Craft breweries rarely choose a business strategy based on cost leadership and New Belgium is no different, but there are certain aspects of the brewing industry related to cost leadership issues that all must be aware of to survive. The chief issue is economies of scale, but this usually relates to small startup breweries attempting to compete. There is generally a minimum production size necessary to turn a profit when starting a brewery mainly due to the amount of capital required to purchase the equipment needed to produce beer. The factor that affects a brewery the size of New Belgium is diseconomies of scale. Of the four major sources of diseconomies of scale, the distances to markets is the driver that New Belgium has most recently tackled. Beer is a perishable product and craft beer, especially highly hopped beers, are more perishable than the American light lager sold by the big breweries. The original brewery for New Belgium is in Fort Collins, Colorado. While positioned well to serve the west, New Belgium decided to open its east coast location in Ashville, NC. This new brewery adds 500,000 barrels to its annual capacity and positions their beers closer to east coast markets. This results in a reduction in transportation costs as well as opening up new markets. The challenge to opening the new brewery will be to maintain the unique corporate culture that makes New Belgium so special, in a completely new part of the country.
One trend in the craft brewing world is the buyout of small breweries by some of the large breweries. This is an interesting read about the alternative view. http://moderntimesbeer.com/blog/what-selling-out?cc
In looking at a firms resources and capabilities, one method is the VRIO framework. VRIO stands for value, rarity, imitability, and organization. These four questions can be applied to determine whether a resource can add competitive advantage to a firm. New Belgium believes that their people are one of their most valuable assets as they recently decided to become 100% employee owned. In producing a unique product like beer, the employees producing the beer are one of the main keys to the product and hence are valuable. It is possible to argue that high quality beer producing employees are not rare, but I would argue the contrary. The skills needed to produce beer are fairly unique requiring specialized training, thus making them a rarity. Other breweries do attempt to imitate the employee resource but not often with the success of New Belgium. The Unique Historical Condition that grew out of Kim Jordan and Jeff Lebesch deciding that employees should have ownership in the company, is difficult to reproduce in an existing brewery as this started at the hiring of some of their first employees. The fourth question of Organization goes back to the beginning of this post. Kim Jordan feels so strongly that the employees are such a key asset to the company that she sold her controlling share to the employees, so clearly the organization bases its entire success on this resource. Based on the VRIO Framework as applied to the employee resource at New Belgium, they should be able to produce a sustained competitive advantage from their employees.
Addendum to last week: I noted that New Belgium is distributing to 38 states and cited their current website data. Since that post, I noticed that New Belgium has applied the new data and now distributes to 45 states. The craft beer world moves fast and its hard to keep up.
In evaluating the environmental opportunities ideas and how they apply to New Belgium the main threat to compete on is Rivalry. The craft beer market is wide open experiencing record growth, with the overall beer sales decreasing by 0.2% but craft beer sales volume increasing by 12.8% (https://www.brewersassociation.org/statistics/national-beer-sales-production-data/). This is the real advantage in the craft brewing world. All breweries can produce truly unique products and the market demands changing beer offerings constantly. Currently New Belgium only distributes to 38 states (http://www.newbelgium.com/Brewery/company/craft-beer-rankings-and-financials)but has just opened a second brewery in Asheville North Carolina which should further expand their reach allowing them to distinguish themselves from other breweries.
In applying the Five Forces Model to New Belgium Brewing, let’s first look at the Threat of Entry. The biggest two aspects of the Threat to Entry are economies of scale and governmental regulation. Beer brewing has a large capital outlay required to produce beer, so enough must produced to recoup that large equipment purchase. This is why the economies of scale are so important to a company like New Belgium. The second threat to entry is governmental regulation. Beer brewing is highly regulated at federal, state and local levels. With their recent expansion from Colorado to a second location in Ashville, they must navigate the regulation in two separate locations. Both the Threat of Rivalry and the Threat of Substitutes are low. Craft breweries continue to experience record growth (http://www.cnbc.com/2015/07/27/craft-beer-growth-posts-solid-numbers-again.html) with both the number of breweries producing beer and the amount of craft beer sold both increasing. As there is plenty of room for growth no need to worry about rivalry or substitutes in this wide open market. There is a reasonably high Threat of Powerful Suppliers as one of the main ingredients in craft beer is hops. The majority of the market’s hops are produced in a small growing region in the Pacific Northwest. These growers are uniquely positioned to control their portion of the supplies needed to brew. The final threat is the Threat of Powerful Buyers, which is low in the craft brewing market. While many beers are now sold large buyers like grocery chains, the distribution model is so varied as to keep this threat low. In summary, the Threats of Entry and Powerful Suppliers potentially are high but the remaining other threats are low making the craft brewing market and New Belgium’s industry a good one.
In the world of craft beer, many mergers and buyouts are occurring. New Belgium is the number 4 largest craft brewery according to the Brewers Association 2015 rankings. To gain competitive advantage and maintain their independence, they have chosen a different tactic than most. They are now a 100% employee owned company after CEO and founder Kim Jordan and her family sold their stake to the Employee Stock Ownership Program. They are now also a certified B Corporation. To read more about this innovative company and how it maintains competitive advantage in an industry ripe with mergers and acquisitions see this article.
Let’s begin somewhere…..