Sample Economics Case Study on Oligopoly in the beer industry

An oligopoly is a market structure in which a few but large sellers dominate the market. Owing to their favorable position, these sellers can greatly influence the price of a product among other market forces. For instance, the US beer industry is dominated by Anheuser Busch and MillerCoors. These two account for close to 80% of the total beer sales. In many instances, large businesses will strive to maintain their dominance

Advantages of larger brewers over small competitors

Large brewers have enough capital to invest in an extensive and nationwide supply chain. In the United States, this has meant that most beer distributors now align themselves to one of the two brewers. For example, one can be a blue distributor (for MillerCoors brands) or a red distributor (for Anheuser Busch brands). Consequently, these distributors will favor brands from these two companies. Since they can afford large expenses, large brewers use large trucks or trains to transport their products to local markets. This ensures that they can compete in every market. Small competitors that have to be wary of expenses cannot afford such an extensive distribution channel (Guo 2006).

Another advantage of large brewers is that they can afford the latest technology, thereby increasing their efficiencies even as they cut on production costs. For example, their acquisition of modern canning and bottling technology has enabled them to fill around 2000 cans per line every minute. In essence, they produce many beers in a single day. This makes sure that their products will never run out in any given market. Their use of automated procedures has also saved labor costs associated with brewing and warehousing. Other technological factors have also acted in their favor. For instance, the cost of constructing a 4.5 million barrel plant is one-third less than the cost of constructing a 1.5 million barrel plant. This means that small beer companies incur more costs when constructing their significantly smaller plants. This is a key impediment to their expansion efforts.

Unlike small competitors, large brewers can advertise nationally. This has two key advantages. First, advertising nationally means that their beer brands are recognizable throughout the country, including localized markets. Second, advertising nationally is cheaper. This saves on costs. By virtue of their position, large brewers can partner with sponsors of events such as sporting competitions, music concerts, and other public events. Furthermore, they usually have advertising contracts with sports venues. This implies that they can establish beer taps and other related placements all over these venues. A person looking for a brand from a smaller competitor will spend a considerable amount looking for it. In some cases, these smaller brands may be prohibited in such events or venues. The ease with which beer brands of large brewers can be found at such events gives them a massive advantage over smaller brands.

The Australian beer market

The Australian beer market is largely dominated by two companies: SABMiller and Lion Nathan. Thus, this market is an oligopoly just like the US beer market. SABMiller’s market share is estimated to be 48% while Lion Nathan’s share is about 41%. This implies that, together, these two companies control 89% of Australia’s beer market. After these two, the next biggest company is Coopers. However, this accounts for only 3.6% of the total market share. SABMiller and Lion Nathan are foreign-owned, an indication that Australia’s own beer production is just a minor fraction of national consumption. The dominance of these two was rubberstamped in 2011 when the Australian Competition and Consumer Commission allowed SABMiller to acquire Foster’s, a company that was threatening to take away a portion of the market from the big two. Its actions neutralized the competition (Richardson 2012).

Comparing the US and Australian beer market

From the case study, it is clear that the two dominant beer companies in the US are Anheuser Busch and MillerCoors, with these two accounting for 76% of the total beer market share. Similarly, the Australian beer market is oligopolistic with the dominant companies being SABMiller and Lion Nathan. Thus, in many senses, the case study reflects the situation in Australia.

One clear comparison between the two markets is the ownership of the four companies. Anheuser Busch is fully owned by Belgium beer firm InBev. This means that even though it dominates the US, it is actually foreign-owned. On its part, MillerCoors is a joint venture by Molson Coors (itself a joint venture between Molson of Canada and Coors of the US) and SABMiller (headquartered in the UK). This means that by and large, these two companies are foreign-owned. As for the Australian companies, the Japanese firm Kirin Holdings owns Lion Nathan while SABMiller is fully owned by its parent company (Hasegawa 2010). This also implies that SABMiller dominates the beer markets in both the US and Australia despite the fact that it is based in the United Kingdom. In terms of revenues, InBev and SABMiller are the two biggest beer companies in the world.

Another comparable feature between these two markets is the way the dominant companies achieved their leading positions. In both countries, SABMiller bought off a third competitor, thereby neutralizing competition. In 2007, the three leading beer firms in the US were Anheuser Busch, SABMiller, and Molson Coors. However, SABMiller bought the US operations of Molson Coors, thereby forming MillerCoors later that year. This move reduced competition significantly. This ensured that only two big firms remained to compete in the market. Similarly, before 2011, Foster’s, Lion Nathan, and SABMiller were dominating the Australian beer market. In fact, before its purchase, Foster’s was the producer of Australia’s number one beer Victoria Bitter. In 2008, this beer had a market share of 22% (Smith 2011). Just like it had done in the US in 2007, SABMiller purchased Foster’s in 2011. This move also watered down the competition and ensured that only it and Lion Nathan control the market.

