MARKET ANALYSIS

In this section the competitive situation prevailing in the Danish microbrewery market will be described via size and growth trends, rivalry, cost structure, distribution systems, market trends and key success factors as to arrive at an understanding of what characteristics that pervade the market (Aaker, 2005; 80).

In terms of size and growth Danish microbreweries have experienced explosive growth rates throughout the last decade. However, as these have tailed off lately, industry commentators suggest that sales volume growth prospects for microbreweries now lie below 10% per annum given that the competitive landscape for microbreweries quickly has matured and, to a certain degree, supply is beginning to exceed demand (Euromonitor, 2009).

Thus, competition has become fierce on the Danish microbrewery market and many breweries have been forced to capitulate and close. The economic downturn and the following change in consumption patterns struck both large and small microbreweries, as it started in mid 2008.

However, despite of this development new microbreweries are still being established; e.g. in 2009 12 microbreweries were closed but simultaneously 12 new opened (Per Steen Nielsen, 2010).

41 Overall, premium sales continue to drive total Danish beer sales, as Denmark has undergone a “beer revolution” with countless numbers of microbreweries popping up across the market (Euromonitor, 2009). However, Per Steen Nielsen of the Danish brewery association note that “the current amount of 120 breweries, as per June 2010, is likely to decrease, but given the characteristics of the market the decrease is not estimated to be below hundred”. This notion is supported by trade commentators that believe that many microbreweries will struggle to remain profitable and this should result in a reduction in the number of market players (Euromonitor, 2009).

One of the factors that may lie to ground for above estimate is that the microbrewery industry keeps gaining marketshare from the standard beer market – a share that since 2003 has increased with 700% so that microbreweries as of 2009 now sell 3,5 % of the total amount of beer sold in Denmark (Bryggeriforeningen, 2010).¹ As such, the recent growth in demand for microbrew have aided in keeping the number of competitors on the microbrew market relatively stable despite of the many breweries that are forced to close.

Additionally, this trend in development highlights a really interesting achievement of the industry;

for the first time Danish microbreweries account for a larger marketshare than that of foreign (imported) beer. Even more so, this is interesting as the microbreweries have continued to grow their marketshare in a market (the Danish beer market) that since 2000 have decreased with 24% in terms of sales volume (ibid). As such, it might seem that microbrew, opposed to mainstream brew, has thrived from and adopted to the changes in consumption patterns (amongst others, the demand for premium goods have increased and alcohol consumption per capita has changed from 10 liters in 1995 to 8,3 liters in 2009), as well as, it has been able to adopt to the competition with wine.

Diagram 8.1 – Sales share of imported beer and microbreweries (in %) (Bryggeriforeningen 2010).

1 http://www.business.dk/foedevarer/danskere-vilde-med-specialoel

(On-trade)

(Off-trade)

42 There is an intense rivalry within the industry as the majority of the breweries compete for the same (niche) target group and distribution channels, while threats from potential entrants are high, as new competitors arrive at a monthly basis due to low entry barriers. Additionally, in terms of substitutions, the rivalry is primarily being spurred by the fierce competition from wine, while new competitors continue to emerge – the recent introduction of premium alcoholic cider being the most prominent of these. In July, it has furthermore been put forward by Bryggeriforeningen that wine-consumption (43,3%) has now overtaken beer-wine-consumption (39,8%) on the national market and as such puts further pressure on the already strained microbrew industry – “a change starting already in 2007, but now cannot be explained by any statistical errors or incertainties”. ²

These factors cause a great amount of rivalry between the microbreweries in terms of obtaining the profitable B2B customers and keeping these. To support the notion of high rivalry it can be noted, that the Danish Competition Authority in 2006 removed the beer industry from the list of markets with lacking competition after years of dominance by Carlsberg and Royal Unibrew.³

The increased competition can also be seen in the prices of beer in general (i.e. not just microbrew) as the beer price index recently has had a lower rate of growth than the consumer index (Bryggeriforemingen, 2010). The initial decrease of the beer price index around year 2001 can likely be attributed to a decreasing demand for alcohol in general and an increase in demand for wine (as supported by the above consumption pattern). Following this development the index rose again after a couple of years of recession and did so around the time that microbrew started to pose a serious threat on the beer market and grew their market share, thereby driving the price index up being a premium product.

