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Transcript

Distribution Channels

  • Limited access to distribution networks is increasingly becoming a barrier to entry
  • This is in direct correlation due to its three tier distribution system
  • producer to wholesale distributor to retailer
  • The wholesale beer market is higly concentrated with most markets only having three or four beer wholesalers
  • The number of independent wholesale distributors that handle craft brands are slowly being reduced due to extreme growth in the industry
  • The difficulty is increased for new entrants as these distributors generally require that a reasonable variety of products be provided before they are willing to distribute the product.
  • Current market participants have an advantage over new entrants and is increasingly more significant as either the number of new entrants increases or the amoount of demand tapers and shelf space becomes sparse

Craft Beer: Normal good

Change of taste

  • Entry barriers in the craft brewed beer industry are low
  • Evidnece of this is the recent imbalance between high enterance rates and low exit rates
  • The market continues to grow exponentially as few people fail in the craft brewed beer market
  • The factor that may ex[plain this imbalance is the considerable growth in demand in the craft brewed beer industry that has kept exit rates lower than projected

Market research spanning several industries indicates that once a consumer switches to a more flavorful product, she rarely switches back to the original product, banning drastic changes in price or availability.

The market for craft beer has developed as a result of an increasing desire on the part of some consumers to obtain full flavored, high quality beer. These consumers are taste and quality sensitive.

Physical Resources

Craft beer's emergence and rapid growth is due to a specific consumer demand and not simply a subsitute for other beers

  • The physical resources that are needed to be successful in the craft brewing industry are easily obtained
  • Basic brewing equipment can be purchased for roughly $25,000
  • Inputs are commoditites - hops, barley, and water
  • Few issues pertaining to rights to certain products or processes,, such as patents that need to be overcome by the entrants
  • Economies of scale and scope influence the overall beer industry, but they are not a considerable entry barrier in the craft brewed beer market
  • Technological advances in brewing equipment have reduced the costs of brewing smaller batches by creating economies of scale at lower levels of production
  • If the entrant decieds to exit the market, there is a large use for used brewing equipment, so the costs that were invested are not lost

Taste's affect on craft beer

Substitute

Taste brought craft-brewing to what it is today

A rapidly growing market

  • The biggest difference between craft and domestic beer is taste.

  • Craft brews usually use more ingredients than mass produced beer and therefore has much more flavor.

  • Most craft brews tend to also have higher alcohol content

The major brewers stopped producing fuller-flavored beers because they do not fit into this mass production model. This left many consumers seeking a fuller-flavored taste.

Note: Craft beer is a normal good

Entry Into the Craft Beer Market

Substitute

Substitutes

  • The craft-brewed beer industry has a lack of substantial entry barriers which is a key characteristic to the industry

Substitutes to craft-beer are products that affect the craft-beer industry cross-price elasticity of demand because they possess a similar product

  • Other products such as regular beer, wine and spirits are less close substitutes.

  • However there is little doubt that consumers would substitute these products for craft-beer if craft-beer prices increased
  • The market for craft beer has developed as a result of an increasing desire of consumers to obtain full flavored, high quality beer.

  • Craft-brewers believe that at the top end of the market, product quality is a key success factor.

  • Craft-brewers believe that they have a quality advantage over imported beers, as a result of the freshness they can achieve in the craft-beer product.
  • Domestic Beer
  • Imported Beer
  • Speciality Beer
  • Wine / Spirits
  • Ample capital is available so brand new breweries start operations with state of the art equipment and professional brewers

Overview

  • Evidence of the ease of entry into the craft beer market is shown by a steady gowth rate over the past few years

The craft-brewed beer industry has enjoyed a comeback in recent years and now is among the fastest growing domestic beverage segments despite national trends of diminishing alcoholic consumption. The aim of this presentation is to analyze the craft beer industry and its economic underpinnings in terms of the supply and demand graph to explore the reasons for its recent success.

  • Factors that facilitate entry are availability of basic physical resources and insignificanct economies of scale and slope.

Excise Tax

  • Access to distribution channels is becoming a barrier to entry

Government Regulations/Taxes

The relaxation of excise tax has been an important factor to the growth and establishment of the craft beer industry-an industry prospected to continue to grow another 30%-40% in the next 5-10 years.

Currently, the US imposes an excise tax of $18 per barrel of beer produced domestically(brewers who produce over 2,000,000 barrels/yr); whereas, craft brewers are taxed only $11 per barrel of beer (<60,000 barrels/yr).

This difference in excise tax between domestic brewers and craft brewers significantly favors craft brewers and significantly effects the profitability of the industry.

The role of federal, state, and local government is important in determining the market structure of the industry.

Craft brewers must comply to the following government regulations and laws:

-trade and pricing practices

-permitted and required labeling

-advertising and marketing practices

-relationships with distributors

-EXCISE TAX

Determinants of

Supply and Demand

Demand: Income, Tastes, Prices of related

goods and services, Expectations, Number of

buyers

Supply: Prices of resources, Technology and

productivity, Expectations of suppliers,

number of suppliers, Prices of related goods

and services

BEERONOMICS

Taylor Koblenz, Sam Hughes, Matt Lewis, Adam Dykstra, Terry Hudson

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