Australian Beer Market - Case Study Example

ECONOMICS FOR BUSINESS Name: Course: Tutor: Institution: Date: Table of Contents 1. Executive Summary ................................................................................................3 2. Introduction ................................................................................................4 3. Main Issue ................................................................................................4 4. Main Stakeholders .................................................................................................5 5. Economic Theories .................................................................................................7 6. Conclusion .................................................................................................9 7. Bibliography .................................................................................................10 Executive Summary The main issue in the Australian beer market is the changing consumer choices that are affecting what products companies can offer. Many people are reducing their consumption of draught beer while increasing that of craft beer and wine. This has resulted in complaints against the biggest brewers who are trying to wade off competition by utilizing anti-competition distribution strategies. The main stakeholders in the issue are the mainstream beer brewers, craft beer brewers, wine makers and the retailers who include pubs, clubs and supermarket. The impact for mainstream brewers is the need to diversify into craft beer. For the current craft brewers, the main impact has been an opportunity to increase revenue. However, with the big brewers using strategic distribution aimed at reducing competition, the small craft brewers’ existence is threatened. For retailers, it determines the amounts of products they stock and offer to consumers. Economics for Business Introduction The Australian market is currently experiencing a change in drinks preferences where consumers are reducing their consumption on draught beer and increasing on wine and craft beer. “The latest figures from the Australian Bureau of Statistics (ABS) show the average person is drinking 44 fewer standard drinks of beer than they were in 2008,” (Herrick 2013). The consumers are becoming more attentive to what they take. Restaurants are now serving food accompanied by craft beer to their customers. This change in consumer preferences has resulted in a heated battle between the main draught beer brewers and the small craft brewers. The big brewers such as CUB and Lion have opted for strategic distribution channels aimed at wading off competition from the small craft beer. Several economic issues have arisen, with the main ones being consumer choice and game theory. Main Issue One of the main issues in the Australian beer market is the changing consumer preference. The media has indicated that consumer preferences are changing from draught to craft beer and wines. The statistics indicate a major shift in the last decade. Recently, beer consumption has hit its lowest in 66 years, leaving the major beer makers concerned given the declining profits (Kruger 2014). Over the years, consumers have been made to believe that beer is similar in quality and taste regardless of location. However, many have realized this is not the case and opted for craft beer that offers different flavours. The competition warrants an analysis given big brewers try to dominate the beer market by entering into contract with pub and club owners, where they offer incentives while controlling majority of the beer taps. “The upshot is they are starting to offer a variety of incentives to clubs and pubs to snare up to 100 percent of the beer taps, offering their mainstream and craft beer products, rather than up to 80 percent in the past,” (Ferguson 2014). Clearly, the demand for drought beer is changing, which is consequently changing the competition. Consequently, complaints have been levelled against the big brewers by the small craft beer makers over unethical means of wading off competition. They are complaining to the competition watchdog with the expectation of the big brewers being stopped. However, it is not certain the measures available to the competition watchdog to regulate against the practise. Ultimately, if no action is taken, the big brewers will have their market control increase indefinitely. Main Stakeholders The main stakeholders in this issue are the mainstream beer makers, craft beer brewers and the pubs and clubs. The mainstream beer brewers have for a long time held a high market share in Australia because of the belief from consumers that beer quality has insignificant difference in quality regardless of brand or location. However, this has changed after consumers realized different flavours in craft beer. Some of these brewers include Carton & United Brewers, Lion, Coopers and CUB. They are the market leaders, taking up about 90% of the market share (Kruger 2014). After the consumer preferences changed, they also bought some of the craft beer brewers in order to remain in competition. The other main stakeholders are the independent craft beer brewers, who are trying to compete with the main market leaders. The independent craft brewers have increased from just 25 to around 160. They form a significant portion of competing firms in the beer industry. Wine makers are also stakeholders given they are also affected by the shift in competition and demand. Consumer preferences are not only changing to craft beer but also wine, meaning they will be affected. The other stakeholders are the retailers that include clubs, pubs and supermarkets. They are involved in distributing and availing the product to the final customer. The dynamic trend in consumer preference affects each of these stakeholders in differently. The consumer change means the mainstream beer brewers will experience reduced revenues as craft beer brewers gain