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The brewing industry in 1985 can be analyzed using Porters five competitive forces threat of new entrants bargaining power of suppliers bargaining power of buyers substitutes and rivalry among existing competitors All five competitive forces jointly determine the intensity of industry competition and profitability Furthermore the five forces narrow in on why the brewing industry became more concentrated and key features defining industry success In the brewing industry barriers to entry were high Fixed costs increased as a percentage of revenue necessitating brewers to have higher production capacitiesminimal efficient production scale to achieve economies of scale This could be achieved by doubling brewery production which decreased unit capital costs by 25 percent In addition high capital requirements existed since 35-45 million was required in launch costs and advertising for a new brand These financial requirements implied a competitive advantage for large brewing companies who were spending approximately 1200 million about 10 percent of sales in advertising in 1985 An entering firm had limited access to distribution channels as the wholesalers who served the largest brewers did not carry other brewers beer The bargaining power of suppliers is medium since the removal of price controls for aluminum led to sharp increase in can prices and therefore raised cost of packaging materials and for the brewers Some companies like Coors reduced these costs by starting can recycling programs to decrease their dependence on new raw materials Bargaining power of buyers was high as the independent wholesalers who purchased the beer and sold and delivered to retail accounts earned low profits The average return on sales for wholesalers had fallen from 3 percent in 1981 to 21 percent in 1984 In addition the increasing production capacity desire for companies to enter new markets and promote new products and cost reductions led to a 30 percent decrease in beer prices between 1960 and 1980 Pressures from substitute products was minimal as advertising affected consumers willingness to substitute among
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