The Strategic Analysis Of Adolph Coors

Beer is the oldest alcoholic beverage in the world. It has produced in an artisanal setting for thousands of years, dating back to around 3500 BC (History, 2010). As developments in agriculture and technology occurred, beer production shifted to industrial manufacturing. Beer is produced using a process called brewing. The brewing process involves variable amounts of time in which a source of starch, usually hops, is fermented to produce alcohol. The process can produce countless types of beer, with variable concentrations of alcohol, varying flavors, and appearances. These beverages are packaged into either kegs, glass bottles, or aluminum cans. A building or organization dedicated to this process is known as a brewery.

The brewing industry today is a global business that is made up of several dominant companies. As of 2010, the key players in the industry are MillerCoors and Anheuser-Busch. Anheuser Busch is the largest brewing company in the United States with 32 breweries globally, 12 of which are located in the United States. In late 2007, SABMiller and Molson Coors Brewing Company joined forces in order to better compete with Anheuser-Busch. These major brewing companies make up the largest segment of the brewing industry. There are also thousands of smaller regional breweries often referred to as microbreweries which make up a second segment. Finally, a very small percentage of “homebrews” and domestic production occur. This analysis will focus almost exclusively on the segment that consists of the multinational conglomerates such as MillerCoors and Anheuser-Busch.

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The US beer market produced total revenues of $78.8 billion in 2008. Lager sales account for $28.2 billion of the total (Datamonitor, 2009b). Beer accounts for 52.9% of the alcoholic drink industry in the US, with spirits at 29.4%, and Wine at 17.7% (Datamonitor, 2009a).

*A stipulation to this analysis is that it will be based primarily on the Harvard case study “Adolph Coors in the Brewing Industry.” Outside information will be incorporated where necessary for a complete analysis.

*In the absence of specific statistics from past years, current numbers are substituted.

*Brevity is highly valued for this analysis, though not at the expense of a thorough analysis.

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PEST

The PEST model is a framework which is used to analyze the macroenvironmental factors that companies within an industry must take into account. This PEST analysis will examine the political, economic, social, and technological factors in relation to the brewing industry.

Political and Government regulation

There are significant rules governing general alcohol consumption. First, drinking in public places such as streets or parks is prohibited. Second, the minimum age of consumption is 21 years old in the United States. There are also restrictions related to the manufacturing, sale and possession of alcohol. In the United States, the sale of alcoholic beverages is controlled by individual states. Finally, the production of spirits is taxed and requires a permit to operate a plant (TTBGov, 2010).

Economic

The brewing industry benefits from having commodity-based inputs. There is little variance in the raw materials necessary for the brewing process, as they are mainly agricultural commodities. Price elasticity of demand for beer is low, ensuring steady demand.

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Social-cultural

Consumer preferences are important in the brewing industry. Consumers have varying tastes, and prefer to be able to choose among the varying types of beer. However, alcohol consumption can have adverse affects on human physical health. Beer is high in carbohydrates, and it can be argued that high consumption can cause weight gain, or even liver-disease. There are also benefits of alcohol consumption. The age of the consumer affects the industry. As baby boomers reach the legal drinking age, the number of beer drinkers rose, and also the amount consumed (Ghemawat, 1992). Additionally, more and more Americans drink more beer at home, whereas they had traditionally had it in bars and restaurants (Ghemawat, 1992).

Technological

Brewing techniques affect the brewing industry heavily. Post WWII developments would allow for less time needed for the aging process. The pasteurization process would allow beer to last up to six months unrefrigerated (Ghemawat, 1992). Capacity and efficiency are highly based on technology of both the brewing, and packaging machinery. Also, the switch from glass bottles to aluminum cans was a large technological development. The technology surrounding television and web marketing have changed, giving firms easier methods for greater exposure, and also shipping and transportation costs fluctuate, affecting value-added (Ghemawat, 1992).

III. Porter’s Five Forces

A. Threat of New Entrants (LOW)

The following elements will help determine the level of threat from new entrants.

