The Economics of American Beer

Introduction

While the United States is not the first name that comes to mind when people think of quality beer, the American beer industry is a titan of world brewing. American beer brands such as Budweiser and Coors Light are known and consumed the world over, and beer conglomerates such as Anheuser-Busch and Pabst Brewing Company are among the largest alcoholic beverage companies on Earth. The American beer industry has risen to world prominence in large part due to a marketable product, slick advertising, and mistakes on the parts of its competitors. However, the U.S. beer industry is facing serious challenges in regards to its impact on the environment. In particular, the production of barley, one of the most important ingredients in beer, is having a massive impact on the environment in the U.S. and other countries where it is grown.

The massive quantities of barley needed to sustain the U.S. beer industry requires an agribusiness approach, which combined with other forms of mass farming has wreaked untold havoc on American farmlands. However, there are ways that the American beer industry can reduce its environmental impact without compromising the quality or quantity of its product. By implementing a few simple changes to how it grows barley, U.S. beer companies can become more environmentally friendly without sacrificing their profits. By studying the economics of the beer industry, a plan to implement these changes can be formulated.

Conduct

The American beer industry has retained its competitiveness through a series of innovations and marketing campaigns. While the aforementioned conglomerates such as Anheuser-Busch and Pabst Brewing Company are usually all that come to mind when thinking of American beer, this ignores the massive explosion of microbrews and craft brews that have blossomed in the past two decades. Cities such as Portland, Oregon and Denver have become hubs of microbrewing, home to countless local beers that are crafted to the needs and wants of their particular communities. Some craft brews have become regionally or nationally known, to the point where more established beer companies acquire them outright, such as how Anheuser-Busch acquired Chicago-based Goose Island Brewing in 2011.

These microbrews have survived despite the seemingly oligopolistic nature of the U.S. beer industry because of their unique niches and marketing campaigns. The increasingly corporatized nature of mass market beer in the 1990’s helped drive a desire on the part of consumers for beer brands that hearkened back to the decentralization of decades past. Microbrews and craft brews attract their market in part because they cater to consumers who dislike the “watered-down” taste and design of mass market beer, a necessity due to the breadth of customers that products like Budweiser need to appeal to. Small breweries can take advantage of this decision by major brewers to create specialized brews that cater to underserved minority markets (McBride, 593).

For example, many microbrews and craft brews have a higher-than-normal amount of hops, a beer ingredient that has been used in smaller quantities by major brewers due to the fact that it tastes bitter. Consumers who enjoy a bitter taste in their beer or appreciate the purported health benefits of hops will gravitate towards microbrews that have a higher hops content than mainstream brews. In effect, this creates a market structure that is best described as monopolistic competition, albeit with elements of oligopoly. While it’s true that it’s extremely unlikely that any other company will be able to break the dominance of Anheuser-Busch and the other giants of the beer industry, smaller breweries have no reason to even try when they can carve out a comfortable profit by appealing to smaller niches. It’s as if microbreweries and major beer companies exist in different worlds despite offering the same product, because their target markets don’t have much overlap. This is why the beer industry is best described as monopolistic competition: while no one will be able to topple the major companies, it’s possible for a small brewery to survive by targeting the right market. The ease with which new entrants can join the beer industry is also in keeping with the nature of a monopolistic competition market, as there are no barriers to the establishment of new firms or vendors.

This two-tiered nature of the beer industry also affects the pricing of American beer. Mainstream beers are typically less expensive than microbrews, regardless of whether they are bought in stores or in bars and restaurants. This is because both groups target different audiences. Mass market beer companies try to reach as large and diverse a demographic as possible, which requires them to sell their beer at relatively low prices (DeJong et al., 766). Microbreweries, on the other hand, can afford to raise their prices because they target individual niches that both have more money to spend and that are underserved by the beer industry in general. Moreover, because mainstream beer companies have larger supply chains and production facilities, they can afford to produce their beer at a lower cost due to the mechanics of mass production. Microbreweries do not have this luxury because they brew beer in smaller amounts. As mentioned already, this allows for a two-tiered market in which no one company or suite of companies has total control over the price of beer and can raise or lower it at their leisure. This is in keeping with a monopolistic competition market, in which no one firm or cartel exercises a disproportionate amount of leverage over the industry.

The nature by which beer is advertised in the U.S. also speaks to the industry’s monopolistic competition nature. Beer companies both large and small spend a large amount of money on advertising, with the intent of fashioning new markets for their product and cutting into competitors’ market share. Anheuser-Busch, Pabst Brewing Company and their ilk are known for major ad spends on sporting events, television and other male-oriented activities, as they cultivate an image of being beers aimed at the average person (DeJong et al., 669). While there are occasional attempts by these companies to market to minority demographics, the mass market nature of their beer means that they attempt to draw as generic an audience as possible, which is reflected in their advertising.