market share. As more consumers seek for new flavours in beer, the mainstream beer sales continue to reduce. Eventually, it will compel draught beer makers will have to diversify to craft beer production. Currently, the two largest beer makers have already diversified to craft beer making. “… Lion and CUB, which have watched their market share dwindle over the years, have moved into the craft beer market and between them own three of the biggest craft beer businesses,” (Ferguson 2014). This means it will affect the products they produce, in what amounts and for whom. Currently, they will have to reduce on their drought beer production for more craft beer. On the other hand, the situation presents an opportunity for the craft beer makers because there is an increasing preference from the consumers for their products. This means they stand a chance to gain more profits from the increasing revenues. However, with the two largest brewers in the market owning three of the largest craft brewers, the small brewers face stiff competition from the aggressive strategies adopted by these large producers. The wine makers face the same impact, where they stand a chance to sell more wine as consumer choices change from beer to wine. To the pubs, clubs and other retailers including supermarkets, this issue means they will have to change what is offered in their premises. It will determine the amount of draught beer, craft beer and wine to offer. For the pubs and clubs, this requires knowing what has the biggest demand. If craft beer continues to gain preference from the consumers, they will stock more of it and reduce on mainstream beer. This will be the same case for clubs and supermarkets. Economic Theories Involved One of the economic theories involved in this situation is consumer choice. This has been the main issue contributing to the rest, such as aggressive distribution strategies from the big brewers to eliminate competition. Consumption theory tends to relate preferences of goods and services to expenditure. It states that consumers always seek to maximize utility. The other theory present in the media reports is game theory, where the main brewers in the market are using collaborative strategies to wade off competition. Controlling a bigger market share, they have the ability to influence consumption by working together (Becker 2011). Consumer choice is more about utility, which describes the satisfaction that one derives from consuming a good or service. It assumes that when customers act rationally, they choose between various goods depending on the total satisfaction they get. In most cases, consumers will choose the good or services with the maximum satisfaction. Some of their considerations include the amount of satisfaction derived by consuming an extra product, the price they have to pay, satisfaction of consuming alternative or substitute products and their prices as well. In our case, the craft beer may be more expensive that mainstream beer. However, consumers derive more satisfaction from craft beer because of its taste. http://www.econpage.com/301/handouts/IC_applications/sandi_effects.htm In the media reports, evidence indicates that people are more interested in the taste of the beer as opposed to drinking a lot of it. In this case, many have realized that choosing craft beer over an extra mainstream beer has more satisfaction. Instead of taking the same flavour, consumers are seeking to have different flavours that are good to taste. “Festival director Joel Connolly says people are becoming more familiar with the wide range of flavours on the market,” (Australian Network News 2013). Game theory on the other hand is focused on studying strategic behaviour. Game theory can be in two forms, cooperative and non-cooperative. The former happens when firms act using the same strategic decisions in order to achieve their goals, while the former happens when each individual makes their distinct decisions (Becker 2011). In the media report, there is evidence of cooperative game theory between CUB and Lion, who are seeking to own 100% of beer taps in pubs and clubs (Ferguson 2014). This happens in an oligopoly market, which we are experiencing here considering the biggest four players own more than 50% of market share. The reports indicate that the biggest two companies are engaging in the same aggressive strategies aimed at eliminating competition in order to dominate the market. Conclusion The main issue facing Australian beer market is the changing consumer choices, where mainstream beer is losing revenues as craft beer and win continue to gain. When consumer choices change, the players are forced to change their strategies and decisions over the good to produce, in what amounts and for whom. The main beer brewers have also entered the craft beer market in order to capture its growing market. This means they will have to increase craft beer production and reduce the mainstream ones. To wade off competition, the two biggest companies are using the game theory to dominate. This is possible because the market is an oligopoly. Despite having q160 small craft beer brewers, the first four companies own more than 50% of the market share. Bibliography Australian Network News 2013, Distinct Craft Flavours Changing Beer Market, viewed May 02, 2014, at http://www.abc.net.au/news/2013-10-30/an-craft-beer-boom/5058324 Becker, G. S 2011, Economic Theory, New Jersey, N.J: Transaction publishers. Ferguson, A 2014, Trouble Brewing in Battle over Beer, viewed May 02, 2014, at http://www.smh.com.au/business/comment-and-analysis/trouble-brewing-in-battle-over-beer-20140122-3191i.html Herrick, R 2013, Drink Choices Shifting from Beer to Wine, viewed May 02, 2014, at http://www.abc.net.au/news/2013-09-18/drink-choice-shifting-from-beer-to-wine/4966018 Kruger, C 2014, Craft Brewers face an Uphill Battle, viewed May 02, 2014, at http://www.smh.com.au/business/craft-brewers-face-an-uphill-battle-20140122-3191n.html Read More