bsc thesis market structure of the global beer market
TRANSCRIPT
BSc Thesis
Market structure of the
global beer market
Bram Roes
971008701130 Supervisor: Dr. Emiel Wubben
Business and consumer studies (BBC) Wageningen University and Research
YSS-81812 BSc Thesis Business Studies 12 ECTS
09-12-2019
2
Acknowledgement During the process of this thesis, I was supervised by Dr. Emiel Wubben. I want to thank him
for the meaningful and patient guidance during the process of writing this thesis.
3
Abstract The aim of this thesis is to give an overview of what the current global beer market looks like.
With the help of industrial organization literature and the corresponding Structure-Conduct-
performance paradigm, seven different hypotheses are listed in order to describe what the
current global beer market looks like. Four of these hypotheses are tested in order to
describe the beer market. These four hypotheses are tested with the help of two different
databases which contained market information and company financials. The data analysis
and literature research showed that the beer market contains a few large breweries that are
growing with the help of smaller breweries which are merged into the larger breweries.
Besides larger growing breweries, a lot of smaller breweries enter the market which diversify
market offerings. The data analysis, focussed on CR(n) and HHI measures, showed that the
beer market is in transition towards a more concentrated market. In order to test four of the
seven hypotheses, the concentration measures are compared with the company’s individual
financial information. The total research did lead to an approval of one of the seven
hypotheses.
Keywords: SCP paradigm, concentration ratio, beer market
4
Table of contents Acknowledgement ...................................................................................................................... 2
Abstract ...................................................................................................................................... 3
Chapter 1 Introduction ................................................................................................................ 6
1.1 Sector overview ................................................................................................................ 6
1.2 Problem statement and research aim .............................................................................. 7
1.2.1 Research questions ................................................................................................... 7
1.3 Methodology ..................................................................................................................... 7
Chapter 2 Literature ................................................................................................................... 8
2.1 Introduction ....................................................................................................................... 8
2.2 Defining Industrial organization ........................................................................................ 8
2.3 Two schools of thought within industrial organization literature ...................................... 9
2.4 Structure – Conduct – Performance further examined .................................................. 11
2.5 Market structure .............................................................................................................. 12
2.5.1 Number of sellers ..................................................................................................... 12
2.5.2 Barriers to entry ....................................................................................................... 12
2.5.3 Diversification ........................................................................................................... 13
2.5.4 Conclusion market structure .................................................................................... 13
2.6 Market conduct ............................................................................................................... 14
2.6.1 Pricing behaviour ..................................................................................................... 14
2.6.2 Product strategy ....................................................................................................... 14
2.6.3 Advertising ............................................................................................................... 14
2.6.4 Mergers and Acquisitions ........................................................................................ 15
2.6.5 Conclusion market conduct ..................................................................................... 15
2.7 Market performance ....................................................................................................... 15
2.7.1 Profitability ............................................................................................................... 16
2.7.2 Growth / progress .................................................................................................... 16
2.8 General hypotheses from the SCP paradigm ................................................................ 16
Chapter 3 Data analysis ........................................................................................................... 18
3.1 Introduction ..................................................................................................................... 18
3.2 Herfindahl-Hirschman index and Concentration index .................................................. 18
3.3 Revenues ........................................................................................................................ 23
3.4 Profit rates ...................................................................................................................... 24
Chapter 4 Hypotheses testing .................................................................................................. 26
4.1 Not used hypotheses ...................................................................................................... 26
4.2 1. Barriers to entry hypothesis ...................................................................................... 26
4.3 2. Diversification hypothesis .......................................................................................... 26
5
4.4 3. Profit rates hypothesis ............................................................................................... 27
4.5 4. Market performance hypothesis ................................................................................ 27
Chapter 5 Conclusion ............................................................................................................... 28
Chapter 6 Discussion ............................................................................................................... 29
Chapter 7 Appendixes .............................................................................................................. 30
Chapter 8 References .............................................................................................................. 31
6
Chapter 1 Introduction
With an increasing number of small breweries and a few large breweries which are owned by even larger multinationals, the global beer market can be an interesting object of study. The large multinationals are in most cases established as the following example. In 1989 three men bought a Brazilian beer company for 50 million dollars. Ten years later they acquired a large competitor, Antartica. This lead to AmBev being created. (The economist, 2015).
Breweries grew and grow by acquiring competitors and gaining more market share. Recently in 2016, the biggest merger in the existence of beer took place. The former AmBev, now AB InBev with sales in 2015 of $43604 (million), (AbInBev financial report, 2015) merged with SABMiller, the second-largest beer producer. After the merger, sales in 2017 grew to $56444 (million), (AbInBev financial report, 2017). For AB InBev merging SABMiller into the company was a valuable acquisition because sales grew with 29,446%. This example describes a common practice of how large breweries are growing.
At the same time, many small and local breweries pop up. Most of these breweries produce unique and different beers, which seems to gain market share. In 2007 the Netherlands counted 90 breweries. Ten years later the amount of breweries grew to 370 (CBS, 2017). This large increase can be indicative of a shift in beer demand in the Netherlands towards a more differentiated taste. Brewing local beer has also become more popular in other countries. For example, in the USA, the amount of breweries has increased from 1511 breweries in 2007 to 6372 breweries in 2017. (Brewers Association, 2017).
1.1 Sector overview
Figure 1 gives an overview of how the global market is divided between different brewing companies. It is remarkable that one company has almost 30% market share while smaller breweries only have less than 10% market share each. Another significant aspect of figure 1 is that other smaller breweries have more than 40% of market share. This could be an indication of a shifting global market share. Besides the large breweries, many small and local breweries gain ground. Considering the growth in breweries mentioned in the introduction, it can be stated that a new type of beer consumption is popping up. With this new type of beer consumption, not only the beer but also the experience that comes with drinking the beer is appreciated. This trend of authenticity seems to enlarge market supply and also increase competition between breweries (Frake, 2017). It can be concluded that the beer market is going through a transformation where the big beer brewers grow even bigger, while at the same time many small competitors pop-up, that differentiate themselves. In order to analyse what is happening in the beer market, literature from the industrial organization topic seems most appropriate. Within industrial organization literature, researchers are trying to find explanations for different structures and behaviours of companies in a market.
0 0,1 0,2 0,3 0,4 0,5
Anheuser-Busch InBev NV
Heineken NV
China Resources Enterprise…
Carlsberg A/S
Molson Coors Brewing Co
Asahi Group Holdings Ltd.
Efes
Other
Global market share of the leading beer companies in 2016
Percentage of market share
Figure 1, Global market share of the leading beer companies in
2016 (Statista)
7
1.2 Problem statement and research aim
The large breweries like Ab-InBev and Heineken are growing larger and larger. They are acquiring other companies on a continuous base. At the same time, smaller breweries are popping up. These smaller breweries focus on brewing local and unique beer. This is something which seems to be valued by customers more and more. This change in market structure, seen from large breweries and from small breweries, calls for research that gives an overview of the current situation in the global beer market. Therefore, the aim of the research is to investigate different transformations and parallels in the global beer market. By discovering typical patterns in market structure of the global beer market and combining these patterns with industrial organization theories from the literature, it should be possible to give a clear image of what is happening in the global beer market. These considerations have led to the following research questions:
1.2.1 Research questions
Main question: To which extent does the global beer market align industrial organization hypotheses in order to give an overview of how the current global beer market looks like?
Sub-questions:
1. What are the key theoretical hypotheses in industrial organization literature? 2. What are the outcomes when the hypotheses from sub-question 1 will be used to
interpret the global beer market? 3. What conclusion can be drawn of these hypotheses and their outcomes?
1.3 Methodology
In this research, a qualitative method has been used. Therefore, most of the research is based on scientific literature. The literature provides information on different theoretical models. In chapter 2, a literature overview has been given in order to answer the first sub-question that is: What are the key theoretical hypotheses in industrial organization literature? With the help of these theoretical hypotheses, it is tried to interpret the structure of the beer market. A lot of hypotheses from industrial organization literature do also have a quantitative part. Due to time restrictions, the quantitative part of these models are taken into account at a limited base when interpreting the beer market. In chapter 3 the hypotheses have been tested empirically. As mentioned before, this is done at a limited base due to the scope of this thesis. In the following chapter 4, the results of chapter 3 are used to interpret the hypotheses concerning the beer market. The final chapter 5 contains a conclusion. Literature that is used, is mainly from scientific online databases like Scopus, Web of science, Econlith and the Wageningen University Library online database. Besides online databases, handbooks from Wageningen University library are also used. For chapter 3, two online databases are used which are Marketline advantage and Orbis.
