SYWTOABP: Industry Research
The So You Want to Open a Brew Pub series of blog postings is in the final stretch. I realize I’ve done several posts on market research, but not a dedicated post on industry research. What’s the difference you ask? Well, I got asked that once and, basically, market research is investigating the people (businesses) who potentially would buy your product or service. Industry research is everything else: competitors, government regulations, suppliers, etc.
A loyal reader would note we have covered government regulations and suppliers pretty thoroughly, and touched on direct competitors and less direct competition for people’s disposable income. What part of industry research have we neglected? For starters, what industry is a brew pub in? If you answered brewing, you haven’t been paying close enough attention. A brew pub is officially classified as part of the restaurant and food services industry. That is the industry most of my research and writing has focused on. However, some of the brew pubs in the province have had considerable success selling beer outside of their pub in kegs, bottles, and even cans.
The recent BC Business article on the craft brewing industry noted the success of Central City. They started making their beer available for purchase offsite. Now demand exceeds capacity, which isn’t a bad problem to have. Their rapid success isn’t unique. Several other BC craft brewers are noted as experiencing very healthy sales growth in the last few years. However, I have to caution anyone thinking of opening a brew pub that thinks Central City’s growth is the norm for new businesses in either food services or brewing. As Central City expands, less of their total revenue will come from retail sales at the brew pub and more will come from packaged product. Selling bottles, kegs, and cans for consumption elsewhere is what the brewing industry is all about.
So before we take a closer look at the brewing industry from a business strategy/business planning point of view, a couple of points to reiterate to anyone seriously thinking of opening a brew pub. If you just care about brewing beer, consider opening a small craft brewery instead. Brewmasters turned entrepreneurs, in particular, may enjoy and succeed more readily with a business focused exclusively on brewing beer. This was a point Claire Connolly made when I interviewed her. A brew pub is a service business. Customer service and managing people who serve the public is a big part of achieving success. Location is also key to a brew pub’s success. A brewery can be located further from consumers on less expensive real estate. Brew pubs also have to abide by more regulations, especially around serving food and cleanliness.
If my continuing efforts to scare people away from opening brew pubs has once again failed, read on for a quick high level look at the brewing industry.
Most people, when they think industry research, think of statistics, sales figures, market share, growth rate, but there is a lot more to research than numbers. I’ve already provided links to the major industry organizations and government agencies to consult, but here they are again:
- Stats Canada
- Agriculture and Agri-foods Canadian Brewing Industry overview
- Brewers.ca (Brewer’s Association of Canada)
- The Brewer’s Association of Canada also operates brewstats.ca
Breweries are classified by Industry Canada as industry code NAICS 31212. You can use that code to access a variety of industry research from specialty systems available to business schools (and their libraries), as well as others who do a lot of industry research. Most beer fans neither know, nor care, what the industry code is for brewers.
One of the first things you do when analyzing an industry is define it and determine the nature of competition in the industry. NAICS 31212 is something you have to look up in Google. We need a definition of the brewing industry we can work with, something like “every business in Canada that sells beer in either bottles, kegs, or cans to end consumers either directly or through a distributor.” Replacing ‘Canada’ with ‘BC’ shouldn’t change the industry structure, but would remove several competitors and eliminate some regulations around distribution. I left capacity out of the definition so brewpubs can be included in this discussion, even though most don’t produce enough volume to register individually when looking at national beer sales.
In economics, you measure industry competitiveness using a concentration ratio or the even harder to spell Herfindahl index. I don’t need a calculator to tell me most industry revenue is concentrated amongst a few giant firms. Over 95% of beer sales in Canada is produced by the three largest firms, according to the Agriculture Canada industry report linked to above. This means the Canadian brewing industry is an oligopoly, though someday in some segments it may become monopolistic competitive.
What do you know! If you do enough Googling, you can find a thorough, exhaustive industry analysis of the American craft beer industry. Note, the authors of this study defined their industry both geographically and by production/capacity. Thanks to S. Berghoff, C. Hackett, L. Hun, P. Liebwald, and J. Reddinger for producing Tapping into the Craft-Beer Industry and whoever made it freely available on Google.
