Entry Barriers in Liquor Industry
ENTRY BARRIERS IN LIQUOR INDUSTRY
When a new firm enters into an industry it can affect all of the firms that are currently in that industry. “new entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents cost inflated as a result, reducing profitability.”24Therefore as new firms enter into an industry the entire industry’s potential for sustained profits is reduced due to the increased amount of competition in that industry. Some factors help reduce the threat of entry as they act as barriers that prevent new firms from entering into an industry. These factors include economies of scale, product differentiation, capital requirements, access to distribution channels, and government regulations. When these factors reduce the threat of entry, the profit potential for the industry increases.
Economies of Scale. Economies of scale is defined as the “declines in unit costs of a product as the absolute volume per period increase” Therefore the greater quantity of a product that is produced the lower the cost of each will be to the producer. This creates an advantage for a high volume producer like those seen in the brewing industry. Economies of scale in the brewing industry also exist in areas other than in production and these include purchasing, distribution, and advertising. For example, national brewers achieve economies of scale in advertising through bulk media purchases and umbrella brand marketing. Local-craft brewers spend more than twice that spent by large brewers on marketing and advertising per barrel.25 One company in particular, which is Anheuser-Busch, has done an extremely good job in exploiting the economies of scale that are present in the brewing industry. “Anheuser-Busch has been able to leverage its 45 percent U.S. market share into 75 percent of the industry’s operating profits through significant economies of scale in the areas of raw material procurement,
When a new firm enters into an industry it can affect all of the firms that are currently in that industry. “new entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents cost inflated as a result, reducing profitability.”24Therefore as new firms enter into an industry the entire industry’s potential for sustained profits is reduced due to the increased amount of competition in that industry. Some factors help reduce the threat of entry as they act as barriers that prevent new firms from entering into an industry. These factors include economies of scale, product differentiation, capital requirements, access to distribution channels, and government regulations. When these factors reduce the threat of entry, the profit potential for the industry increases.
Economies of Scale. Economies of scale is defined as the “declines in unit costs of a product as the absolute volume per period increase” Therefore the greater quantity of a product that is produced the lower the cost of each will be to the producer. This creates an advantage for a high volume producer like those seen in the brewing industry. Economies of scale in the brewing industry also exist in areas other than in production and these include purchasing, distribution, and advertising. For example, national brewers achieve economies of scale in advertising through bulk media purchases and umbrella brand marketing. Local-craft brewers spend more than twice that spent by large brewers on marketing and advertising per barrel.25 One company in particular, which is Anheuser-Busch, has done an extremely good job in exploiting the economies of scale that are present in the brewing industry. “Anheuser-Busch has been able to leverage its 45 percent U.S. market share into 75 percent of the industry’s operating profits through significant economies of scale in the areas of raw material procurement,