8
Chapter 2 Literature
2.1 Introduction In this chapter, different definitions of industrial organisation will be presented first. After this,
several hypotheses of industrial organisation will be illustrated. With these hypotheses, the
first sub-question of this research will be answered, that is: What are the key theoretical
hypotheses in industrial organisation literature?
2.2 Defining Industrial organization In order to answer the first sub-question, a better understanding of the concept of industrial
organization should be illustrated. Different authors provide different views on how the term
industrial organization can be lined out. Therefore, an overview of different definitions is
given in Table 1. Table 1 is ordered in chronological sequence.
Author: Definition:
Florence, (1933,2013) Citation, book, WUR Library
“I believe that knowledge how logically to plan industrial structures and functions would gain greatly if the study of industry were linked more closely with both economics and political science, provided these sciences are prepared to build upon a basis of facts accurately measured by statistical methods, and to interpret results in the light of modern psychology.” (p. 10)
McKie., (1970) Citation, book, WUR Library
“industrial organization has taken many forms in different hands and has followed multiple lines of development difficult to characterize by a single label.” (p. 3)
Bethel et al., (1971) Citation, book, WUR Library
“Industrial organization is a means by which human resources, physical assets, money, and time are coordinated into efficient production of products and services.” (p. 27)
Scherer, (1980) Citation, book, WUR Library
“the field that is concerned with how productive activities are brought into harmony with society’s demands for goods and services through some organizing mechanism (…) and how variations and imperfections in the organizing mechanism affect the degree of success achieved by producers in satisfying society’s wants.” (p. 1)
Clarkson et al., (1982) Citation, book, WUR Library
“… the study of industrial organization investigates the structure of firm sizes, the causes of this structure, and the effects of the structure upon markets.” (p. 1)
McGee, (1988) Citation, book, WUR Library
“Industrial organization studies how the performance of an industry is related to its structure; that is, to the number and size of firms it contains.” (p. 1)
Tirole, (1988) Book, Google books
Industrial organization is indescribable, because the borders of the definition are blurred.
Burgess, (1989) Citation, book, WUR Library
“It is the study of markets for goods and of the firms which produce them. It is the study of industry. (…) industrial organization is more concerned with why markets are structured the way they are and behave the way they do.” (p. 29)
Waldman et al., (2001) Citation, book, WUR Library
“The field of Industrial organization developed as an offshoot of microeconomic theory. (…) Industrial organization emphasizes the behaviour of firms as compared with the behaviour of industries more than does traditional microeconomic theory.” (p. 11)
Belleflamme et al., (2010) Citation, book, WUR Library
“presenting the role of imperfectly competitive markets for private and social decisions” (p. 19)
Table 1 Overview of definitions of Industrial Organization
9
As showed above, the definition of industrial organization can be described in many ways. In
this research, the choice has been made to use ten definitions created throughout the years
to give an overview of different industrial organization definitions. This overview of multiple
definitions in different periods of time is necessary for an analysis of the meaning of industrial
organization. In the overview, there is a partition between authors who have given a clear
definition of the concept and authors who thought that they were not able to give a clear
definition because the concept is too broad. This research is focussed on describing the
market structure of the beer market. Therefore, the definition of industrial organization should
be definable with regard to market structure. Focussing on a specific definition for this
research and taking all above-mentioned definitions into consideration, the best definition
can be described as: “Industrial organization studies how the performance of an industry is
related to its structure.” (McGee, 1988).
2.3 Two schools of thought within industrial organization literature In the next section, two different schools of thought within industrial organization literature
are given. A school within scientific context can best be described as a group of scientists
who have the same view on a certain topic and are at the same time somewhat different
compared to the general view of other scientists on that same topic (Stigler, 1962).
One of the first groups of scientists who described market structure and behaviour, were
scientists who adhered to the Chicago school of economics. According to Tirole (1988),
industrial organization can be split up in two different waves (other scientists describe more
waves but due to time restrictions only two are mentioned in this thesis). The first wave in
industrial organization literature are followers of the so-called Chicago school. This is a
way of thinking in microeconomics that explains how different markets work based on neo-
classical economics. Founders of this school are George Stigler, Milton Friedman et al.
(Davies, 2017). The development of the Chicago school depended heavily on empirical
hypotheses and data application to test these hypotheses. The way that these hypotheses
were formulated relied on neoclassical economic principles. Concluding, the followers of the
Chicago school within industrial organization literature were interpreting different market
structures and behaviours by using neoclassical microeconomic principles.
10
Besides the Chicago school within industrial
organization literature, there is a more
theoretical school of thought, which can be
seen as the second wave in industrial
organization literature. (Because this second
wave is more theoretical than Chicago
school, it will be the called the theoretical
school in this research.) One of the founders
of the theoretical school of thought was
Edward Mason. He is considered the father of
industrial organization (Schmallensee, 2012).
Part of Mason’s research focussed on the
problem of concentration in industries. He
questioned price policies of firms in different
industries and examined generalisations
towards price and production policies (Allen,
1959). Mason argued that the performance of
a company depends heavily on the conduct
of sellers and buyers. Furthermore, the
conduct of sellers and buyers depends on
market structure. The model also assumes a
set of basic conditions which are supply,
demand and public policy (Scherer, 1980).
This model is currently known as the
Structure-Conduct-Performance paradigm
(SCP paradigm). In the 1950’s other
researchers thought that Mason was
considering too many theories (Nutter, 1957). Currently, science has a considerable owe to
Mason’s development of the SCP paradigm while the paradigm is still being used to explain
different structures and behaviours in markets (De Figueirȇdo et al., 2014; Dick et al., 2012;
Halbersma et al., 2011).
Continuing on Mason’s research, professor Mason and his students also focussed largely on
case studies in particular industries in order to discover other patterns of behaviour
(Schmallensee, 2012). Later it became clear that the focus on case studies did not bring the
desired outcome. Mason described his thoughts on the deducted case studies as follows:
“valid generalizations as a basis for prediction or for public action (…) are hard to come by.”
(Mason, 1957, p. 5, according to Schmallensee (2012),). As mentioned above, discovering
patterns of behaviour can be very difficult. Bain (1956), who is another major contributor to
the field of industrial organization and the corresponding SCP paradigm, managed to further
develop the paradigm. Bain managed to focus on the empirical part of the paradigm by
analysing variables from 20 different manufacturing industries (Heflebower, 1957). He
focussed on the effects of barriers to enter a market. With these effects, Bain tried to
describe the state of (potential) competition and the consequences of profitability in the
market. These consequences were higher or lower profitability. Bain concluded that a
market with a high product differentiation leads to high barriers to entry. Continuing,
high barriers to entry also leads to significantly higher profits (Schoeffler, 1957). With
these conclusions, Bain’s written book managed to “make this book the most significant
contribution to this phase of economics in many years” (Heflebower, 1957, p. 371).
In the previous section, the Chicago school and the theoretical school within industrial
organization literature are illustrated. While this research is a qualitative literature study, the
Figure 2, The Structure-Conduct-Performance paradigm (SCP) (Scherer
and Ross, 1990)
11
continuation of the research will focus on the theoretical school (SCP paradigm) within
industrial organization literature. The theoretical school is more appropriate because it
focuses on descriptive theories and hypotheses to illustrate market structure and behaviour.
This is contradicting to Chicago school, because Chicago school focuses more on
mathematical empirical models to explain market structure and behaviour. With the help of
the SCP paradigm, I am trying to uncover hypotheses which can be used to illustrate the
beer market. Therefore, a closer look at the SCP paradigm will be given in the next section.
2.4 Structure – Conduct – Performance further examined In this section, a slightly adapted SCP paradigm will be given first. Within this adapted
paradigm only the topics, which are most interesting for illustrating the beer market, are
given. This has been done in order to be able to give a clear description of hypotheses by
which we can align the beer market. Besides the interest of the research, it has also been
done in order to structure and reduce the amount of literature that is available. Every chapter
starts with an explanation of why topics are added or left out.
Table 2 shows the original SCP paradigm with the topics that are left out or added.
