The U.S. Brewing Industry: Data and Economic Analysis

Published by EH.NET (May 2005)

Victor J. Tremblay and Carol Horton Tremblay, The U.S. Brewing Industry: Data and Economic Analysis. Cambridge, MA: MIT Press, 2005. xv + 379 pp. $40 (cloth), ISBN 0-262-20151-8.

Reviewed for EH.NET by Jon P. Nelson, Department of Economics, Pennsylvania State University

The Tremblays have written an interesting and detailed book about the evolution of the U.S. brewing industry, which is focused on the time period from 1950 to 2000. In the tradition of industry case studies, the book analyzes the structure, conduct and performance of the brewing industry. However, the authors strive to go beyond the confines of aggregate data by presenting game-theoretic and empirical analyses of leading firms in the industry, especially price and non-price strategies. These analyses are supported by regression results that employ industry, firm, and brand-level data, and many of the regressions represent an updating or extension of the authors’ earlier studies. Fundamental questions addressed in the book include reasons for the exit of smaller brewers, sources of Anheuser-Busch’s success, reasons behind the rise of micro-brewers, and possible oligopolistic strategies used by the leading producers, such as trigger pricing and brand proliferation. Two chapters focus on public policy issues. For the researcher, there is a data appendix and an offer of access to data sets. The authors are economists at Oregon State University and have been studying the brewing industry for more than twenty years.

During the past fifty years, economic conditions in U.S. brewing industry have changed substantially (Nelson 2005a). The number of brewers declined from 404 in 1947 to 150 in 1963 and only 33 in 1986. After 1986, the number of brewers rose due to entry of specialty brewers, microbrewers, and brewpubs. By 1999, the number of small brewers exceeded 1,400. Imports now account for about 11% of the market compared to only 5% in 1993. Nevertheless, beer production is concentrated in the hands of the three remaining national brewers: Anheuser-Busch, Coors, and Miller presently account for 80% of total production and have market shares of 50%, 12%, and 18%, respectively. Remarkably, Anheuser-Busch’s market share in 1978 was only 25%, and the three leading firms that year had 55% of the market (Anheuser-Busch, Miller, Schlitz). Beer production also is concentrated by product category and brand. Light beer sales account for 45% of the market compared to only 20% in 1984. This growth has come at the expense of the other major categories, including popular-priced beers produced by regional brewers, premium-priced beer, and super-premium beer. Four brands of beer presently account for 48% of the market – Bud Light, Budweiser, Coors Light, and Miller Lite – and the market share of the top 10 brands is 67%. However, despite increased concentration, the real price index for beer was unchanged from 1980 to 2000. Further, real advertising declined from 1985 to 2001, and real advertising per case of beer remains below the peak levels attained in the mid 1980s. Lastly, beer consumption per capita peaked in 1981 and total output was constant from 1990 to 2003. In light of these major trends (or lack thereof), the Tremblays face the substantial task of bringing order to the remarkable amount of data they have assembled. Fortunately, they are well prepared and clearly up to the task before them.

The book is divided into ten chapters. Chapter One describes some of the technical aspects of brewing and presents an overview of beer production and consumption. Chapter Two is concerned with basic conditions of demand and cost, including changes in consumer tastes and technological change. As stressed by Elzinga and Scherer, two key features have been increases in minimum efficient plant scale (MES) and development of multi-plant brewers based largely on marketing advantages. The Tremblays use a variety of evidence to document increased MES and the productivity gains from technological change. In my opinion, a fuller discussion of multiplant economies would have rounded out this chapter. Their estimated demand function for Anheuser-Busch leads them to conclude that “there is little evidence that advertising has a significant effect on the market demand for beer” (p. 37). This agrees with my own assessment of the role of beer advertising (Nelson 2001, 2005a).

In Chapter Three, the authors examine the causes of increased market concentration, which they characterize as a “war of attrition” involving four strategic business options: expand internally, merge with a competitor, find a market niche, or exit the industry. Building on prior work by Sutton and others, this chapter provides a fascinating account of how advertising by the leading firms combined with scale economies to put financial pressure on the second- and third-tier firms. Chapter Four presents the business histories of thirteen prominent brewers: Anheuser-Busch, Ballantine, Carling, Coors, Falstaff, Genesee, Hamm, Heileman, Miller, Pabst, Schaefer, Schlitz, and Stroh. Only five of these firms are still in operation, an outcome the Tremblays attribute to increased MES and greater emphasis on television advertising. They also discuss the business strategies chosen by each brewer. Chapter Five examines the recent growth of imported beers and specialty brewers, which compete for the super-premium market segment. The authors speculate that growth in this market segment “probably has peaked” (p. 281).

Two chapters are devoted to issues of market conduct, including product and brand proliferation (Chapter Six) and price, advertising, and merger strategies (Chapter Seven). The industry’s most significant product development was “light” beer and the famous advertising war between Bud Light and Miller Lite. While light beer sales have grown to 45% of the market, beer consumption per capita has been declining. It is a wonder to me that some observers cannot separate out growth or success at the product or brand level from growth of the total market. The Tremblays do not suffer from this myopia. They demonstrate that growth of light beer significantly reduced sales and market shares of other beer product categories. Product proliferation also affects light beer, where several price points are now being marketed (Natural Light, Bud Light, Michelob Light). The authors present a regression analysis of new product introductions that demonstrates that demand for variety is a normal good and firms with lower profit rates are more likely to enter new product categories. Chapter Seven is devoted to traditional oligopoly issues of price and non-price strategies. With respect to advertising strategies, there is considerable variation in real advertising per barrel for the leading brewers and brands. After examining prior research and evidence on advertising intensities by brand, the authors conclude that “a marginal increase in advertising generally leads to higher beer prices” (p. 186). It follows that restrictions on advertising, such as advertising bans, can have unexpected consequences depending on the price and advertising elasticities for different groups of consumers, including underage consumers.

