Economic Concepts in the Beer Industry
Length: 1090 words (3.1 double-spaced pages)
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Beer is distributed through a system called the "three-tier" distribution system. The three-tier system was established by the 21st Amendment to the Constitution and state and federal governments in the wake of the repeal of Prohibition as a means of checks and balances at each tier level. The first tier consists of brewers and importers, followed by wholesalers, and lastly with the retailers. The brewers and importers manufacture the beer and in the case of importers, import it into the country, then sells the beer to wholesalers who then sell and ship it to retailers. Besides manufacturing the beer, brewers are also responsible for providing market support and assistance to wholesalers, providing point-of-sale materials, providing consistent supply of the product, maintaining a consistently quality product, and notifying the wholesaler of changes in product, ownership of company, changes in marketing strategy and provide adequate lead time for introduction of new items or product design changes.
Beer wholesalers occupy the middle tier of the three-tier system. The 21st Amendment instituted the necessity of a middle tier for a variety of reasons. First, retailers are now protected from control previously used by the suppliers, or brewers. Second, it encourages consumption in moderation. Third, the process allows for more controlled and accurate collection of state and federal taxes. Finally, it allows individual states to regulate the licensed beverages in a manner that reflect their own practices and beliefs.
The distribution appears to be simple, but the specifics are very involved. After manufacturing, the brewer will take orders from wholesalers based on the stock needed to fulfill orders from retailers. The beer is loaded into trucks, some often refrigerated to ensure freshness, and taken to the wholesaler or warehouses for storage. Over 2,000 breweries and importers sell their product to over 2,500 wholesalers that are often independent from the brewer. The wholesaler then sells the product, with a percentage markup (often 25%), to retailers. The wholesaler's job does not stop there, however. Wholesalers are also responsible for maintaining proper storage environment as dictated in contract with the retailer, maintaining adequate inventories, ensuring proper stock rotation in warehouses and retail trade, removing products past their expiration dates, maintaining payment terms as dictated by state liquor law or as stated in contract, servicing all accounts in their assigned territory, providing market intelligence (buy and non-buy lists, monthly depletions, sales data) to supplier, and assisting in agreed upon market promotions.
The third tier consists of the 531,000 retail establishments in the U.S. These retail establishments consist of traditional liquor stores, supermarkets, drug stores, membership clubs, convenience stores, independently owned taverns, restaurants, nightclubs, and hotel chains. Beer comprises 61%, or nearly $8 billion in sales at grocery stores yearly. Therefore, it is the most important beverage for retailers and should encourage them to understand beer drinkers. Although such high sales exist at grocery stores, according to VNU Business Publications, 45% of all beer purchases are made at convenience stores indicating a preference to pay a little extra for the "get in get out" convenience. However, that trend is changing due higher fuel prices and aggressive supermarket promotions.
This three-tier beer distribution system provides the best method for smaller breweries to get their beers into a diverse marketplace and provides small retailers and consumers the best variety of choice and value of beer. It has given consumers and retailers unparallel access to a tremendous variety of beers.
There are several factors affecting the demand for beer. First, price is a factor because demand responds considerably to a change in price. If the price of beer increases, people will consume less. If the price of beer falls, people will consume more. Second, as consumer's income changes their demand for beer will also change. A rise in income will likely trigger a decrease in beer purchases because people that generally consume beer tend to have lower incomes. Another reason is that people with higher incomes are statistically better educated and would, therefore, be aware of the positive affects drinking wine can have on the heart. Third, prices of related goods affect the demand for beer. If the price of wine were to decrease then the demand for beer would also decrease because consumers would want to purchase the less expensive wine. This would be an example of a substitute. Other examples of substitutes would be spirits, wine coolers, soft drinks, water, tea, and sports drinks. Two goods are said to be compliments if a change in price leads to a negative purchasing behavior (e.g. price of beer increases, consumption of tobacco decreases). Another factor affecting the demand of beer is age. As the people age, statistically they consume less beer, substituting it with wine and spirits. This is shown to be the trend because as the baby boomers age over the past several years beer sales have declined. The last factor affecting the demand for beer is tastes and preferences. The U.S. is collectively turning into a health conscious society. As this happens more light beers (especially beers with low carbohydrates) and specialty drinks are being consumed. All these factors together determine how much beer consumers will demand.
Beer consumption in the U.S. is has an inelastic demand of -.9, meaning if beer prices were to increase 1% then the demand would decrease -.9%.