- Not included in the main part of this research, but could be used in results
- Included in the main part of this research
- Added to this research
Supply:
- Unionization - Raw materials - Technology - Product durability - Value / weight ratio - Business attitudes - Legal framework
Demand
- Substitutes - Rate of growth - Cyclical and
seasonal behaviour - Marketing type - Price elasticities - Purchase method
Market structure
- Number of sellers - Barriers to entry - Diversification - Product differentiation - Cost structures - Vertical integration
Public policy
- Taxes and subsidies - International trade
rules - Regulation - Price controls - Antitrust - Information provision Conduct
- Pricing behaviour - Product strategy - Advertising - M&A - Research and innovation - Plant investment
Performance
- Profitability - Growth / progress - Production and allocative efficiency - Full employment - Equity
Table 2 Adapted SCP paradigm
12
2.5 Market structure In this paragraph, a closer look will be given on the number of sellers in a market, barriers to
entry of a market and diversification within a market. Within the market structure part of the
adapted paradigm, the topics cost structures and vertical integration are left out. Cost
structures are left out because it is very time-consuming to analyse cost structures of a
market and results are difficult to associate with structure, conduct, and performance.
Vertical integration is left out because most of the time this depends on companies’ individual
behaviour. This means that it cannot be generalised over the entire structure, conduct or
performance of a market.
2.5.1 Number of sellers The concentration ratio is a different description of the number of sellers in a market. The
concentration ratio affects pricing behaviour, profit rate, market power and in the end
consumer welfare. An often used hypothesis in this relationship is that: “the average profit
rate of firms in oligopolistic industries of a high concentration will tend to be significantly
larger than that of firms in less concentrated oligopolies” (Bain, 1951). This hypothesis can
be explained through collusion which is easier in highly concentrated industries. The
easiness of collusion within high concentrated industries leads to higher prices and in the
end, higher profits (Waldman et al., 2001).
The hypothesis of Bain (1951) is endorsed by Stigler (1964), Miller (1967) and many others
(Bhuyan et al., 2013). The concentration – profit ratio hypothesis (Bain, 1951) is still being
studied in recent literature. Although some studies do not find a positive correlation in the
concentration ratio and profit ratio of a market (Bucevska et al., 2017, Bolarinwa et al., 2017,
Gavurova et al., 2017 Goldberg et al., 1996), there are still studies which do find a positive
correlation (Delorme et al., 2002). In the literature, it seems that the hypothesis of Bain
(1951), once endorsed by many, does not hold anymore for every market. Most of the
mentioned studies do recognize a different relationship. For example, market performance
has a positive effect on market concentration (Gavurova et al., 2017).
Concluding, from the large number of studies that have been done, there should be a
relation between the number of sellers in a market and the performance of a company.
For this research, I assume, based on various literature mentioned above, that there is a
relationship between concentration ratio and profit. However, at this point, the literature
does not support one evident hypothesis about that relationship. In other words, multiple
hypotheses could be used when researching this relation. In this research, I will use the initial
hypothesis of Bain (1951) which states that a high concentration ratio leads to higher profit
ratios. I will use this hypothesis because it was and still is, a hypothesis that is used in large
amounts of literature.
2.5.2 Barriers to entry Barriers to enter a market have a large relation with certain specifications of a specific
market. There are different barriers to enter a market, for example, production capacity or
product differentiation could both be a barrier to entry. These barriers are most of the time an
advantage for firms that have already established a constant position within that specific
market. A company can also see it the other way round. A barrier to entry can namely be set
and used by companies who are already operating in that market. This makes it harder for
new companies to enter the market. Therefore, a company could use a barrier to entry as
part of its competitive strategy (George et al., 1992). This specifically creating barriers by
companies can only happen when there are not many competitors in the market. With few
competitors, it is easier for companies to work together and create market power by setting
up a barrier to entry.
13
In order to get an overview of different forms of barriers to entry, table 3 gives a description
which states, according to Bain (1950), there are 3 stages which describe the form of a
barrier to entry and which characteristics belong to that form (Bain, 1950).
Barrier to entry Characteristics
1. Markets with easy entry (low barrier to entry)
These are markets in which firms do not have any or little cost to enter the market. Most of the time a high seller concentration.
2. Markets with difficult entry (medium barrier to entry)
The most common form of barriers to entry in most markets. Where concentration of firms is moderate or low. Product differentiation is moderate or high.
3. Markets with blockaded or very difficult entry (high barrier to entry)
Not rare, with high product differentiation, high costs and few sellers.
Table 3 Three conditions of entering a market (Bain, 1950)
Concluding from table 3, a high concentration leads to low barriers to entry. This also
holds vice versa.
2.5.3 Diversification Diversification is a strategy in which companies are diversifying their operations. This could,
for example, be done by changing or expanding product assortment. Besides companies
who use diversification, markets can also be diverse or in other words heterogeneous. In
order to cope with a heterogeneous market, companies should be able to continuously adjust
to that specific changing market. This ability to respond to a changing market is useful when
competition increases. Because, increasing competition initially leads to lower profit rates,
companies are starting to use a diversification strategy in order to retain normal profit
rates because of growing competition (Belkhaoui et al., 2014). This adoption of
diversification, changes the structure of the market in for example the diverse supply of
products. Another aspect of diversification is that the level of innovation will increase
because companies have to innovate in order to develop and diversify their products and to
retain a solid position in the market. Therefore, increasing competition also leads towards
more innovation (Raider, 1998).
2.5.4 Conclusion market structure The concentration ratio of firms in a market can be seen as a fundamental concept within the
determination of market structure. It influences the barriers to entry in a way that high
concentration makes it easier to enter a market and low concentration makes it more difficult
to enter a market (Bain, 1950). Furthermore, the number of sellers influences the
diversification of a market in a way that more sellers lead to a more diverse market. Not only
a diverse amount of sellers but also a high concentration leads towards the innovation of
existing products or the rise of new products by companies who were already operating in a
market.
Barriers to entry and diversification are two different concepts to indicate market structure.
Although the two concepts have specific characteristics which indicate specific market
elements, see par. 2.5.2 and par. 2.5.3, the concentration ratio prescribes how the barriers to
entry and diversification of a market will look like. This is because the concentration of firms
influences the barriers to enter a market and the level of diversification. Being important in
two aspects mentioned, it can be stated that the concentration ratio is most important in
determining market structure. With the help of the concentration ratio, other aspects of
market structure can be determined.
14
Notable, is the connection between structure and conduct within the last paragraphs. Many
things from the conduct part of the SCP paradigm align with topics within the structure part of
the SCP paradigm. With all the topics that are mentioned in the conduct part of the SCP
paradigm, it is possible to draw a connection with market structure.
2.6 Market conduct In this section of the research, market conduct will be explained with the help of the earlier
used topics about market structure. Just like the previous part, I used the adapted SCP
paradigm in order to be sure to cover topics that are relevant for the beer market. Within
market conduct, the topics of plant investment and research and innovation are left out. Plant
investment is left out because it has a low connection with the structure, conduct or
performance of an entire market. For plant investment, it is better to analyse at an individual
scale. Same holds for research and development. That leaves us with the topics of pricing
behaviour, product strategy, advertising and mergers and acquisitions. These topics provide
solid theories of market conduct within the SCP paradigm.
2.6.1 Pricing behaviour Prices can be based on very different aspects. It can, for example, be used to indicate the
quality of a product or it can serve as an estimation of how valuable a product is. But prices
are not controlled by firms most of the time. It is the market on which prices mostly depend.
Therefore, it is the first subject within the conduct part of this research. Price is most of the
time the key measure of conduct in the SCP paradigm (Okeahalam, 2007). It heavily
depends on the structure of the market in which a company operates. In many studies, a
relationship between the concentration ratio of firms and pricing behaviour is found. The
relation can often be defined as a high concentration leads to a higher fluctuation of
price. This is true for the reason that in oligopolistic industries prices depend heavily on the
behaviour of different competitors. If one competitor cuts his price other competitors also
need to cut their price in order to maintain sufficient sales (George et al., 1992).
The topic of pricing behaviour is more home to the Chicago school within industrial
organization. Microeconomic theories like prisoners dilemma and oligopoly pricing define
different types of pricing behaviour.
2.6.2 Product strategy Different firms can operate in one market since they can distinguish themselves through the
use of different product strategies. The most common product strategies are the three
generic strategies of Porter (1980). Which prescribes that a company should either focus on
product differentiation, cost leadership or product focus in order to gain competitive
advantage and outperform competitors in a market. Which strategy is best for a certain
company depends on the market in which the company operates. Besides that, the best
strategy also depends on the customers that a company wants to target.