Diagram 8.2 – Development of consumer and beer price index in Denmark (I.Y = 1996) (Bryggeriforeningen 2010)

2 http://bryggeriforeningen.dk/default.asp?pid=191&visnyhed=349

3 http://www.dev-bryggeriforeningen.dk/default.asp?pid=289 Consumer Price

Index

Beer Price Index

43 With regards to the cost structure, the major cost for a microbrewery in the production stage is to be found in the fabrication process, i.e. the time it takes to make the beer and the required machinery (Aaker, 2005; 89). The key success factors of a microbrewery are very well connected with this, as the fabrication determines the taste of the beer, while the actual geographic location of the production facility have an impact on distribution costs and thereby distribution opportunities, as well as, it is likely to affect the benefits used in the positioning of the brand.

Focusing on enhancing the distribution system may be a way to counter the costs found in the production stage. These systems rely on distribution through on- and off-trade, but a few of the bigger microbreweries such as GourmetBryggeriet and Nørrebro Bryghus also utilize their homepage as an alternative distribution channel, as you can buy their products online.

Future on-trade sales for microbrews are likely to be concentrated in players’ own on-trade outlets, so-called “Brew-Pubs” (Euromonitor, 2009). This is supported by Per Steen Nielsen (Bryggeriforeningen, 2010) who notes that one of the major trends in the market is for microbreweries to open their own restaurant, or vice versa, as to obtain a relatively low-cost distribution channel that they fully control. Such initiatives may very well come as a somewhat forced reply to the distribution system which is largely controlled by the major beer companies of Carlsberg and Royal Unibrew, as they also have the licenses to distribute respectively the Coca Cola Company and the Pepsi Co products in addition to their own portfolio.

Thus, microbreweries suffer from an asymmetric bargaining relationship with the majority of their sales channels as these hold a better bargaining position. Such poor bargaining relationships typically stem from microbreweries being small in size compared to the distribution channels, i.e.

Dansk Supermarked and COOP, and having the products of a specific microbrewery on the shelves is typically of less importance to the off-trade, than it is for that specific microbrewery.

The on-trade is the smaller distribution channel as this account for 23%, but opposite to the off-trade, hotels, restaurants, etc. generally tend to only have one supplier of beverages (ibid). As such, microbreweries may find themselves in a poor bargaining situation with the on-trade, as with the off-trade, as they tend to lack a wide selection in the portfolio they offer in terms of soda and more standard beers and thus it may be relatively hard to become a supplier to the on-trade when facing competition from bigger companies with bigger portfolios. However, it is accepted that draught beer sales is an area in which microbreweries may become more price competitive in the on-trade

44 and be able to compete against more established breweries and thus target the general on-trade (Euromonitor, 2009).

Additionally, trends on the product side have throughout recent years given rise to beers that focus on contemporary social values. Nørrebro Bryghus have launched a CO2 neutral beer, many microbreweries have produced beers with organic ingredients, and the microbrewery Ørbæk have decided to solely produce organic beers and complement this by other organic products. This trend is very contemporary in nature, but also a symbol of an increasing need to differentiate on a microbrewery market that is becoming clustered with brands that all claim superior quality and craftsmanship. Thus, being able to detect changes in consumption trends, cultural values and consumer groupings is an important area of focus in order to differentiate your offerings and thereby sustain and enhance your position in the market. An example of such an option is the growing supply of cider as an alcoholic beverage – a product that primarily is being offered by larger breweries. Utilizing a similar approach as that of competing on the beer market with premium microbrew against more standard brew, microbreweries could potentially diversify their portfolio and offer premium cider (an option that however is outside the scope of this paper).

The key success factors governing the Danish microbrewery industry have implicitly been touched upon in this brief section on market characteristics. Undoubtedly, great taste and superior quality of the beer are pivotal variables, but given that this is claimed by all competitors this is a strategic necessity (at the least claim wise), rather than a strategic strength (Aaker, 2005; 91). Strategic strengths can on the other hand be found in e.g. the distribution agreements that a given microbrewery hold as to reach as many of the target group as possible, while doing so at a minimal cost. Thus, a successful microbrewery needs to emphasize several business areas and make sure to exploit the potential key success factors and thereby potentially obtain a strategic strength.

One of the areas that may function as a strategic strength, but so far is unsuccessfully addressed by microbreweries today is that of obtaining a unique positioning for the respective brand. On a market that is increasingly being crowded with products that all claim superior quality there is a definite need to be able to obtain and utilize points of differentiation – undoubtedly, this is a (future) strategic strength.

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