1. Economies of scale

Economies of scale are significant for the brewing industry. This represents a high barrier to entry for potential competitors. Large, established firms such as MillerCoors and Anheuser-Busch have enormous brewing capacity, and are able to realize economies of scale that come from mass production and larger contracts. As of 1985, doubling the scale of a brewery cut unit costs by 25% (Ghemawat, 1992). During the rising demand that the industry experienced during the 1960s and 1970s, both Anheuser-Busch and Schlitz, major players at the time, added large breweries to help cope with the demand, and to benefit from economies of scale (Ghemawat, 1992). This allows existing firms to decrease their cost per unit produced. Any new entrant would have to invest a large amount of capital in production facilities. This makes the industry unattractive.

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2. Working capital requirements

The cost of operating a brewery is significant. A significant implication of the brewing process is that it takes time. A major development in the brewing process after WWII allowed brewers to cut the aging time from 30 days to 20 (Ghemawat, 1992). Even with this decrease, it is still costly not only to facilitate the brewing process, but to maintain locations in which the beer can be aged. This serves as a deterrent for small firms who wish to enter.

3. Proprietary product differences

Coors, like many most brewers, has a unique taste associated with its beverages. Little information was available as to the nature of the Coors recipe, however, it would not difficult for any knowledgeable entrant to the industry to imitate the taste of the varying Coors lines. Coors does age its product for 70 days, rather than the industry average of 20-30 (Ghemawat, 1992). Imitation of the Coors brewing process would also be easy, and therefore, threat of entrants is increased.

5. Brand identity

Brand identity is important in the brewing industry. For Coors, their marketing expenses as a percentage of sales increased from 3.3% in 1973 to 10% in 1985 (Ghemawat, 1992). This decreases the threat of entrants, as it takes significant investment to establish brand recognition.

4. Absolute Cost Advantages

As stated above, Coors and its major competitors can take advantage of economies of scale, which gives lower manufacturing costs, and also cheaper access to raw materials. Coors produces its own malt through long-contracts with farmers (Ghemawat, 1992). These connections are likely exclusive to large firms, and decrease the threat of entrants.

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6. Access to distribution

Coors products reach the market primarily through retailers and wholesalers. As of 1985, Coors’ distribution network consisted of 569 wholesalers, and 5 additional Coors-owned wholesalers. Coors also has its own trucking subsidiary, which takes on a large amount of its transportation needs. This decreases the threat of entrants (Ghemawat, 1992).

The threat of new entrants is low. The capital requirements for starting a brewery, and quickly achieving the necessary economies of scale is a large barrier. Access to distribution networks takes time, and also contracts to obtain necessary shelf-space to sell product. These factors make the industry unattractive for new entrants.

B. Suppliers (LOW)

1. Supplier concentration

The main suppliers in the brewing industry consist of malted grain and hops for the fermentation process, and bottles or barrels for storage and transportation. Supplier power is weak because of their size, relative to the brewers, and also because farming operations are numerous (Brewing Industry US).

2. Presence of substitute inputs

The presence of substitutes in the brewing industry varies. If aluminum cans are considered a substitute for bottles and barrels, then this factor is an issue. Also, lower quality hops might be substituted for higher quality, more expensive, flavorful hops.

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3. Differentiation of inputs

Since ingredients required for brewing have little qualitative differentiation, supplier power is lowered.

4. Importance of volume to supplier

There are few other uses for hops, especially commercially, than brewing beer. The brewing industry purchases a significant percentage of the total hop production, which diminishes supplier power. However, there are alternative uses for barley, which can be integrated in the brewing process, but isn’t as common. This slightly boosts overall supplier power (Brewing Industry US).

5. Impact of inputs on our cost or ability to differentiate

Agricultural inputs account for 20-25% of total raw materials costs for major brewers. The remainder is allocated for packaging (Ghemawat, 1992). This increases supplier power, as the price of their product affects the final product.

6. Threat of forward or backward integration

Since suppliers are small in comparison to breweries, forward integration is uncommon. However, there is evidence of backwards integration by large brewers. For example, Coors acquired a grain-processing plant as well as other operations to protect itself from price fluctuations (Ghemawat, 1992).

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7. Access to labor

As of 1985, Coors was the only major brewer that was not unionized (Ghemawat, 1992). The implication is that the brewing industry is unionized. During a strike in 1977, a strike caused Coors to have to shift employees within the company. The production levels were quickly returned to normal, indicating that skilled workers are not necessary (Ghemawat, 1992). Labor supplier power is low.