2.6.3 Advertising With a good advertisement, companies can generate more sales and in the end produce
more profit. When a company’s product is known by a large number of people, most of the
time it is due to advertising. With advertising, companies are trying to inform or persuade
customers about or for their product (Waldman et al., 2001). Advertising behaviour is mostly
influenced by the extra output that it generates. This can be more sales output, more
customers for a company etc. If the additional revenue of advertising exceeds the cost of
advertising, companies should do more advertising (George, 1992). Besides this basic
assumption, there is also a relationship between advertising and the concentration ratio of
firms (George, 1992). If advertising serves to gain an advantage on your competitors, it is
15
logical that within a very low or almost monopolistic competition, advertising has no added
value towards increasing competitive advantage. When there is oligopolistic competition, the
Dorfman and Steiner (1954) theory suggests that:
“the optimal level of advertising expenditure for a firm would be where the marginal
revenue product of advertising equalled the absolute value of the elasticity of demand
for the firm’s product. Since the price elasticity of the demand curve faced by a firm is
lower in more concentrated industries, advertising intensity might be expected to
increase with concentration.” (Strickland et al., 1976)
The last part of the above-mentioned citation contains the most interesting assumption for
this research. Which is that there is a positive relationship between market
concentration and advertising intensity. This is most important because it could tell
something about market structure of the beer market.
2.6.4 Mergers and Acquisitions Within company behaviour, mergers and acquisitions are a very common method to expand
a company. Expanding a company with the use of M&A is mostly based on the following
theories. First, the efficiency theory which shows off in increasing economies of scale and
reduction of costs. Second, mergers and acquisitions can also be done in order to increase
market power (monopoly theory). Third, a goal of M&A activity can be to increase the value
of a company (valuation theory) (Trautwein, 1990). There are more theories mentioned in the
article. But I consider these as the most important.
Besides expanding a company, mergers and acquisitions can also eliminate other
companies, by acquiring its competitors. This is another way of using mergers and
acquisitions. These kind of mergers are called conglomerate mergers. In this research, the
definition of conglomerate mergers can best be described as; mergers that involve
companies which offer the same product but are operating in different geographical markets
(Waldman et al., 2001). With conglomerate mergers, the actual competition is not likely to
decline. In fact, not the actual competition but the potential competition will decline.
Because a company which can take over another company has more power at that moment
in time. With a merger, the more powerful company eliminates possible competition of the
company that is merged into the stronger company. With this explanation, it can be stated
that one of the goals of conglomerate mergers is to eliminate potential competition (Waldman
et al., 2001).
2.6.5 Conclusion market conduct It can be concluded that within market or company conduct three main hypotheses hold for
the conduct of a market or a company. The first one, pricing behaviour fluctuates more in
highly concentrated markets than in lower concentrated markets, see par. 2.6.1. This is due
to increased concentration which leads to more competitors to compete with. More
competitors then positively stimulates price fluctuation (George et al.,1992). Second, the
approach that a company has on advertising can reveal something about market structure,
see par 2.6.3. When a company is operating in a more concentrated market, with the
consequence of more competition, it will increase their advertising intensity (Strickland et al.,
1976). This is the same for the positive relation of concentration ratio and pricing behaviour.
Third, conglomerate mergers eliminate possible competition (Waldman et al., 2001), see par.
2.6.4.
2.7 Market performance In this section market performance will be linked to market structure and market conduct.
Within market performance, I will use profitability and growth in order to link performance to
16
structure and conduct. Within market performance ‘production and allocative efficiency’,
equity and full employment are left out. This is because these topics do not show a general
market phenomenon. These topics are of better use when researching companies on an
individual scale.
2.7.1 Profitability Profitability is one of the key variables to measure the performance of total markets or
different individual companies. As mentioned in 2.5.1, there is a relationship between a high
concentration rate in an industry and higher profit rates of companies (Schoefler, 1957). This
also holds vice versa, low concentration of firms leads to lower profit rates. For this research,
it is useful to give an overview of profit rates from different companies in order to compare
companies within an industry with each other. Besides the total profit rates of companies,
profit rate per unit (litre of beer) could give a different view on the performance of different
companies. Profitability, but also ROI (return on investment), operating income and cash flow
are different financial performance measures which are often used (Yusuf, 2018). In this
research, one of these measures should be used to compare different companies and
hypotheses.
2.7.2 Growth / progress In industrial organization, growth determines how a market
develops. This can be either positive or negative
development. Growth is an important factor in studying the
change of a process. It can give information towards which
extent the market has developed. In order to determine to
which extent the market has been developed, the product life
cycle view can be used and gives an important perspective
on how mature a market is. Although it is aimed at the life
cycle of products, it can also reflect information about an
entire market. The product life cycle view indicates that
product sales are related to the stage of evolution where the
product (or market) is in (Agarwal, 2002). A hypothesis drawn
from figure 3 could be that when the growth rate of sales is
>0 then maturity of the market is not reached yet.
2.8 General hypotheses from the SCP paradigm With the help of the analysed topics within structure, conduct and performance from the SCP
paradigm, the following general hypotheses can be concluded.
Topic Hypothesis Underpinning
1. Barriers to entry
A high concentration ratio leads to low barriers to entry and vice versa
Table 3. Bain (1950)
2. Diversification A growing concentration ratio leads to a more diverse market and it stimulates innovation of new products
“increasing competition … growing competition” p.11. Belkhaoui (2014)
3. Profit rates A high concentration ratio leads to higher profit rates
“Continuing high…. Higher profits (Schoefler, 1957)” p. 8
4. Market performance
Good market performance leads to a high concentration of sellers
“Most of … market concentration (Gavurova et al., 2017).” p.10
Figure 3 http://www.quickmba.com/marketing/product/life
cycle/
17
5. Pricing behaviour
Pricing behaviour is more sensitive to highly concentrated markets than for low concentrated markets
“. The relation … sufficient sales (George et al., 1992).” p.12
6. Advertising Advertising intensity is large when a company is operating in a highly concentrated market
“When there … this research.” p. 13
7. Growth Growth of product sales >0, then the market has not reached maturity yet
- (Assumption)
Table 4 Different topics of the adapted SCP paradigm and corresponding hypotheses
18
Chapter 3 Data analysis
3.1 Introduction In this chapter, the hypotheses mentioned in the previous chapter will be tested with the help
of the Herfindahl-Hirschman index, CR(n), revenues and profit rates. This chapter aims to
uncover data which should help in describing the structure of the beer market in chapter 4.
3.2 Herfindahl-Hirschman index and Concentration index In the previous chapter, many hypotheses have been formulated and except for one, the
other 7 are linked to the concentration ratio of firms in a market. In order to visualize
concentration within a market, the CR4 and CR8 and the Herfindahl-Hirschman index, from
now on HHI, will be used. These are the most common measures to visualize market
concentration.
The CR4 and CR8 are concentration indexes which show the total market share of,
respectively, the largest 4 or 8 companies in a market. With the CR4 and CR8, the power of
the largest companies in a market can be expressed. The CR4 and CR8 are calculated
according to the following formula:
𝐶𝑅(4) = 𝑆1 + 𝑆2 + ⋯ = ∑ 𝑆
4
𝑖=1
𝐶𝑅(8) = 𝑆1 + 𝑆2 + ⋯ = ∑ 𝑆
8
𝑖=1
As mentioned before, the concentration ratio of firms is of major importance in the
hypotheses formulated previously. In order to calculate a total concentration ratio, the
Herfindahl-Hirschman index will be used. From now on Herfindahl index. The Herfindahl
index has gained large acceptance because the United States Department of Justice and the
Federal Reserve use it to analyse competitive effects on for example mergers and
acquisitions (Rhoades, 1993). The Herfindahl index is calculated by using the sum of all
squared market shares of companies operating in the beer market. The sum of the squared
market shares of companies operating in the beer market expresses the concentration in the
beer market (Rhoades, 1993). The Herfindahl index has a maximum of 10.000 (monopoly)
and a minimum of close to 0 (perfect competition) (Hayes, 2019). The Herfindahl index will
be calculated using the following formula (Waldman et al., 2001):
𝐻𝐻𝐼 = 𝑆12 + 𝑆22 + 𝑆32 + ⋯ + 𝑆𝑁2 = ∑ 𝑆12
𝑁
𝑖=1
In order to interpret the results of the Herfindahl index the classification of the United States
Department of Justice will be used. According to the United States Department of Justice, a
Herfindahl index between 1500 and 2500 indicates a moderately concentrated market. A
Herfindahl index more than 2500 is considered to be a highly concentrated market
(United States Department of Justice, 2018). In order to calculate the Herfindahl-Hirschman
index (HHI) and the CR4 and CR8, data from Marketline advantage -> Market data Analytics
is used.1
1 The category “others” is removed from the data set since it is not possible to visualize which companies belong to that category.
