The following research report scrutinizes the alcoholic beverage industry by an exhaustive analysis of the industry dynamics through Porter’s five forces analysis. To be precise, the report will focus on threats to new entrants, the bargaining power of consumers, the bargaining power of suppliers, and the threat of substitute products.
The Threat of New Entrants
The alcoholic beverage industry in the recent past has experienced a threat to new entrants. An in-depth study conducted, according to Distilled Spirits Council of the United States (2019) on the industry reveals that the sector has recently been engaged with increasing opportunities on innovation, which have consequently allowed new entrants into the market. Such opportunities have provided increased revenue for suppliers (Mordor Intelligence, 2019). In 2018, it was documented that the alcoholic beverage industry revenue accounted for a total of $ 27.5 billion, which equates to a 2.2% rise in sales (Globe News Wire, 2019).
The economies of scale have attracted a considerable number of investors in the industry, consequently diversifying the competition, industry concentration as well as switching costs. Nonetheless, the industry faces stiff regulations from the government, including rules from the Federal, State, and Local governments, including tariffs on distilling (Editorial staff, 2019). These regulations have limited entrants into alcoholic beverages despite the increase in competition (McCullough, Berning, and Hanson, 2019). For example, high amounts of capital are required to become a significant player in the market. The expectation limits small and medium based enterprises seeking a share of the market (U.S. Alcohol Beverage Industry Structure, 2017). Due to such limitations, the threat of entry factor encourages customer loyalty to already existing brands that enjoy low customer switching costs. Therefore, the barriers of entry have considerably limited new entrants but, has increased diversification of products in the market, which has tipped the balance of the competitive market.
Bargaining Power of Consumers
The aspect of the bargaining power of consumers within the industry has been to their favor. The reason is that the consequent increase in new entrants improves brand choice for consumers. Even though brand loyalty is associated with a brand name, consumers have gained a unique perspective when it comes to purchasing. According to Mordor Intelligence (2019), new entrants have generated a variety of options for consumers ranging from vodka, rum, gin, tequila, brandy to others. Therefore, the positive result of such bargaining power is that there is an increased potential in buyers for the industry. The benefit majorly favors the market players, but it also supports the buyers highly since the higher the number, the more bargaining power the consumers possess.
Additionally, the industry has witnessed change cost, which is described to be at a minimum. The differences in competitors within the market have significantly impacted loyalty among customers. To retain consumers, competitors oblige to altering product prices to attract the market share (Newhart, 2019). However, the power of bargaining in consumers in 2018 is determined to have shifted with the majority of consumers preferring spirits over beer and wine. The bargaining power, therefore, influences the market with demand pressurizing the competitors to indulge in innovative products and authentic brands. However, despite the increase in customer loyalty and numbers, dependability on customer disposable income is a significant determinant. Since millennials portray a more considerable consumer percentage in the alcoholic industry, the decreasing income variable has affected product switching costs (McIntyre, 2018). Millennials are diversifying too much cheaper products for those with lower income dependability index despite the demand for authentic experiences from the brands in the market (McIntyre, 2018). Therefore, the bargaining power of consumers is significantly affecting the alcoholic industry based on product, branding, and innovation, which directly affects the businesses.
Threat of Substitutes
Due to the bargaining power of consumers, the demand for diversity of alcoholic brands in the market is inevitable. A study conducted to determine the difference in alcoholic beverage consumption in 2018 in the U.S. distinguished that cheaper, affordable, and newer brands experienced higher sales compared to the more lucrative and expensive brands (Golan, 2017; Distilled Spirits Council of the United States, 2019). The aspect of industry rivalry has been noticeable, with retail sales improving since 2010. The change is attributed to an increase in competition in the market, which brings on new forces that are the bargaining power of the supplier (Globe News Wire, 2019). As such, substitute products for the more expensive brands have become notable, with most brands opting to have a two-spectrum market variation in their products. For example, vodka, spirits, and rum are indicated to have experienced the most significant shift in substitute products in history (U.S. Alcohol Beverage Industry Structure, 2017). As a result, there are large availabilities of substitutes in the market. The consequence of this is the change in cost in which the lower end is favored more compared to higher prices. However. Buyer proclivity to the substitute product has been gradual or non-existent because, buyer power dictates familiarity but, innovation within the same brand loyalty. In summary, threats to substitutes have been significant within the market, and as a result, have affected the dynamics of brand performance and customer loyalty shift.