Supplier power is low because of unfavorable supplier concentration. Suppliers of the brewing industry need the brewing industry as there are little other uses for their products, and their products are considered commodities.

C. Buyers (MODERATE)

1. Buyer concentration

Buyers in this market are highly concentrated. In 1985, 4,500 independent wholesalers existed in the United States (Ghemawat, 1992). Larger buyers are able to negotiate contracts effectively (Datamonitor, 2009b).

2. Buyer switching costs

Buyers do not have particularly high switching costs. Many buyers are willing to switch brands based on price and differentiation. The lack of buyer switching costs increases buyer power, making the brewing industry more unattractive (Datamonitor, 2009b).

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3. Threat of backward integration

There is no indication that buyers are backward integrating, and producing their own product to sell, making the industry more attractive.

4. Pull through

Pull through exists in the brewing industry because brand identity is important. Advertising expense as a percentage of sales over time for the brewing industry has been trending upward. As of 1973, advertising expenditures were 3.3% of sales. That amount increased to 10% of sales by 1985 (Ghemawat, 1992). Therefore, the brewing industry has power over the buyers, making it more attractive.

5. Price sensitivity

The brewing industry is able to pass cost increases on to the buyer as indicted by the existence of multiple beer segments. End consumers are willing to pay more for quality beer. Brewers are not able to pass on shipping costs however, reducing attractiveness (Ghemawat, 1992).

Buyer power is moderate. There are more buyers than firms in this industry, and pull-through from brewers creates power. There are shipping costs and other aspects that the breweries cannot pass on to their customers.

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D. Substitute Products (MODERATE)

Substitute products for beer consist of wine, liquor, as well as imported beer. These products constitute a moderate threat. In 2008, Beer had a 52.9% share of the alcoholic drinks market, with spirits at 29.4%, and wine at 17.7% (Datamonitor2009a).

1. Relative price/performance relationship of substitutes

The per-unit-volume price is often affected by alcohol content, which is higher in liquor and spirits. Also, shelf space is more expensive for items such as beer, which must be refrigerated (Datamonitor,2009a). The threat of substitute products is increased.

2. Buyer propensity to substitute

Projections for the industry indicate that consumers may switch away from beer to other alcoholic beverages as consumers become more confident and begin spending their discretionary income. Consumers who may normally drink higher priced alcoholic drinks tend to switch to lower priced beer during a recession (Ibisworld, 2010). This effects the buyers of the brewing industry as their demand will fluctuate.

The threat of substitute product is moderate because of end-user propensity to switch away from beer when possible financially. Other forms of alcoholic drinks are often more potent, making them a better deal for the consumer, depending on their intentions or desires.

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E. Rivalry (HIGH)

1. Degree of concentration and balance among competitors

The brewing industry is highly concentrated, and unbalanced. In 1985, the six major players in the industry controlled 75% of market share. In 2009, this number had changed to the two major players controlling 79.2% of the market share. Anheuser-Busch controls 50.1%, and MillerCoors, the remaining 29.1%. This heavy rivalry makes the industry unattractive (Ibisworld, 2010).

2. Diversity among competitors

Anheuser-Busch and MillerCoors are following similar strategies. Both companies are focusing on promoting their largest brands, expanding their geographic reach, and increasing efficiency (Ibisworld, 2010). This makes the industry unattractive.

3. Industry growth rate (past and projected)

The brewing industry is experiencing maturity, growth rates have been slow, and consolidation frequent. From 2010 to 2015, the industry has experienced a -0.3% growth rate. However, it is projected to grow 1.3% by 2025 (Ibisworld, 2010). The industry is unattractive.

4. Fixed costs to value added

Fix costs are high and economies of scale are possible in the industry. Value-added trended upward until its high point in 2003 of $25,924.3 million, but has since fallen to just over $23,038 million. The industry is at maturity and rivalry has increased, making the industry unattractive (Ibisworld, 2010).

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5. Intermittent overcapacity

As of 1985, the 6 major competitors in the brewing industry were operating at an average of 83% capacity. The brewing industry has been plagued with overcapacity issues in the past (Ghemawat, 1992). Rivalry is increased.