19
The calculation of the Herfindahl index gives an average HHI from 2009 to 2017 of 892.
According to the classification of the United States Department of Justice, this means that
the beer market is not high and also not moderately concentrated. In figure 4 it is clear that
the HHI remained constant from 2009 until 2012. Between 2012 and 2013 an increase in HHI
is found. After 2013 it remains almost constant until 2016 and 2017 where the HHI increases
towards 1166. From the figures, it can be concluded that the beer market is in a growing
transition in terms of concentration. Furthermore, the changes in HHI indicate that there is a
shift in market power within the beer market. Increases as described above can be explained
by large companies which have a market share which is >1. The initial market share should
be >1 since the HHI formula only prescribes an increase when market shares are >1
because the market shares are squared. The increase in HHI can be explained by the
increase in the number of breweries mentioned in the introduction of this research. Or,
companies which already have a market share >1 and are growing which means that their
squared market share increases. Resulting in an increase of the HHI without new companies
entering the market.
In order to find out if the growth in HHI comes from the largest 8 companies, the CR4 and
CR8 ratios are conducted.
Year: HHI (rounded):
2009 803
2010 783
2011 774
2012 778
2013 887
2014 936
2015 950
2016 953
2017 1166
Average 892
0
200
400
600
800
1000
1200
1400
2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7
HHI
HHI
Figure 4 and Table 5 HHI calculation based on volume (HL, Hectolitres). Source: Marketline Advantage -> Market Data Analytics. Appendix A: Thesis
HHI calculation.xlsx
20
The CR4 and the CR8 are concentration ratios which show the total market share of the
largest 4 (CR4) or top 8 (CR8) companies in a market. CR4 and CR8 are calculated
according to the following formula:
𝐶𝑅(4) = 𝑆1 + 𝑆2 + ⋯ = ∑ 𝑆
4
𝑖=1
𝐶𝑅(8) = 𝑆1 + 𝑆2 + ⋯ = ∑ 𝑆
8
𝑖=1
Figure 5 and Table 6 show the outcomes of the CR4 and CR8. It is remarkable to see that
the CR8 is almost about 70%. In other words, the top 8 companies, regarding market share,
have a total market share of 70%. According to the United States department of justice, a
market is highly concentrated when CR4 >35% or CR8 >50% (Chen, 2002). This indicates
that the beer market is highly concentrated for both the CR4 and CR8. Compared to the HHI
this is interesting because according to the guidelines of the United States Department of
Justice, the HHI indicates that the market does not have a high concentration while the CR4
and CR8 are indicating a highly concentrated market. This tells us that the largest 8
companies are highly concentrated and are possibly ruling the market. The results until now
are indicating an oligopolistic market. In order to gain more knowledge from the CR4 and
CR8, the average growth per year is calculated. The average growth per year in table 6
indicates that the CR8 is increasing faster than the CR4. This means that the largest 8
companies in a market gain more market share faster than the largest 4 companies in a
market.
Concluding, from the HHI it became clear that the market is not concentrated but the
market is in transition towards a higher concentrated market. It is also obvious that the
increase in HHI should come from large companies which already have a market share >1.
The CR4 and CR8 showed that the beer market is certainly highly concentrated. The
average growth per year showed that the CR8 is growing faster than the CR4. This
Year: CR4 (rounded) :
CR8 (rounded):
2009 45 61
2010 46 63
2011 46 63
2012 46 64
2013 49 67
2014 50 69
2015 51 69
2016 51 69
2017 53 71
Average 49 66
Average growth per year
0.9112 1.0273
0
10
20
30
40
50
60
70
80
2009 2010 2011 2012 2013 2014 2015 2016 2017
CR4 and CR8
CR4 CR8
Figure 5 and Table 6 CR4 and CR8 based on volume (HL, Hectolitres). Source: Marketline Advantage -> Market Data Analytics. Appendix B:
Thesis calculation CR4 and CR8.xlsx
means that the largest 8 companies in the beer market are gaining market share faster than the largest 4 companies in the beer market.
Besides this, the data revealed that the largest 8 companies are not always the same companies. Table 7 gives an overview of the largest 8
companies over the years from 2009 until 2017.
2009 2010 2011 2012 2013 2014 2015 2016 2017
1. Anheuser-Busch InBev
Anheuser-Busch InBev
Anheuser-Busch InBev
Anheuser-Busch InBev
Anheuser-Busch InBev
Anheuser-Busch InBev
Anheuser-Busch InBev
Anheuser-Busch InBev
Anheuser-Busch InBev
2. SABMiller
Heineken Heineken SABMiller SABMiller SABMiller SABMiller Heineken Heineken
3. Heineken SABMiller SABMiller Heineken Heineken Heineken Heineken SABMiller China Resources Beer
4. Carlsberg China Resources Beer
China Resources Beer
China Resources Beer
China Resources Beer
China Resources Beer
China Resources Beer
China Resources Beer
Carlsberg
5. China Resources Beer
Carlsberg Carlsberg Carlsberg Carlsberg Carlsberg Carlsberg Carlsberg Molson Coors Brewing company
6. Tsingtao Tsingtao Tsingtao Tsingtao Tsingtao Tsingtao Tsingtao Tsingtao Tsingtao
7. Modelo Modelo Yanjing Brewery
Modelo Yanjing Brewery
Molson Coors Brewing company
Molson Coors Brewing company
Molson Coors Brewing company
Asahi Group
8. Yanjing Brewery
Yanjing Brewery
Modelo Yanjing Brewery
Molson Coors Brewing company
Yanjing Brewery
Yanjing Brewery
Yanjing Brewery
Yanjing Brewery
Table 7 The Largest companies in the beer market from 2009 until 2017 based on produced volume. Source: Marketline Advantage -> Market Data Analytics. Appendix B:
Thesis calculation CR4 and CR8.xlsx
From table 7 it can be concluded that the largest 8 companies vary over time. Most
remarkable is the disappearance of SABMiller and Modelo. As mentioned in the introduction,
in 2016 Anheuser-Busch InBev takes over SABMiller and merges SABMiller in their
company. Therefore SABMiller disappears from table 7 since it does not produce beer
anymore. This is an example of a conglomerate merger since Anheuser-Busch InBev takes
over its competitor. Conglomerate mergers are described more extensive in paragraph
2.6.4.. The same has happened to the Modelo group. In 2012 the Modelo group (which
produces the famous Corona beer) was taken over by Anheuser-Busch InBev (Blenkinsop,
2012). It can be stated that table 7 confirms the figures from table 6 which shows that the
largest 4 companies are growing larger faster than the largest 8 companies. In order to
research the growth of the largest 4 and the largest 8 companies in the beer market, the next
section provides information on some of the financial aspects of the largest 8 companies.
3.3 Revenues In this section, the financial aspects mentioned in the hypotheses listed in table 4 will be
elaborated. First, hypothesis 4 will be tested with an overview of revenues to see if the
largest 8 companies perform better or worse between 2009 and 2017.
Figure 6 Overview of revenues (Thousand USD). Source: Orbis
Figure 6 shows that in terms of revenue the larger companies are growing and the smaller
companies, for example Carlsberg, Tsingtao and Yanjing Brewery, remain an almost
constant revenue. The overview of revenues shows the same picture as the concentration
ratios in section 3.2. That is, the larger companies grow even larger. In order to analyse if the
growth in revenue aligns with the concentration ratio of firms, the HHI is also added in figure
6. For comparison reasons, the numbers of table 5 (HHI) are multiplied by 50.000. The HHI
shows almost the same growth as the revenue of Anheuser-Busch InBev and also Heineken.
Figure 7 gives an overview of total revenues of the largest 8 companies in order to see if the
total market (market performance) is also growing.
