Having neatly divided the beer industry into two customer segments (beer drinkers and beer connoisseurs), my model has eroded. The more I think (or maybe drink), it seems like this model may be too simplistic for the current situation.
The last post contemplated the way the beer product is changing. This included:
- Single serving size is heading upwards.
- The alcohol content of beer is creeping up1. Or down.
- Shifting label offerings from individual brewers.
Now I’m trying to get my head around whether the distribution channels in Ontario play a role in beer consumption or provision.2 But first, more information about the dynamics of the beer industry:
- In Canada, beer consumption is declining (by volume) or at least showing the slowest annual growth of all alcoholic beverage categories.3 This threat likely has many beer producers, traditional and craft alike, looking for the next way to stay relevant to those who consume alcoholic beverages.
- Large breweries, Canadian and international, are acquiring craft breweries4. This makes a lot of business strategy sense.5 Companies looking to expand or maintain market share eye adjacent market segments, considering if their core competencies are translatable into serving the new market. Thus, the big brewers that serve the beer drinker market are wading into the beer connoisseur market. Among other efficiencies, they can tap their distribution channel to enhance sales of the acquired craft brands.
- Craft brews are merging with other craft brews6, to realize economies of scale at every step on the path from acquiring raw materials to delivering to the consumer.
The emerging picture is a blurring of the lines between the industry segments, at least from the beer providers’ perspective.
What is the role of the unique form of beer distribution we have in Ontario? The Beer Store has supplier power7 because it is THE major retail outlet for beer in the province8. Others are the LCBO (Liquor Control Board of Ontario), and grocery stores. Individual brewers also sell their products direct to consumers. The Beer Store effectively supplies all but the D2C sales.
Beer Store sales to LCBO have increased steadily 2014 to 2021: 22% over the full 7 years, but 5% in 2021 compared to the previous year.9 While this stat doesn’t say anything about which brands of beer the Beer Store is selling to the liquor store, it could mean the individual buyer is competing with the LCBO for the Beer Store’s stocking priorities.
Grocery store sales of beer climbed dramatically during the pandemic. According to this article10, grocery stores get the beer they sell from the LCBO, making it effectively a distributor for the Beer Store.
The Beer Store started out as a collaboration between three large beer producers. It was a cost-effective final stage of the supply chain which provided the consumer with the ability to buy from two or more brewers at once, relieving the brewer of pesky retail tasks, like taking customers’ money, stocking shelves, and collecting empties. A case of beer (24 pack) can only be purchased at the Beer Store, not other distribution channels.
Since 2015, the Beer Store opened ownership shares to any Ontario brewer.11 It also has established policies12 regarding the merchandising of products, which appear to aim at providing all brewers with access to promotional displays.
Through availability, the Beer Store is a gateway that curates which beers consumers can consume in the province. Businesses generally stock products based on perceived demand. But this can be slanted by what their biggest customer wants. So, if the LCBO is becoming the Beer Store’s biggest customer, or fastest growing customer, what the LCBO wants may influence what the Beer Store sells.
In my model of what’s so complicated about beer, the LCBO has a different customer base for beer than the Beer Store. Generally, the LCBO serves beer connoisseurs while The Beer Store provides for beer drinkers. If the Beer Store is being influenced by the LCBO’s customers, this means they are no longer serving different customer segments. Overall, this could create a pull for craft beers, reflected in the Beer Stores’ stocking practices. If a beer drinker goes to the supplier of (no) choice for beer, they buy what is available.
Leaving aside conspiracy theories about the Beer Store controlling retail customers, I assume it stocks what it perceives customers want, and what its suppliers supply.
To an industry losing market share to alternative beverages, all beer consumers – beer drinkers, connoisseurs and those that are a bit of both – are good beer consumers when their numbers are thinning.
The beer industry is threatened by declining sales and substitutes (other alcoholic and non-alcoholic beverages). Thus both big brewers and craft brewers alike are employing tactics (looking for economies of scale, product improvements and innovations, packaging variations, distribution optimizations, consolidations and acquisitions) to support business longevity.
1 https://www.washingtonpost.com/food/2022/08/04/craft-beer-abv-ipas-nonalcoholic/
2 Theory says providers provide what customers demand and will pay for. From the consumer perspective, this often looks like a shift from what ‘people’ want to what makes more money for the company. Both are correct. If the company satisfies the demand of the majority of customers, it will make money. Customers who are late adopters or just don’t like a new path in the industry are likely to point the finger at capitalistic concerns, believing it’s all about company profits rather than consumer tastes.
3 https://agriculture.canada.ca/en/international-trade/market-intelligence/reports/customized-report-service-alcoholic-beverage-market-canada-and-united-states
4 Examples include the Carlsberg group acquiring Waterloo Brewing https://www.cbc.ca/news/canada/kitchener-waterloo/waterloo-brewing-carlsberg-group-1.6687067 and Molson acquiring a London, Ont. based microbrewery. https://www.brewbound.com/news/molson-coors-acquires-londons-hop-stuff-brewery/
5 Margins are likely better for beer connoisseur products but it’s hard to make sweeping statements about making money through such acquisitions. Currently, a tall can of beer costs about $3. A traditional 2-4 costs $45ish, which means one beer from this box costs about $2. Selling 24 $3 cans of beer grosses $72, almost twice that of selling a 2-4. What about profits? There would be economies of scale selling a bundle of 24 rather than single servings. There are sure to be economies of scale in producing the vast quantities of beer sold under popular brands such as Bud Lite or Molson Canadian compared to craft brews that sell much lower volumes. Real numbers are required to see if profits are higher selling large quantities of low margin beer (to the beer drinkers) or small quantities of high margin beer (to the connoisseurs). The volume also needs to be added to the equation as regardless of the margin, the profit on millions of units at a 5% margin is bigger than a profit of 20% on 10’s of thousands of units.
6 https://www.theglobeandmail.com/business/article-canada-craft-beer-industry-covid-oversaturated-market/
7 More accurately, what in Porter’s five forces, a canonical business strategy tool for assessing the competitive environment and therefore fate of a business, is called Supplier Power.
8 Here’s a good source to substantiate the distribution channel structure in Ontario https://www.ontario.ca/page/case-change-increasing-choice-and-expanding-opportunity-ontarios-alcohol-sector
9 https://www.thebeerstore.ca/wp-content/uploads/2022/06/TBS-OpsReport2021_Final.pdf
10 https://www.supermarketnews.com/beverage/beer-battle-brewing-ontario
11 https://www.thebeerstore.ca/ownership-governance/open-ownership/
12 https://www.thebeerstore.ca/ownership-governance/corporate-policy-financial-information/