6. Product differentiation

Firms differentiate their products in this industry through advertising, segmentation, and packaging. Advertising helps firms reach critical thresholds of exposure, while segmentation increases market share (Ghemawat, 1992). Brewers can differentiate their products by segments, but also can use brand, ingredients, and style. The degree of differentiation makes the attractive (Datamonitor, 2009b).

7. Growth of foreign competition

To what extent are foreign firms able to penetrate the US market? If there is a growth in foreign firm’s penetration, this increases rivalry making the industry unattractive. It also shows that US firms are not being globally competitive.

8. Corporate stakes

As of 1985, 84% of Coors’s revenues came from its brewing division (Ghemawat, 1992). This increases rivalry, making the industry unattractive.

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9. Exit barriers

Firms in this industry could exit by converting operations to another product, or as shown by the consolidation of the industry, exit through merger or acquisition.

Rivalry in this industry is high. Since the brewing industry is so highly concentrated and unbalanced, the major firms in the industry have very similar strategies and compete for similar niches. This makes the overall industry attractiveness low.

IV. Conclusion

After analysis of the items above, conclusions can be drawn about the brewing industry.

A. Critical Success Factors

There are a number of critical success factors for this industry:

Economies of scale are a necessity to be profitable in the industry. Firms must have production facilities that are large enough to spread the fix costs of production out of millions of barrels of product. These facilities must also have high capacity to deal with demand fluctuations.

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Second, firms must have strong, differentiated brands that fit into multiple segments.

Finally, a strong distribution network is imperative to obtaining sales levels.

B. Prognosis

Entering into the brewing industry would be a uncertain venture. There are many barriers to entry for small firms such as microbreweries, such as economies of scale and capacity. The brewing industry is projected to contract, but the major players will continue to jockey for market share (Ibisworld, 2010). Competitive forces have contributed to consolidation in the past and likely will in the future, as smaller firms merge with larger ones, in order to better compete in the industry.

Part II: Firm Analysis

I. Current Situation

A. Brief firm history

Adolph Coors brewery was founded in Golden, Colorado in 1873. After surviving the prohibition era of the 1920s, Coors would become very successful. After the repeal of Prohibition, Coors sold 90,000 barrels of beer. It also began expansion with its introduction of wholesalers outside of Colorado, in Arizona, and eventually 9 other states. The size of the company would increase exponentially. By 1960, Coors sales volume reached 1.9 million barrels, 7.3 million by 1970, and finally 12.3 million by 1974. In 1975, the Coors family offered non-voting stock to the public (Ghemawat, 1992).

More recently, the Adolph Coors Company became the parent company through a merger with Molson, a Canadian brewing giant. Coors would begin numerous ventures and partnerships, most notably, a joint venture with Miller Brewing to form MillerCoors in June of 2008 (Datamonitor: Coors).

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Today, the company operates 18 breweries and distribution centers over 30 countries. The US segment operates 8 major breweries with a capacity of 85 million barrels annually. The brands sold in the US are Coors, Coors Light, the Blue Moon line, Killian’s, Keystone, and Molson among others. Molson operates Coors’s Canadian operations with 6 breweries. Coors also sells around 9 million barrels in the UK (Datamonitor, 2009c).

MillerCoors currently controls 29.1% of market share, behind industry-leader Anheuser-Busch with 50.1%. Coors’ broad portfolio of over 40 brands allows it to reach a wide range of market segments (Ibisworld, 2010).

B. Strategic Posture

The current vision of MolsonCoors is “to be a top four global brewer in profitability, fueled by our people who are committed to delivering exceptional results and creating extraordinary brands” (Molson, 2010). The mission statement was not stated anywhere. The first portion, “to be a top four global brewer in profitability” is quantifiable through revenue. The last 2 parts are more difficult to measure, though Coors does have a large portfolio of successful brands.

II. External Environment (Opportunities and Threats)

The findings of the above industry analysis apply specifically to Coors in the following manner:

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A. General Environmental Factors

The issues that affect Coors more heavily are the issues of product differentiation to meet consumer needs, and also the capacity and efficiency factor. The opportunity to market their products more extensively is important to Coors.