Figure 7 Total revenue (Thousand USD) largest 8 companies in each year and HHI based on volume (HL, Hectolitres)
0
10.000.000
20.000.000
30.000.000
40.000.000
50.000.000
60.000.000
70.000.000
2009 2010 2011 2012 2013 2014 2015 2016 2017
Anheuser Busch InBev Heineken
China Resources enterprise Carlsberg
Molson Coors Brewing company Tsingtao
Yanjing Brewery Grupo Modelo
SABMiller HHI
0
20.000.000
40.000.000
60.000.000
80.000.000
100.000.000
120.000.000
140.000.000
160.000.000
180.000.000
2009 2010 2011 2012 2013 2014 2015 2016 2017
Rev
enu
e (t
hU
SD)
/ H
HI
(Pro
po
rtio
ned
)
Year
Revenu HHI
24
As can be seen in figure 7, the beer market was and probably is going to continue to grow.
According to the Marketline database, in 2016, SABMiller does belong to the largest 8
companies in the market. But, the Orbis database does not have data on SABMiller in 2016.
Therefore, data from their annual report 2016 is used instead of data from Orbis. The
revenue line of figure 7 is based on the companies mentioned in table 7 for that specific year.
The included HHI in figure 7 is added to visualize the relation between total revenue and
HHI. The correlation between total revenue and HHI is 0,357. This indicates that there is a
moderate correlation between total revenue and HHI. However, the corresponding p-value is
0.344. This indicates that the correlation is not significant and it, therefore, cannot be used to
indicate a relation between revenue and HHI.
3.4 Profit rates Table 4 shows a hypothesis that a high concentration within a market leads to higher profit
rates. In order to measure profitability, the rate of return on stockholders’ equity after tax will
be used. This measure is useful because it shows the profit that individual investors want to
maximise (Waldman et al., 2001). The rate of return on stockholders’ equity after tax is
calculated by the following formula:
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 = 𝜋 − 𝑇
𝐸
Where π is profits, T is tax and E is stockholders’ equity. Because CR4 and CR8 indicate
that the top 8 companies do influence the structure of the market. The profit rates of the top 8
companies according to Marketline advantage -> Market data Analytics will be calculated and
used. The financial database Orbis will be used to gather the required financial information.
Figure 8 Profit rates (%) largest 8 companies. Source: Orbis. Appendix C: Thesis calculation profit rates.xlsx
Figure 6 shows the profit rates of the largest 8 companies from 2009 until 2017. As noted in
table 7, the largest 8 companies are not always the same companies each year. Therefore
there are a total of 9 companies, which have belonged to the largest 8, illustrated in the
graph. In 2017 only 7 companies are visualized in the graph. The one missing is the Asahi
-20
-15
-10
-5
0
5
10
15
20
25
30
2009 2010 2011 2012 2013 2014 2015 2016 2017
Anheuser-Busch InBev NV/SA SABMiller
Heineken Carlsberg AS
China Resources Beer Tsingtao
Yanjing Brewery Molson Coors Brewing Company
Modelo
25
Group. Since they only belong to the largest 8 companies in 2017, it was not helpful to
display the Asahi Group in the graph.
Figure 6 shows a very fluctuating graph. This indicates that the largest 8 companies do not
all have a constant profit rate over the past years. Reasons for this fluctuation can be
changing taxes, changing profit and changing total stockholder equity. Besides that, there
are a few anomalies that will be discussed. First, the Heineken profit rate in 2012. It is
remarkable that the profit rate of Heineken in 2012 increased with 7% compared to the year
of 2011. The data in appendix C shows that the net income increased from 1.850.277
thousand USD in 2011 towards 3.844.731 thousand USD in 2012. This is an increase in
profit of 207,79218%. By researching the annual report 2012 of Heineken. It can be found
that the increase in profit has to do with the acquisition of Asia Pacific Breweries and the
corresponding fair value. The fair value, in this case, is a value that indicates the difference
between the amount a company has paid for something and the actual value of it at that
time. It is a value that is often used for accounting purposes (Chen, 2019). With the
acquisition of Asia Pacific Breweries a fair value of 1486 million euro was added to the
financial results of Heineken due to a revaluation of previously held equity in Asia Pacific
Breweries (Heineken N.V., 2013). This explains the difference in profit rate between 2011
and 2012.
Anheuser-Busch InBev also does not have a constant profit rate. In 2013 they reached a
very high profit rate compared to other years. Concluding from their annual report 2013, the
high profit rate is established by the coincidence of two events. First, Anheuser-Busch InBev
managed to grow their sales significantly, as can be read in their annual report 2013: “Total
revenue increased 3.3% to 43.2 billion USD. This was mainly due to a good performance by
our global brands, which grew 4.7%, and revenue management initiatives that drove higher
revenue per hectoliter (hl). We saw excellent growth from Budweiser, which rose 6.4% due to
its strong appeal in China, Brazil, Russia and the U.K., while Corona grew 3.9%, with a
strong performance in Mexico and other key export markets outside the U.S.”(Anheuser-
Busch InBev, 2014). Besides the increase in sales, Anheuser-Busch InBev finished the
successful merger of Grupo Modelo (famous for their Corona beer). This merger also gave
the company an increase in sales. In 2016 the company faced an all-time low profit rate due
to the acquisition of SABMiller. This can be seen as an investment since revenue continued
to grow according to figure 6.
The last anomaly that I want to discuss is China Resources Beer in 2015. The Orbis
database shows that China Resources Beer had a negative profit rate of -17,3% in 2015.
The cause of this negative profit rate is the selling of all its non-beer businesses. According
to the agreement that has been made, China Resources Beer should pay a special dividend
of HK$12,3 per share. The special dividend, caused by the selling of its non-beer businesses
led to a negative net income in 2015 (China Resources Beer, 2016).
Chapter 4 Hypotheses testing In this chapter, the data uncovered in chapter 3 and/or the literature used in this thesis will be
used to reject or approve the different hypotheses formulated in chapter 2.
4.1 Not used hypotheses The other three hypotheses (growth, advertising, pricing behaviour) mentioned in table 4 are
not elaborated briefly in this thesis because these three hypotheses do not provide crucial
information in order to describe the beer market. Further research could consider these three
hypotheses since they could provide valuable information about different topics that can be
studied within the beer market.
4.2 1. Barriers to entry hypothesis The barriers to entry hypothesis stated that a high concentration ratio leads to lower barriers
to entry. With the outcome of the HHI, a high concentration ratio cannot be concluded.
However, the CR4 and CR8 did show a high concentration since the percentage of market
share was higher than respectively 35% and 50%. The growth in the number of companies
within the beer market can be the final piece to approve the hypothesis within this thesis.
Furthermore, the number of smaller local breweries, where most of them were not in the
dataset, also grew explosively as indicated in the introduction by the figures of the CBS
(2017) and the American “Brewers Association” (2017). Concluding, the beer market can be
labelled as a market with a low barrier to entry corresponding to the increasing amount of
breweries that entered the market. This is contradicting towards the concentration ratios
which do show a high concentration when CR(n) measures are used but do not show a high
concentration when the HHI is used. Within this hypothesis, the HHI is more applicable than
the CR(n) measure because it takes more companies into account. Therefore, the
hypothesis that a high concentration ratio leads to lower barriers to entry will be
rejected. The rejection of the hypothesis is due to the HHI which does not show a high
concentration ratio while at the same time the beer market can be called a market with
a low barrier to entry. However, the HHI is increasing and the number of breweries do also
increase. This might be an indication that the hypothesis might hold in the future.
4.3 2. Diversification hypothesis The diversification hypothesis stated that a growing concentration ratio leads to a more
diverse market and it stimulates innovation of new products. As mentioned before, the beer
market can be labelled as growing in terms of concentration. According to the hypothesis, the
beer market should, therefore, have an increase in the diversification of the market and an
increase in the innovation of new products. Within the introduction of this thesis it was
mentioned that the number of breweries has grown and based on circumstantial evidence,
still is growing. Millennials have a large role in this diversifying market. This generation has
different preferences as they want to consume new products and appreciate for example
diversity and authenticity of products (Williams et al., 2018). As mentioned in the introduction,
the experience that comes with drinking a beer is being appreciated more and more. The
possibly low barriers to entry (due to growing concentration) the beer market, might be a
stimulation of this change in consumer preference that is going on. A low barrier to entry is
beneficial for smaller companies. The change in consumer preference is mostly stimulated
by the smaller companies, since there is an increase in concentration within the market, the
smaller breweries force the larger ones to also diversify and/or innovate their product
portfolio. Therefore it can be stated that the hypothesis can be approved and a high
concentration ratio leads to a more diverse market and it stimulates the innovation of
new products.