Microbreweries, lacking both the mass demographic of mainstream beer brewers as well as their huge profit margins and advertising budgets, often rely on alternative means to sell their wares. Small breweries often rely on word of mouth, the Internet, and coverage in local publications in order to popularize their products. Since they are targeting individual niches that are either underserved by preexisting beer brands or not served at all, advertising is not as central to their survival as it is for major beer companies. It’s very easy to see the difference in how each group markets itself: mass market beer ads can be found on television, the Internet, billboards, and other places where there are lots of eyeballs, while advertising for microbrews is much harder to come by. This is in keeping with a monopolistic competition market, in which brand advertising is a crucial part of staying ahead of the competition.

Performance

The growth and dominance of the U.S. beer industry has been aided by Americans’ insatiable appetite for beer. Beer is by far the most popular alcoholic beverage in the United States, accounting for nearly 90 percent of all domestic sales. In 2016, Anheuser-Busch took in over $8.3 billion of income, fueled by its continued dominance in the U.S. and its strong position overseas. Molson Coors, the international parent of U.S.-based MillerCoors, took in $360 million of income in that same year. Mega-profits in the U.S. beer industry have been fueled by the industry’s reliance of efficiencies: the current state of a handful of companies having much of America’s market share is the result of a number of mergers and acquisitions over the past few decades. The dominance of Anheuser-Busch due to its many acquisitions and mergers is well-known, but MillerCoors’ parent, Molson Coors, took its current shape in 2005 due to a merger between Montreal-based Molson and the American Coors (Carroll et al., 744). As mentioned above, the corporate dominance of American mass market beer has not prevented microbreweries from proliferating in the U.S., though by nature they will never overtake the major operators. Mass market beers accounted for 74 percent of market share in the U.S. in 2014, with imported beers at 15 percent and craft beers taking the remaining 11 percent.

As the beer industry has grown, so has the production and cultivation of crops and materials necessary in its creation. In particular, the cultivation of barley has taken a toll on farmlands in the U.S. and elsewhere. Barley typically requires continuous tilling of soil and heavy use of fertilizers and pesticides, which not only cause rapid nutrient depletion, but also taint land for years after initial crop yields (Ashenfelder et al., 340). To make matters, the specific needs of barley used in beer production amplifies the damage done to croplands. Brewers require the barley’s kernel to be as large and thick as possible, which necessitates heavy irrigation to croplands. This in turn results in water shortages and droughts, as water that could be used for other, edible crops is diverted for the production of beer. The drying and roasting of individual barley crops, a necessary part of the brewing process, also contributes to climate change due to the energy consumed in both processes.

The way to minimize barley’s impact on the environment is through smart conservation techniques. For example, low- and no-till methods of growing barley have been developed, which would considerably reduce the impact that barley-related soil tilling has on farmland. In addition, in lieu of fertilizers, barley farmers could use organic malts instead, which have a lower carbon footprint yet are just as effective. These methods would also reduce the amount of water used in the production of barley, which would alleviate the current strain on U.S. water supplies, particularly in the western part of the country, where much of America’s barley is grown. Finally, breweries can implement heat exchange and conservation methods when drying and roasting barley, which will reduce the emissions that they put off in the process. These steps, if taken, will make the brewing of beer much more environmentally sustainable.

Conclusion

The U.S. beer industry has overcome numerous challenges and changes in order to arrive in its currently dominant position. Given the American thirst for beer, it’s all but certain that U.S. brewers will continue to have a place in the international beer market in the future. However, the environmental impact the industry is having on the earth cannot be ignored. By changing its barley-growing practices, the U.S. beer industry can help create a cleaner, greener planet, all while continuing to provide the beer brands that Americans and others have come to love. This is a challenge that the U.S. beer industry can and will overcome.

References

Ashenfelter, O. C., Hosken, D. S., & Weinberg, M. C. (2015). Efficiencies brewed: pricing and consolidation in the US beer industry. The RAND Journal of Economics, 46(2), 328-361.

Carroll, G. R., & Swaminathan, A. (2000). Why the Microbrewery Movement? Organizational Dynamics of Resource Partitioning in the US Brewing Industry 1. American Journal of Sociology, 106(3), 715-762.

DeJong, W., Atkin, C. K., & Wallack, L. (1992). A critical analysis of” moderation” advertising sponsored by the beer industry: are” responsible drinking” commercials done responsibly?. The Milbank Quarterly, 661-678.

McBride, R. (1985). Industry structure, marketing, and public health: a case study of the US beer industry. Contemp. Drug Probs., 12, 593.

Swaminathan, A. (1998). Entry into new market segments in mature industries: Endogenous and exogenous segmentation in the US brewing industry. Strategic Management Journal, 389-404.

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