B. Task Environment

The Rivalry factor is currently affecting the level of competitive intensity within the brewing industry. Coors faces strong rivalry from Anheuser-Busch. They currently pursue very similar strategies, making competition strong. Currently Anheuser-Busch controls over 50% of the market share. As they compete for the same markets niches, it will be important for Coors to maintain competitive levels of advertising. Also, Coors has been efficient in their production capacities in the past, but as demand grows, they may need to make changes to keep up.

III. Internal Environment (Strengths and Weaknesses)

A. Management

The Coors board consists of nine members, four of which are members of the Coors family. As of 1985, the Coors family continued to hold all of the voting stock (Ghemawat, 1992).

Peter Coors became president of Coors in 1985. There was some dissent between the younger members of the board, including Peter, suggesting that had a differing vision for the direction of the company. It is implied that he thought it was necessary to add effective marketing skills to the manufacturing skills that the company already had (Ghemawat, 1992).

B. Marketing

Coors operates in every segment except for the low-price “popular” segment. In1985, Anheuser-Busch had a particularly strong product mix, much as Coors had, though Anheuser-Busch’s market share was much larger. The most notable major competitors’ products were Anheuser-Busch’s Budweiser, with 25.8% of market share, and Miller’s Lite beer, and High Life which together accounted for 17.5% of market share (Ghemawat, 1992).

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Coors’ pricing is appropriate for the market. There are no strong indicators that Coors’ pricing strategy is not competitive. In 1985, domestic producers supplied barrels at $67 each.

Distribution is a major issue for Coors. In 1985, all of the major competitors except Coors functioned in all 50 states, but only had a median shipping distance of 300-400 miles. Coors was shipping their product 1,500 miles. Beyond this, their inefficient trucking system added 10-15% additional cost (Ghemawat, 1992).

Finally, Coors’ launch of new products called for an increase in advertising. Coors’ “silver bullet” campaign proved successful, as Coors Light had become the 2nd best-selling light beer (Ghemawat, 1992). Coors spends less than the industry average for its promotional efforts. There is also statistical evidence that 90% of the effect of advertising is lost within one year (Ghemawat, 1992).

Coors has not marketed itself as heavily as some of its competitors, which puts it at a disadvantage. It likely has much to do with the smaller size of Coors’ market share.

C. Operations/Production

Productivity improvement has been extremely important to Coors in its history. In 1985, Coors’ capacity utilization was above that of both the top players in the industry at 92%, which is high. The issues Coors is facing pertaining to distribution, and whether or not to open a new brewery would be a result of the firm’s re-invention.

Growth through product development is important to Coors. It has six product lines in varying segments, indicating it is emphasizing product development within the brewing industry. At some points in its history, it was diversified outside of the brewing industry, but decided to focus on core competencies (Ghemawat, 1992).

Coors benefits from high historical efficiency in production, and also strong brands that it can use to differentiate itself.

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D. Human Resource Management

Unions have historically had little effect on the operations of Coors in particular, but they are present in almost every other firm in the industry. A strike during 1977, illustrated Coors’ lack of vulnerability to this threat (Ghemawat, 1992).

E. Management Information Systems

This section is not applicable.

IV. Critical Success Factors

This section will briefly outline how Coors is managing the critical success factors in its industry.

Economies of scale are a necessity to be profitable in the industry. Coors’ Golden Colorado brewery is the largest in the industry, capable of producing 25-30 million barrels a year (Ghemawat, 1992). This production facility has allowed them to take advantage of economies of scale and spread the fix costs of production out of millions of barrels of product. Coors brewing facilities have historically had high capacity to deal with demand fluctuations, but future demand may prompt changes.

Second, Coors has strong, differentiated brands that fit into multiple segments. Coors’ broad portfolio of over 40 brands allows it to reach a wide range of market segments (Ibisworld, 2010).

Finally, a strong distribution network is imperative to obtaining sales levels. This is the aspect in which Coors is the weakest. Economics would dictate that an “in-house” operation would increase value-added, but Coors’ distribution network is not strong enough for them to realize financial benefit.

