercial distribution have pricing issues due to
pressure from distribution costs and grain prices, partially offset by brewery
productivity and positive product mix and average price increases of
approximately 1% to 2%. (Craft Brew Alliance, 2012). On the one hand, the new microbreweries and
pub breweries are competing in the specialty and imported beer market and are
able to command a premium price for their products whereas on the other hand,
income elasticity and price elasticity at the local area are factors as well (Coulter, M., (1987).
Cost Management Issues
Input Costs
Input
costs in the microbrewery industry comprise of the rising input costs of barley
and hops (Sekar, S., 2009). The
brewing process is energy intensive and uses large volumes of water. Also, in the brewhouse, the place where micro
beers are processed by mashing and wort boiling from heat, the commodity of
fuel oil is considered prized input. The
price of this commodity was pushed to higher levels. As of 2012, there were no signs that the cost
of using fuel oil will decrease any time soon (Olajire, A. 2012). This is being countered with the use of
electricity for use of the production process.
While natural gas and coal make up 60% of the total energy used at
brewhouses, electricity and the investment in the infrastructure to support
electric use in yet another input costs (Mignon, D and J. Hermia. 1995).
Key
factors in operating costs such as wastewater treatment plants at
microbreweries are another input cost that maximizes efficiency (Olajire, A.
2012). Many brewers are searching for
ways to cut down on the water usage due to disposal of this being costly
(Simate, 2011). Unfortunately, the
lowest cost inputs tend to equate to slow and inefficient systems. For example, in the production process, the
mash that floats on top of the wort of the mashing vessel traditionally is
slowest separation process, but is the lowest cost in terms of capital outlay
(Galitsky, 2003). Followed, is the
separation process; then comes the filtration process. The sludge disposal that comes from the
filtration process is the main cost with varying costs (Isaacs, N. 2001).
Nearly
every area of the microbrewery industry has been affected by rising input
prices. Pricing issues in the
microbrewery industry consist of wheat, corn price increases, the influx of oil
prices coupled by instability in the weather with droughts, floods and the
emergence of the Chinese economy. Costs
in the microbrewery industry have soared by more than 100% since June
2010. As a result, production and
transportation costs have been driven up (Thornton, G. 2011). Another set of pricing issues come to
investing. Potential investors need to
be cognizant of production levels and any alliances with distributors as well
as the price per barrel (Davila, F. and Perez, E. 1995).
Pricing and
Profitability Issues
Overall,
the beer industry is in a decline in terms of profitability. However, the microbrewery is becoming
stronger. With the continuation of
consumer education, it is projected that microbreweries will have stronger
growth when compared to macro breweries (Lapoint, 2012). The microbrewery market will have an added
strain on the market due to twice as many craft breweries opening this year
than the previous year. Profit issues in
the microbrewery industry consist of distribution, for example. However, nontraditional routes are needed for
microbreweries to remain profitable. To
offset the distribution issue, alliances and acquisitions are aligned and
carried out. For example, microbreweries
have allowed for macro breweries to become a minor shareholder of the business
and in return, distribute product in the most efficient way. By doing this, microbreweries avoid paying a
high margin to an independent and protect the microbrewery in bargaining with
their suppliers (Lapoint, 2012). Craft
Brew Alliance, an organizations comprising of the brands of Redhook Brewery,
Widmer Brothers Brewing, Kona Brewing Company, and Omission Beer have a
distribution agreement with Anheuser-allowing for the product line to be sold
in 48 states as of March 31st, 2008. (Reimer,
M. ,2010).
The
Boston Beer Company, maker of Sam Adams, has been the pioneer of microbreweries
in the US in terms of growth. A
microbrewery that grew beyond this status, The Boston Beer Company has set the
benchmark for more microbreweries in terms of creating ways for craft brewers
to turn a profit (Boston Beer Company, The. (2013).
Management issues. Management issues in the microbrewery
industry mainly come from mismanagement of growth. Examples of this are shortages in
inventory. While some consider this as a
good problem to have, but if product is out, this means that it can't be
sold. Missing out on a potential sale is
not only detrimental on the bottom line, but it is also sets precedence that
your brewery will have the reputation of not being able to deliver, especially
with distributors, vendors and the end customer (Orchestra, 2012).
Another
example of management issues in the microbrewery industry is not maintaining
consistency. As a consumer, having
expectations met when it comes to a supplier's product line is paramount. Consumers tend to be loyal to a supplier's product
line if their expectations are being met (Orchestra, 2012).
Next,
mismanagement of cash flow is another management issue. Ensuring that accounts receivable and
accounts payable are kept at manageable levels while meeting demand and
managing growth are all balanced is essential (Orchestra, 2012).
Social and ethical issues. Social issues in the beer industry come
from health, religion, and tax issues.
For example, on the one hand, long term beer consumption has links to
cancer, heart disease, and diabetes.
Also, religions such as Islam forbid the consumption of alcohol. Then on the other hand, in some countries,
alcoholic products are heavily taxed (Bjornstad, J., 2011).
Ethical
issues in the microbrewery industry come from how a supplier can improve their
sustainability. First, consumers are
keen on transparency and accountability.
As a result, a consumer is more likely to support a company that
reflects this value (Orgolini, J., 2011).
Also, water and energy use are a big part of a microbrewery's
operation and the ability to maximize efficiency is good ethics that determine
if a brewery can sustain itself (Orgolini, J., 2011).
Climate change has caused periods where
there are droughts and floods have made the phrase "xeriscaping"
prevalent. This is where landscaping
and gardening in ways that reduce or eliminate the need for supplemental water
from irrigation. In periods where there
is a drought, rice farmers are unable to produce crops due to water
conservation efforts. As a result,
ingredients for micro-brews are used at a premium (Alexander, R.,
2012).
Competitive Market Environment
Microbreweries in imperfect
competition. The microbrewery
industry operates in a monopolistic competition
environment. When home breweries are
included, there are a large number of suppliers acting independently, market
entry and exit is not difficult, services are differentiated by being suppliers,
eateries, and drinking establishments.
While customers chose among products, nonprice competition was essential
as well. For example, the beer industry revolutionized
the advertising game with the use of popular professional athletes in the
1970s. (National Beer Wholesalers
Association, 2011).
Since
a monopolistic competition environment has the characteristic of earning above
normal profits which invites new entrants to the market, it appears that the
microbrewery industry will continue with new entrants entering the market. Furthermore, since new entrants will cause
the microbrewery demand curve to shift down and to the left and the microbrewery
supply curve to shift out and to the right, the prices will still remain competitive. (National Beer Wholesalers
Association, 2011).
References
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http://daniel-j-stone.blogspot.com
(C) 2009-13
, faculty and staff at The Ohio State University at Marion will have to find someplace else to smoke, chew and spit come January.