The industry report linked to above is much too long for most people to write or even read. Business schools and consultants have invented ways to distill key information into a single diagram or a brief summary. Some of the more famous and commonly-taught methods are SWOT, PEST, Porter’s 5 Forces, and whatever the Boston Consulting group calls their matrix system. SWOT is used to analyze a firm, not an industry. PEST is better for industry analysis; it deals with risk identification. Porter’s 5 Forces analysis is relevant to opening a new business, such as a brew pub. It also is used to identify risks. I guess I’ll produce those two to complete our industry analysis.
- The manufacture and sale of alcohol is heavily regulated in Canada. Changes in regulations can impact businesses negatively. A return to prohibition is unlikely, but a change in who is eligible to purchase beer, and where and how it can be sold, has happened in my lifetime. It may happen again. That said, one advantage to an oligopoly and having large foreign-owned market participants is they are going to lobby hard to maintain favourable (to them) market conditions and resist changes that make the Canadian beer market less desirable. Given beer’s close association with hockey and, thus, Canadian identity, there is little political risk in legally brewing beer and selling it under existing Canadian laws.
- Beer consumption per capita is decreasing, but there is an expanding market for premium and/or craft beers. Worldwide economic conditions have yet to recover, but historically, alcohol sales have held up well during economic downtimes. Most major economic indicators are currently unfavourable, but interest rates are low, which is important in a capital-intensive manufacturing process, such as brewing.
- The existence of large, entrenched competitors with dominant market share, huge brand awareness and significant economies of scale, combined with the relatively high capital costs for brewing equipment, are the biggest impediments to new market entrants beyond barriers to entry erected by the government.
- Just as liquor sales are unlikely to be forbidden, a populist temperance movement is unlikely in Canada in 2011. Alcohol consumption by minors should indicate that a temperance movement is also unlikely in the future. That said, there are dry communities in Canada’s North. However, it is unlikely a major metropolitan area in tolerant and multicultural Canada will ever voluntarily go permanently dry. We can even drink on election day now!
- Coolness: beer is seen as old fashioned among the youngest consumers, especially certain Molson and Labatt manufactured product. Faced with premixed vodka and Red Bull drinks and numerous other new products on the market, an increase in consumer choice has contributed to a decrease in per-capita beer consumption since its peak in 1981. Immigration trends from East and Southeast Asia, as well as Muslim countries, have also hurt beer consumption on a per-capita basis, but Canada’s pro-immigration policy has increased total potential market size considerably since 1981, making it a moderate risk for the industry as a whole. Certain long-established brands, like Carling Black Label, are seeing their fan base get old and disappear. Changing consumer trends are a constant but low risk in the brewing industry.
- A decrease in per person beer consumption is also somewhat offset by a higher willingness to pay for premium branded beers. There is also a healthy market for cheap strong beer. A decrease in total volume sales has not unduly hurt revenue at well-run Canadian breweries, both large and small.
- Increased consumption of foreign beer is another consumer trend which provides a moderate level of risk to companies in the Canadian brewing industry. Foreign beer is marketed either as exotic and fun in the case of Mexican and South American beers or having a longstanding tradition of quality in the case of most European beers. Asian beers rely partially on brand familiarity among immigrants, but also on close association with cuisine, such as Japanese beers and sushi. Most major American beer brands are brewed under license in Canada, making them not foreign in the eyes of Industry Canada.
- Brewing is an ancient process. Improved systems for heating, cooling, and moving liquid occasionally arrive on the market, but the mixing and fermentation process is time constrained. New strains of yeast and even barley get created or discovered, but there is little risk that brewing equipment purchased today will go obsolete before it wears out.
- R&D in the brewing industry is allocated to producing new flavors such as Bud Lime, as well as increasing shelf life. Premixed cooler drinks and hard sodas are a substitute for bottled beer, but beer will never go obsolete. There is little technological risk in opening a brewery assuming you source your equipment wisely and hire an experienced brewmaster.
Here is a PDF of Porter’s Five Forces for the Canadian Brewing Industry as defined above, based on research conducted prior to September 14, 2011.
I’m winding up the series soon. So if there is anything you want covered in more depth or touched upon that hasn’t been addressed, leave a comment and we’ll see if I can find the answers you seek.