27
4.4 3. Profit rates hypothesis The most discussed and questioned hypothesis from the literature is the hypothesis that a
high concentration leads to higher profit rates. As the beer market is highly concentrated for
the CR4 and CR8 measures, the profit rates of the largest 8 companies are used in this
thesis. The data in chapter 3 showed that the profit rates were very fluctuating and there was
not a clearly visible indication of a relation between an increasing concentration ratio
and increasing profit rates. There are multiple explanations for the fluctuations within the
profit rates. First, changing taxes in a country could lead to a different profit rate. Second,
stockholders’ equity is used within the formula to calculate profit rate of a company. The
stockholders’ equity could change over the years. Third, the most straightforward reason,
profit is also changing over time. Since there is no evidence for a relation between a high
concentration and corresponding higher profit rates, the hypothesis will be rejected
within this thesis.
4.5 4. Market performance hypothesis The literature showed that good market performance leads to a high concentration of sellers.
In order to measure market performance, the revenues of the largest 8 companies are lined
out in figure 6. Figure 6 shows that the already large companies are also growing larger in
terms of revenue. Especially Anheuser-Busch InBev, in terms of revenue they grew
significantly. The other large companies as Heineken and Carlsberg are not growing that
fast. It can be concluded that their market performance in terms of revenue is growing slow.
Seen from the individual companies, market performance cannot be labelled as growing,
however, figure 7 shows the total amount of revenues of the largest 8 companies. In contrast
to figure 6, figure 7 shows a more significant growth in total revenue. Therefore, it can be
stated that the beer market is growing. Compared with the concentration ratios from
paragraph 3.2, at first sight, figure 6 and 7 show a relation between revenue and HHI. After
performing a correlation calculation, the correlation between both variables is 0,357. This
indicates that there is a medium correlation between revenue and HHI. But the measured
correlation is not significant since p-value is 0.334. Therefore, the hypothesis that good
market performance leads to a high concentration of sellers can be rejected within this
thesis.
28
Chapter 5 Conclusion The main question of this thesis was: to which extent does the global beer market align industrial organization hypotheses in order to give an overview of how the current global beer market looks like? The main question was followed by the following sub-questions:
1. What are the key theoretical hypotheses in industrial organization literature? The literature study showed that industrial organization literature mainly contains two schools of thought. The first one is the so-called Chicago school. Researchers who adhere to the Chicago school within industrial organization focus on the functioning of markets approached from the perspective of neo-classical economics. In other words, followers of the Chicago school were interpreting markets with the help of mostly empirical neo-classical economic models. The second school of thought within industrial organization literature are followers of the ‘theoretical school’. This school of thought was and still is much more theoretical than the empirical Chicago school. Founders of this school focussed on the relation between the structure of a market, its conduct and market performance. They questioned for example how barriers to entry influence product strategy. Followed was the Structure-Conduct-Performance paradigm which indicates different topics within different parts of the paradigm. To make it suitable for this thesis, table 2 shows an adapted version of it wherein topics are added or left out. From the different topics of the SCP paradigm researched in chapter 2, key theoretical hypotheses from industrial organization literature, in order to describe the beer market, are listed in table 4.
2. What are the outcomes when the hypotheses from sub-question 1 will be used to interpret the global beer market?
The seven hypotheses listed in table 4 gave an overview of possible applicable hypotheses to interpret the current global market. Hypothesis number 5,6,7 are not used in this thesis since these hypotheses do not provide crucial information to interpret the beer market. The other four hypotheses showed several aspects that I now want to elaborate on. First, the most used concept within this thesis is concentration. After testing the hypotheses it showed that the beer market is not highly concentrated. Notwithstanding that the beer market is growing in terms of concentration. Therefore, it could be that the beer market is highly concentrated in a few years. This growth in concentration is also an indication for diversification of the market, see paragraph 4.3. The performance of the market was tested by hypothesis 3 and 4. Both hypotheses were rejected but it showed once again that the beer market is in transition regarding market performance as well.
3. What conclusion can be drawn of these hypotheses and their outcomes? The four tested hypotheses in this thesis gave an answer to the main question that the beer market is in transition towards a more concentrated and saturated market. Within this thesis, only number 2 of the hypotheses in table 4 is approved and the others are rejected. However, the other hypotheses showed that the beer market is currently in transition. The answer to the main question that is: to which extent does the global beer market align industrial organization hypotheses in order to give an overview of how the current global beer market looks like? At this moment in time, the global market does not fully align industrial organization hypotheses. Currently, the global beer market is a market with a possibly low barrier to entry and an almost high concentration of sellers. This growing concentration of sellers induce to a more diversified market in terms of products and innovations. Furthermore, it forms the global beer market to a market with more competition and this competition forces all companies but especially the larger ones to perform better than they have done before.
29
Chapter 6 Discussion This research tried to approve or reject seven different hypotheses that were formed after a
literature research. Only one of the seven hypotheses is approved within this thesis. The
results from the data analysis did not show significant values that could approve one of the
hypotheses, which are mostly related to the concentration ratio of firms within the beer
market. One of the reasons why the other six hypotheses were unable to approve within this
research could be the time span that is used in this thesis. A better description of the beer
market, which is a market that already exists for a long time, could be given when a larger
time span would have been used. Although the beer market does exist for a long time, in the
past decade the market is shifting towards a more diversified market. If a larger time span
would be taken, this might give a complication since there is a big difference with the beer
market nowadays and the beer market twenty years ago. Besides that, data from for
example twenty years ago was not available in the databases that I used and due to time
restrictions, I was unable to use different sources to find data from a larger time span.
Within this thesis, a large focus is laid on the concentration of firms within the beer market.
This is measured with the help of the CR(n) and the HHI. These measures are used because
they are most common within concentration-related studies. A drawback of both measures is
that smaller breweries that are entering the market are not taken into account. These smaller
breweries should be taken into account, since they play a large role in the changing beer
market. The CR(n) within this thesis only focusses on the largest 4 or 8 companies.
Furthermore, the formula to calculate the HHI prescribes that when a company has a market
share <1, it does not contribute to total HHI as significantly as when a company has a market
share >1 . Therefore, the HHI also does not sufficiently measure smaller new companies.
Within the data from Marketline, used to calculate concentration, in 2017 only 12 companies
out of 533 companies had a market share that was larger than 1. Concluding, the CR(n) and
HHI might not be the most appropriate measures to calculate concentration since both
measures do not take into account the smaller companies which are definitely important for
the beer market.
In order to calculate the concentration ratios, the Marketline Advantage database is used.
Within the database, there is a category that gives an overview of produced volumes of 615
different breweries across the world. With these figures, I calculated the CR(n) and the HHI.
For the financial part of the data analysis, a different database (Orbis) is used. Orbis gives an
overview of all kinds of different financial aspects of almost every company in the world. The
usage of two different databases and comparison of the data with each other might be a
shortcoming of this research since the two databases do not always align with each other. An
example of misalignment was the missing financial data on SABMiller in 2016, where the
Marketline database showed that SABMiller did have production in 2016.
30
Chapter 7 Appendixes Appendix A: Thesis HHI calculation.xlsx
Appendix B: Thesis CR4 and CR8 calculation.xlsx
Appendix C: Thesis profit rates calculation.xlsx
31
Chapter 8 References AB InBev. (2014). Annual Report 2013. Retrieved from http://www.annualreports.com/HostedData/AnnualReportArchive/a/NYSE_BUD_2013.pdf AB InBev. (2016). Financial Report 2015. Retrieved from
https://www.ab-inbev.com/content/dam/universaltemplate/ab-inbev/investors/reports-and-filings/annual-and-hy-reports/2015/Financial-Report-2015-ENG.pdf AB InBev. (2018). Annual Report 2017. Retrieved from http://annualreport.ab-inbev.com/downloads/ABI-Annual-Report-2017-NL.pdf Agarwal, R., & Gort, M. (2002). Firm and product life cycles and firm survival. American Economic Review, 92(2), 184-190. Allen, G. (1959). Book review: Economic concentration and the monopoly problem. The Economic Journal, 69(273), 156-158. Bain, J. S. (1950). Workable competition in oligopoly: theoretical considerations and some empirical evidence. The American Economic Review, 40(2), 35-47. Bain, J. S. (1951). Relation of profit rate to industry concentration: American manufacturing,
1936–1940. The Quarterly Journal of Economics, 65(3), 293-324.
Bain, J. S. (1956). Barriers to new competition: their character and consequences in
manufacturing industries (Vol. 329). Cambridge, MA: Harvard University Press.