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V. Strategic Problem

Management has failed to ensure the long‐term survival of Coors because they have neglected the importance of strong distribution networks, and shipping expenses associated with proximity to markets, and of refrigeration needs. If Coors wants to successfully compete on a national level, like its competitors, it will need to boost the efficiency of its distribution network.

VI. Strategic Alternatives

Option 1

Construct an additional brewery in the eastern United States such as the location in Virginia. This brewery would serve the eastern United States, and add additional capacity to Coors overall.

The pros of this option are as follows: It would reduce costs associated with shipping from the Golden Colorado site. Coors estimates a $2.50 saving per barrel if it would not have to ship its entire product the average 1500 miles. Although the brewing industry is not projected to grow, it would not hurt Coors to have more resources and capabilities, and not have to base their entire operation on the single brewery.

The cons of this option are as follows: It would take a large investment to establish a new brewery, and maintain its production. A 5-million barrel brewery would cost $200-$250 million (Ghemawat, 1992).

Option 2

A second option would be to begin focusing heavily on marketing. The numbers show that Coors is considerably behind their competitors in advertising spending as a proportion of sales. The company has strong brands that could perform better with additional promotion.

The pros of this option are as follows: Increased brand awareness, and information about the varying brands that Coors produces will result in additional sales volume. Targeting advertising about certain product lines to certain target markets could increase penetration into market niches, and result in additional market share.

The cons of this option are as follows: The additional costs of a national advertising effort will be high. ROI may be low because of statistical data from studies indicating that advertising in this industry does not create lasting impressions (Ghemawat, 1992).

VII. Recommendation

After weighing the alternatives and their pros and cons, it would be most beneficial for Coors to select strategic option one, and construct an additional brewing facility. If they were to select strategic option 2, and the effects of their marketing campaign were favorable, they may not be able to keep up with demand which would be disastrous for the company. It may take them too long to make the necessary expansions in time to capture the additional market share. Constructing another brewery would also serve to drastically lower shipping costs.

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VIII. Implementation

There are a number of strategic steps that will need to be implemented.

Coors will need to ensure that it has the necessary funds for completion of the project. If they do not have the necessary funds, they will need to be acquired through efficient channels.

Second, the site will have to be purchased. Any local environmental or social regulations or preferences will need to be planned for. Construction of the brewery will begin.

Finally, the project will need to be completed on time to meet projections of needed capacity from the brewery to satisfy the demand needs of the east coast.

Necessary sunk costs will need to be maintained to aid in startup of the facility including provisions for raw materials and machinery, as well as beginning the brewing process.

Finally, Coors’ distribution network will need to smoothly integrate the new site into the existing framework.

The brewery will allow for additional production of all of Coors’ product segments, using the existing brand recognition and perceived quality that Coors’ brands have. The costs associated with shipping will be reduced drastically.

Coors has an opportunity to further expand its capacity. Coors position within the industry is currently strong, but the company will need to take the necessary steps to facilitate growth. Fierce competition from Anheuser-Busch, the industry leader will only get tougher if Coors does not take a proactive rather than reactive stance. If the company follows the strategic recommendation above, it puts them in a good position to market themselves additionally, but only after they have the necessary capabilities.

IX. Bibliography

Datamonitor, Inc. (2009a). Alcoholic Drinks in the United States: Industry Profile. New York, NY. Retrieved April 19, 2010, from the Datamonitor Company Profiles Authority Database.

Datamonitor, Inc. (2009b). Beer in the United States: Industry Profile. New York, NY. Retrieved April 19, 2010, from the Datamonitor Company Profiles Authority Database.

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Datamonitor, Inc. (2009c). Molson Coors Brewing Company: Company Profile. New York, NY. Retrieved April 20, 2010, from the Datamonitor Company Profiles Authority Database.

Ghemawat, P. (1992). Adolph Coors in the Brewing Industry. Boston, MA: Harvard Business School. (Original work published 1987)

History of Beer Brewing. (2010). Wine Making | Beer Brewing. Retrieved April 21, 2010, from http://www.winemakingbeerbrewing.com/history/history-of-beer-brewing

IBISWorld, Inc. (2010). IBISWorld Industry Report 31212: Beer Production in the U.S. Washington, DC: Areeb Pirani.

Molson Coors Brewing Company.

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