University of Pennsylvania
The beer industry in The United States was going through a huge structural change during the 1970s. Within1970-1980, the number of traditional breweries reduced from 82 to 40 whereas the number of specialty breweries rises from 1 to 8 within the same period. From 1974 to 1984, the sales of the top 5 breweries rose from 64 percent to 83.9 percent (Elzinga 2011). In the meantime there were six mega brewers in the United States (Miller, Heileman, Stroh, Anheuser-Busch, Pabst and Coors) together with 75% of the market share (Cabras and Higgins 2016).
The per capita consumption of beer rose from 18.7 to 23.1 within 1970-1980. The consumption of canned beer rises and draught beer falls following the removal of the prohibition act in 1935. This trend continued in 1970 and 1980 (Stack 2022). At that time, the major brewers started increasing their competitive advantage by differentiated products and not by lowering prices (Cabras and Higgins, 2016).
There are several reason for this consolidation in the beer industry. Technological progress in the production system, packaging, brewing process and better infrastructure increased competitive advantage for the mega breweries. Secondly, the production of lagers or bottom-fermented beer was associated with a high fixed cost and more time which led to the exit of the smaller breweries from the market. The brewers with large economies of scale did not go for a price competition rather focused on advertisements and gained a significant competitive advantage (Garavaglia, C. and Swinnen, J., 2017). Many brewers expand their market share by expanding their production facilities into other states and owning new plants through mergers and acquisitions (Cabras and Higgins, 2016).
Coors indeed had a locational advantage in comparison with its competitors during the 70s. The first location and headquarter of Coors’ plant was established in a center of the town, named Golden in Colorado, United States. According to Lichtenstein, (1975), the plant used to dominate the local community as it was situated more on the west side of the country. One-fourth of the population of the Golden city used to work at the Coors’ factory. The plant was situated near the market and thus Coors could supply its products easily to the market despite the fluctuations in demand. Coors had the water rights in the springs of town which made availability of water less costly.
According to Lichtenstein, (1975) Coors never pasteurized its beer like most of the other companies. Coors used a different process for fermentation which was associated with longer time. Others breweries used to age beer for 20-30 days whereas the Coors used to do the same for 701 days. It increased the costs of production of beer in Coors compared to the other companies. From the exhibit 9 of the operating statements of Coors, it can be understood that Coors was able to keep their production cost at a very low level compared to it competitors.
Coors used to produce at least 90 percent of the brewing machineries and 75 percent of the packaging machineries by itself. Coors used to contract over 2000 farmers for barley. It had its own factory for production of cereals such as gran and rice. They used to buy hops from domestic and foreign suppliers. They introduced a two-piece aluminum can which were bought from external source. Coors’ value in the sustainability and environment can be seen in their recycling program which used to meet 14% of the aluminum requirement. The horizontal and vertical integration created a major cost advantage for this company (Harvard Business School, 1992).
To enhance competitive advantage two factors are necessary to focus: the value of the product and the cost (Walker and Madsen 2016). Coors was always focused on lowering their cost of production. The company tried to become self-sufficient to get a cost advantage over its competitors. Plus they did not only focus on the quality of the product but also focused on the health aspects of the consumers and the environmental effects of the production. They were the first company that used its own recycled aluminum for the packaging and to use a different process of fermentation in which fewer preservatives were to be added. It used its location very wisely to increase efficiency in marketing.
Coors was very strict regarding the policies of marketing such that the wholesalers were strictly forbidden to store beer in the selves for more than 60 days. It shows Coors’ commitment towards product quality. Coors product used to be shipped in refrigerated trucks to the wholesalers. In 1978, with the help of marketing experts, hired from other companies, Coors managed to launch new brands and to spread their brand awareness in Canada and West Germany. In 1985, a campaign was started by Coors, called “Coors is the One’. This ad campaign was focused on impacting their customers by presenting Coors beer as a fresher and better beer (Harvard Business School 1992).
Coors positioned itself as a low cost company in the market. The other breweries was more focused to differentiate its product whereas Coors tried to make itself sufficient to produce its intermediate inputs internally. Its resource management strategy helped it to produce with lower production costs. The operating cost of Coors was so low that the percentage of its operating income was higher than its competitors. This cost advantage was helpful to arrange funds for future investments (Harvard Business School 1992).
By 1985 the performance of Coors changed compared to 1970. In the starting the company extended their distribution in the U.S. but then it started to spread its presence in the western states. Since its beginning, its prime focus was to minimize the operating cost but they need to do some changes like more investment in marketing. They started expending more for advertisements which led a decline in the operating cost of the company. The data in the operating report (1992) is not enough to compare the change in performance with the other companies.
Coors changes many things including shift of their focus from cost-saving strategies to good marketing strategies. They kept their plant at the same location but expanded their distribution channels throughout the U.S. as well as the other countries. They started to introduce new brands of beer which was unusual during the 1970s. It raised their operating cost. The biggest change was when Coors allowed to brew its beer in more than one plant. Coors collaborated with Kaltenberg castle and Molson of Canada to make Masters Brewing Company (Harvard Business School 1992).
As Coors started to expand its presence in the beer industry and the production need was surpassing the maximum capacity of its only plant it started to look for another plant location. It planned to construct a packaging facility of 10 million barrel per year in Rockingham country and acquired 2100 acres of land. The new facility was expected to reduce the shipping cost to $2.50 per barrel which means $6 million savings yearly. There is no economic upside potential from this facility as the initial investment is $95 which is higher than the annual return from the same (Harvard Business School 1992).
If the demand for beer is considered, it is very stable and rising over time. Though the operating cost is rising Coors still can compete if its new facility construction is finished. By using this facility the company can save $6 million annually along with additional savings of $2.50 per barrel. In 1985, other major companies dominated the Southeastern and New England market and thus Coors have an opportunity to grow and gain huge market share on the East coast.
Coors may suffer from a late-mover disadvantage as two of its major competitors had started investing on marketing and also launched new brands to the market before Coors had done all of these. Thus they had the upper hand in acquiring more market share than Coors had.
As a recommendation it can be said that Coors could plan the construction of new packaging facility earlier and also start focusing more on marketing sooner. It already had a cost advantage over others, the potential for more production could be helpful for this company to fetch huge success.
Cabras, I. and Higgins, D., 2016. Beer, brewing, and business history. Business History, 58(5), pp.609-624. https://doi.org/10.1080/00076791.2015.1122713
Elzinga, K.G., 2011. The US beer industry: Concentration, fragmentation, and a nexus with wine. Journal of Wine Economics, 6(2), pp.217-230. https://doi.org/10.1017/S1931436100001619
Garavaglia, C. and Swinnen, J., 2017. The craft beer revolution: An international perspective. Choices, 32(3), pp.1-8.
Harvard Business School, 1992. Adolf Coors in the Brewing Industry.
Lichtenstein, G., 1975. Sold only in the West, Coors beer is smuggled to the East. Henry Kissinger drinks it. So does Paul Newman, though he would abhor the Coors family's politics. The New York Times, [online] Available at: <https://www.nytimes.com/1975/12/28/archives/article-4-no-title-sold-only-in-the-west-coors-beer-is-smuggled-to.html> [Accessed 14 February 2022].
Stack, M., 2022. A Concise History of America’s Brewing Industry. [Online] Eh.net. Available at: <https://eh.net/encyclopedia/a-concise-history-of-americas-brewing-industry/> [Accessed 15 February 2022].
Walker, G. and Madsen, T., 2016. Modern Competitive Strategy. 4th ed. MC Graw Hill Education.
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