Belleflamme, P., & Peitz, M. (2010). Industrial organization: markets and strategies.
Cambridge University Press.
Belkhaoui, S., Lakhal, L., Lakhal, F., & Hellara, S. (2014). Market structure, strategic choices
and bank performance: a path model. Managerial Finance, 40(6), 538-564.
Bethel, L. L. (1971). Industrial organization and management. McGraw-Hill Science,
Engineering & Mathematics.
Bhuyan, S., & McCafferty, M. (2013). US Brewing industry profitability: a simultaneous
determination of structure, conduct, and performance. Journal of agricultural & food industrial
organization, 11(1), 139-150.
Bolarinwa, S. T., & Obembe, O. B. (2017). Concentration–Profitability Nexus: New Approach
from Causality. Studies in Microeconomics, 5(1), 84-98.
Blenkinsop, P. (2012, 29 June). AB InBev buys out Corona maker Modelo for $20 billion. Retrieved from https://www.reuters.com/article/us-modelo-abinbev/ab-inbev-buys-out-corona-maker-modelo-for-20-billion-idUSBRE85S0B420120629 Brewers Association. (n.d.). Number of Breweries and Brewpubs in U.S.. Retrieved from
https://www.brewersassociation.org/statistics/number-of-breweries/
Bucevska, V., & Hadzi Misheva, B. (2017). The Determinants of Profitability in the Banking
Industry: Empirical Research on Selected Balkan Countries. Eastern European Economics,
55(2), 146-167.
Burgess, G. H. (1989). Industrial organization. Prentice Hall.
32
Centraal Bureau voor de Statistiek. (2017, July 4). Aantal bierbrouwers meer dan verviervoudigd sinds 2007. Retrieved from https://www.cbs.nl/nl-nl/nieuws/2017/24/aantal-bierbrouwers-meer-dan-verviervoudigd-sinds-2007 Chen, J. (2019, 16 May). Fair Value. Retrieved from
https://www.investopedia.com/terms/f/fairvalue.asp
Chen, P. H. (2002). Who owns cable television? Media ownership concentration in Taiwan.
The Journal of Media Economics, 15(1), 41-55.
China Resources Beer. (2016) Annual Report 2015. Retrieved from:
https://www.crbeer.com.hk/home/investorrel/financialrep/ap/201604/P020160422286405393
261.pdf
Clarkson, K. W., & Miller, R. L. (1982). Industrial organization: Theory, evidence, and public
policy. McGraw-Hill Companies.
Davies, W. (2017). Chicago School of Economics. The Wiley‐Blackwell Encyclopedia of
Social Theory, 1-3.
de Figueirêdo Junior, H. S., Meuwissen, M. P. M., & Oude Lansink, A. G. J. M. (2014).
Integrating structure, conduct and performance into value chain analysis. Journal on Chain
and Network Science, 14(1), 21-30.
Dean, T. J., Brown, R. L., & Bamford, C. E. (1998). Differences in large and small firm
responses to environmental context: Strategic implications from a comparative analysis of
business formations. Strategic Management Journal, 19(8), 709-728.
Delorme Jr, C. D., Kamerschen, D. R., Klein, P. G., & Voeks, L. F. (2002). Structure, conduct
and performance: a simultaneous equations approach. Applied economics, 34(17), 2135-
2141.
Dick, A. A., & Hannan, T. H. (2012). Competition and antitrust policy in banking. The Oxford
Handbook of Banking.
Florence, P. S. (1933,2013). The logic of industrial organization. Routledge.
Frake, J. (2017) Selling Out: The Inauthenticity Discount in the Craft Beer Industry.
Management Science 63(11):3930-3943. https://doi.org/10.1287/mnsc.2016.2517
Gavurova, B., Kocisova, K., & Kotaskova, A. (2017). The structure-conduct-performance
paradigm in the European Union banking. Economics & Sociology, 10(4), 99-112.
George, K., Joll, C., & Lynk, E. L. (1992). Industrial organization: Competition, growth and
structural change. Routledge.
Global beer industry market share [Dataset]. (n.d.). Retrieved, from
https://www.statista.com/statistics/257677/global-market-share-of-the-leading-beer-
companies-based-on-sales/
Goldberg, L. G., & Rai, A. (1996). The structure-performance relationship for European
banking. Journal of Banking & Finance, 20(4), 745-771.
Halbersma, R. S., Mikkers, M. C., Motchenkova, E., & Seinen, I. (2011). Market structure and
hospital–insurer bargaining in the Netherlands. The European Journal of Health Economics,
12(6), 589-603.
33
Hayes, A. (2019, April 30). Why the Herfindahl-Hirschman Index (HHI) Matters. Retrieved from https://www.investopedia.com/terms/h/hhi.asp Heflebower, R. B. (1957). Barriers to new competition. The American Economic Review,
47(3), 363-371.
Heineken N.V. (2013) Annual Report 2012. Retrieved from
https://www.theheinekencompany.com › Downloads › 2012 › Heineken-NV
Heineken N.V. (2019). Full year results 2018. Retrieved from
https://www.theheinekencompany.com/Media/Media-Releases/Press-
releases/2019/02/2234675
Kirin Beer University Report Global Beer Production by Country in 2017 | 2018 . (2018, August 9). Retrieved from https://www.kirinholdings.co.jp/english/news/2018/0809_01.html Molson Coors Brewing Co. (2019). Full year and quarter results 2018. Retrieved from http://ir.molsoncoors.com/news/press-release-details/2019/Molson-Coors-Reports-2018-Full-Year-and-Fourth-Quarter-Results/default.aspx McKie, J. W. (1970). Market structure and function: performance versus behavior'. Industrial
Organization and Economic Development, 3-25.
Nutter, G. (1957). Economic concentration and the monopoly problem . Edward S. Mason.
Journal of Political Economy, 65(6), 544-544. doi:10.1086/257989
Okeahalam, C. (2007). Economics of access in a developing country: an analysis of firm-
conduct in financial services. International Journal of Social Economics, 34(12), 923-942.
Raider, H. J. (1998). Market structure and innovation. Social Science Research, 27(1), 1-21.
Rhoades, S. A. (1993). The herfindahl-hirschman index. Fed. Res. Bull., 79, 188.
SABMiller. (2017). Annual Report 2016. Retrieved from: https://www.ab-inbev.com › content ›
dam › ab-inbev › investors › sabmiller
Scherer, F.M. (1980). Second edition: Industrial market structure and economic performance.
Hopewell, N.J.
Scherer, F.M., Ross, D. (1990). Third edition: Industrial market structure and economic
performance. Hopewell, N.J.
Schmalensee, R. (2012). “On a level with dentists?” Reflections on the evolution of industrial
organization. Review of Industrial Organization, 41(3), 157-179.
Schoeffler, S. (1957). Barriers to new competition by Joe S. Bain. Journal of Marketing,
21(4), 488–490.
Stigler, G. J. (1962). On the" Chicago School of Economics": Comment. Journal of Political
Economy, 70(1), 70-71.
Strickland, A. D., & Weiss, L. W. (1976). Advertising, concentration, and price-cost margins.
journal of political Economy, 84(5), 1109-1121.
The economist, (2015, September, 19). Beer monster, a giant drinks merger. Retrieved from
https://www.economist.com/business/2015/09/19/beer-monster
34
Tirole, J. (1988). The theory of industrial organization. MIT press.
Trautwein, F. (1990). Merger motives and merger prescriptions. Strategic management
journal, 11(4), 283-295.
Tremblay, V. J., & Tremblay, C. H. (2012). New Perspectives on Industrial Organization.
Springer, New York, NY.
United States Department of Justice. (2018, July 31). Herfindahl-Hirschman index. Retrieved from https://www.justice.gov/atr/herfindahl-hirschman-index Waldman, D., & Jensen, E. (2001). Industrial organization : Theory and practice (2nd ed.,
Addison-wesley series in economics). Boston etc.: Addison Wesley. Williams, A., Atwal, G., & Bryson, D. (2019). Luxury craftsmanship–the emergent luxury beer market. British Food Journal, 121(2), 359-370.
Yusuf, Y., Gunasekaran, A., Papadopoulos, T., Auchterlounie, W., Hollomah, D., & Menhat,
M. (2018). Performance measurement in the natural gas industry: A case study of Ghana’s
natural gas supply chain. Benchmarking: An International Journal, 25(8), 2913-2930.