Market performance is examined in Chapter Eight. Previous research on profit margins by the authors led them to conclude that there was little market power through the 1980s as price and advertising competition restrained profits. Using new data for 1950-2001 for Anheuser-Busch, the authors report that market power increased since the 1980s as the number of significant competitors diminished. Overall, I think this conclusion is probably correct, but their analysis ignores the importance of the wholesale and retail sectors as determinates of the retail price of beer faced by consumers. For example, about 25% of beer is sold by bars and restaurants, but pricing and advertising by these establishments is clearly different from, say, grocery stores and supermarkets. About 60% of packaged beer is sold through supermarkets, or about 45% of beer sales overall (Fogarty 1985). There are some important policy issues here that the book overlooks, such as the market power of beer wholesalers and the larger retailers.

Chapter Nine addresses a number of broad public policy concerns, including beer advertising, drunk driving, underage consumption, and antitrust policy. The authors offer a variety of thoughts on public policy, which I did not always find to be clearly thought out. They conclude (correctly) that antitrust merger policy toward brewing was misguided and that higher excise taxes on beer are too blunt a policy to deal with externalities. They also conclude that the “effect of an advertising ban on price and social welfare remains uncertain” (p. 272). However, these cautionary findings are scattered about in a chapter that frequently calls for government action on this or that issue, despite a lack of evidence on costs and benefits or information about the efficacy of various policies. For example, on drunk driving policy the authors argue that “even the 0.08 BAC may be too lenient” (p. 261). But this ignores the fact that most drunk driver fatalities involve BAC levels that far exceed 0.08 or that the rate of recidivism in drunk driving convictions is relatively low. Similarly, they claim that “some beer ads clearly violate the [self-regulatory] guidelines by promoting sexist stereotypes and underage drinking.” These are strong words that might apply to many products, but evidence is lacking about the proposed remedies. For underage populations, alcohol expectancy studies conducted by social psychologists have serious limitations (Nelson 2001) and recent evidence on targeting of youth does not support the authors’ conclusion (Nelson 2005b, 2005c). Furthermore, both underage consumption and drunk driving fatalities have declined substantially since the peak levels of the early 1980s. According to the Monitoring the Future survey, drinking prevalence among the nation’s twelfth graders declined from 72% in 1980 to 47.5% in 2003. In 2003, 17.7% of adolescents, ages 12 through 17, reported having had a drink in the last 30 days, while 82.3% do not drink. Similar declines in prevalence can be demonstrated for binge drinking and drinking by college freshman. The total number of drunk driving fatalities declined from 21,113 in 1982 to 13,041 in 2003. This represents a decline of 53% in the death rate per licensed driver; 66% per vehicle mile traveled; and 60% per registered motor vehicle. Deaths due to drunk driving now account for about 30% of all traffic fatalities compared to 48% in 1982. Teen drunk driving fatalities were 1,681 in 2003 compared to 4,214 in 1982, or a 60% decline in the number of fatalities. These favorable trends have not received much attention in the popular press and I feel that the Tremblays are equally negligent. Alcohol regulators and industry observers should seek first to understand these favorable trends, rather than propose a host of new regulations.

Despite some misgiving on the policy discussions, I found this to be a readable and informative book. The authors have assembled an impressive amount of evidence on the recent history of the brewing industry. The book covers a lot of ground, but in an accessible manner. I highly recommend the book to those interested in the industry’s recent history and the economic relationships among the leading firms.

References:

D. Fogarty (1985), “From Saloon to Supermarket: Packaged Beer and the Reshaping of the U.S. Brewing Industry,” Contemporary Drug Problems, 12(4), 541-92.

Jon P. Nelson (2001), “Alcohol Advertising and Advertising Bans: A Survey of Research Methods, Results, and Policy Implications,” in Advertising and Differentiated Products: Advances in Applied Microeconomics, Volume 10, editors M.R. Baye and J.P. Nelson (Amsterdam: JAI Press), pp. 239-95.

Jon P. Nelson (2005a), “Beer Advertising and Marketing Update: Structure, Conduct, and Social Costs,” Review of Industrial Organization, 26(3), 269-306.

Jon P. Nelson (2005b), “Advertising, Alcohol, and Youth,” Regulation, 28(2), 1-8.

Jon P. Nelson (2005c), “Alcohol Advertising in Magazines: Effects of Price, Demographics, and Audience Size,” working paper. http://econ.la.psu.edu/Papers/Nelsonmagazinecounts.pdf.

Jon P. Nelson is Professor Emeritus of Economics at Pennsylvania State University, University Park, PA. He has been studying alcohol advertising and marketing since 1985 when he testified in favor of lifting Pennsylvania’s ban of price advertising of beer.