Bargaining Power of Suppliers
The bargaining power of suppliers has been dependent on how cooperative suppliers have been with the manufacturers within the alcoholic beverage industry. The setback for manufacturers is that the entry of suppliers in the market has been overwhelming. It means that numerous suppliers in the market offer similar ingredients for the manufacturers (Hart and Alston, 2019). The positive aspect of this is that raw materials are readily available for the market players. For such players, suppliers rely on volumes of sales, which is critical for profitability. Due to the corresponding increase in manufacturers in the market, the bargaining power of suppliers has decreased. Suppliers are reliant on high volumes of sales, but, in this case, producers are willing to handle more than one supplier when it comes to outsourcing for ingredients (U.S. Alcohol Beverage Industry Structure, 2017). Therefore, the bargaining power of the suppliers has gradually decreased. The other negative connotation about the bargaining power of suppliers in this industry is that producers’ ability to cut volume supply affects supplier profitability. Since producers are willing to outsource from multiple vendors, suppliers are findings it challenging to profit from the venture.
Another aspect of the bargaining power of suppliers is that they are bound to enter into contracts with manufacturers in an attempt to remain profitable and relevant. The setback to this approach is that suppliers may not be open to dealing with other producers exclusively, which may hurt the business in the long run. Therefore, the bargaining power of suppliers in this market is described as one of the losers in the increasingly profitable industry in the country.
The report has provided an in-depth analysis of the alcoholic beverage industry through a thorough review of Porter’s five forces model. The report has elucidated on threats of new entrants, threats of substitutes, bargaining power of suppliers, and consumers. In summary, the benefactors of the industry are consumers and new entrants but, those who have lost are suppliers and existing market brands who have to cope with new substitute products.
References Golan, E. (2017). U.S. Patent Application No. 15/534,121. Mordor Intelligence. (2019). North America Alcoholic Beverage Market. Retrieved from https://www.mordorintelligence.com/industry-reports/north-america-alcoholic-beverage-market Globe-News Wire. (2019). Alcoholic Beverages Market To Reach US$ 1, 977.9427 Bn by 2025Due to Rising Trend in Consuming Alcohols. Transparency Market Research. Retrieved from https://www.globenewswire.com/news-release/2019/03/13/1752499/0/en/Alcoholic-Beverages-Market-to-reach-US-1-977-9427-Bn-by-2025-due-to-Rising-Trend-of-Consuming-Alcohols-TMR.html McIntyre, Douglas. (2018). America’s Favorite Alcoholic Drink Varies by Class. USA Today. Retrieved from https://www.usatoday.com/story/money/2019/08/13/beer-wine-americas-favorite-alcoholic-drink-varies-class-gender/39937723/ Newhart, Beth. (2019). State of the Industry: What’s To Come For Alcohol in 2019. Beverage Daily. Retrieved from https://www.beveragedaily.com/Article/2019/01/03/State-of-the-industry-What-s-to-come-for-alcohol-in-2019 Editorial Staff. (2019). Rules and Regulations About Marketing Alcohol Products. Alcohol.org. Retrieved from https://www.alcohol.org/laws/marketing-to-the-public/ U.S. Alcohol Beverage Industry Structure. (2017). Georgia Distillers.org. Retrieved from http://georgiadistillers.org/perch/resources/alcoholbevindstructure.pdf Distilled Spirits Council of the United States. (2019). Distilled Spirits Reports Ninth Straight Year of Record Sales, Market Share gains. Distilled Spirits.org. Retrieved from https://www.distilledspirits.org/news/distilled-spirits-council-reports-ninth-straight-year-of-record-spirits-sales-market-share-gains/ Hart, J., & Alston, J. (2019). Evolving Consumption Patterns in the US Alcohol Market: Disaggregated Spatial Analysis. Available at SSRN 3358620. McCullough, M., Berning, J., & Hanson, J. L. (2019). Learning by Brewing: Homebrewing Legalization and The Brewing Industry. Contemporary Economic Policy, 37(1), 25-39.