Before SABMiller took over Foster’s, it used to run a joint venture called Pacific Beverages with Coca-Cola Amatil. This allowed it to distribute many of its beer brands throughout Australia. Before the takeover, Pacific Beverages had 2% of the market share. The two companies had also discussed plans of building another brewery. If this had gone ahead, Pacific Beverages would have posed a major threat to the dominance of SABMiller, Foster’s, and Lion Nathan. To prevent this threat, SABMiller decided to cancel the venture with Coca-Cola Amatil (Christopher 2012). As a result, it was able to cancel out all competition apart from Lion Nathan.

Large brewers always use their position to control beer distribution channels to make certain that their products are available in local markets. Just like in the United States, the two dominant firms in Australia dominate the distribution channels. In addition, they compete in distributing popular foreign-produced beers. For example, Lion Nathan is the official distributor of Stella Artois in the country. Stella, a Belgian production, is the fourth most popular imported premium beer in Australia. Lion Nathan also distributes Budweiser and Becks. Similarly, SABMiller has been the long-running distributor of Corona, Mexican beer production, and is the most popular imported premium beer in Australia. Its market share in that category is 34% (Ramirez 2011). The dominance of the distribution channel has meant that these two boast the ten highest selling beer brands in the country.

Impact of factors on Australian beer market competition

Geography and Size

Australia is the largest sixth-largest country in the world. For its size, its corresponding population of around 21 million is low. However, this has vital implications for the beer industry. Due to its large size, Australia has a number of islands (seven) and territories (ten) in addition to the mainland. The mainland has been divided into six states (Banting 2003). The dominance of the two companies has meant that most brewers produce craft beer brands that will compete with other regional brands. Each state, island, and territory boasts its own local beer. Thus, the main objective of many beer manufacturers is to compete regionally.

Inter-industry competition

Unlike the beer industry, there is a lot of competition in the wine and spirits industries. For instance, the biggest five wine companies control only 43% of the wine market. In addition, the major spirits manufacturers control 82% of the market (Richardson 2012). These statistics show that the wines and spirits are markets are more feasible than the beer market. This suggests that many alcohol companies would rather venture into the wines and spirits business than the beer business.

Technological advances

The big beer companies have ease of access to the latest manufacturing technologies, especially considering that their parent companies are based in technologically advanced countries. Moreover, their huge revenues mean that they can obtain the latest technological advances. This means that while these companies can benefit from the manufacturing and distribution efficiencies that come with the latest technologies, other smaller companies cannot due to cost constraints. Consequently, technological advances have only enhanced the dominant positions of SABMiller and Lion Nathan.

Contestability of the market

In this country, the contest is between Lion Nathan and SABMiller. At present, the third biggest beer company in Australia has a market share of only 3.6%. Other companies have to compete for the remaining 6.4%. These figures indicate that the Australian market is largely oligopolistic and uncontestable to many companies. The smaller companies have been forced to contest in the craft beer segment. These brewers contest with other regional brewers. Nationally, however, the real contest is between the big two, who boast the top ten highest selling beer brands. The situation would have been different had the Australian Competition and Consumer Commission opted not to allow the purchase of Foster’s by SABMiller.

International trade

This has probably been the most dominant factor that has shaped the competitive nature of Australia’s beer industry. Presently, international companies control the market such that the biggest local manufacturer has a 3.6% share. Meanwhile, foreign beers such as Corona, Stella Artois, and Budweiser are popular among the public. Australia opening up itself for international trade and foreign direct investment has played a major role in defining the competitive nature of the beer industry. In the past, local companies have been competing to distribute popular foreign beers. The foreign dominance has limited the popularity of local beers.

References

Banting, E. (2003). Australia. New York, Crabtree.

Christopher, E. (2012). International management: explorations across cultures. London, Kogan Page.

Guo, Y. 2006. Global Big Business and the Chinese Brewing Industry. London, Routledge.

Hasegawa, Y. 2010. Rediscovering Japanese business leadership 15 Japanese managers and the companies they’re leading to new growth. Hoboken, N.J., Wiley.

Ramirez, D. 2011. Brew masters battle for Australian beer market. Retrieved 8 March 2014 from http://bizmology.hoovers.com/2011/12/20/brew-masters-battle-for-australian-beer-market/

Richardson, D. 2012. ‘The liquor industry’. Technical Brief, no. 14, pp. 1-30.

Smith, H. 2010. Melbourne, Victoria & Tasmania. Madison, Hunter Publishing Inc.