UK Beer Market Report Will Hodgetts

Concentration Ratio
The concentration ratio of the UK Beer Market is difficult to measure due to how fractured the
market is in terms of consumer tastes for different types of beer (which change year on year) and
different producers specialising within these types. In the past, there have been attempts to
dominate the market by firms. Firms that undertake research will often conceal the results of their
reports into the industry since there are large amounts of profit to be made; and since it is not a
utility industry such as broadband or electricity not many government or non-profit studies are
released. In 2016, the largest beer brand in the UK was Heineken, with a total volume market share
of 21%, and InBev a close second with 20%[1]. This is in contrast to 2013 where Molson Coors
Brewing Co was the largest firm, with a market share of 18%[2]. From these figures we can deduce
that the current 3-firm concentration ratio is likely just shy of 60%. In 1985, the 3-firm concentration
ratio was 47% compared to 66% in 2005. This pattern can be explained by the changing nature of
consumer tastes. Preferences have moved, thanks partly to CAMRA, increasingly to a return to real
ales and cask brewed independent beers in comparison to the ‘Euro-lagers’ and mass-produced
commercial Pilsners popular in the early to mid-2000s. The decrease in the concentration ratio is
also explained by the split and sell-off of brewer Scottish-Courage, which was sold partly to Heineken
and partly to Carlsberg[3].
Nature of competition
Historically, the UK Beer Market has been led by taste preferences and pastime drinking; for
example in pubs. There are two main sectors in the Beer Market: ‘On-trade’ and ‘Off-trade’ drinking.
‘On-trade’ is served in pubs and other establishments, whereas ‘Off-trade’ is beer sold for home
consumption. As of 2013, 48% of beer was sold in the Off-trade market[4]. In 1987, the Monopolies
and Mergers Commission issued the ‘Beer Orders’[5], requiring the sale of pubs by large brewers in
the hopes of increasing competition. Instead, this had the opposite effect. The pubs that were sold
by the brewers were their least profitable locations, and many were unable to sustain a profit when
run by smaller companies or individuals with higher average operating costs due to a lack of
economies of scale. As a result, many of these pubs subsequently closed; resulting in less
competition in the pub sector as pubs owned by the larger chains remained open, which in turn
decreased competition in the wider brewing sector as brands favoured by the larger chain pubs
were able to thrive. Branding is not as important in the UK beer market than in the past; since
people are moving away from consumer loyalty, tradition or familial factors towards the cheapest
drink or the beer which is ‘easiest’ to drink as those who have not traditionally enjoyed it broaden
tastes, and those who drink large quantities of beer looking for one which will go down easier.
Themes such as ‘Best served chilled’ are emerging increasingly within the Lager market. When a beer
is served chilled, the tastebuds are numbed and detect less bitterness from the hops, giving the
impression that it goes down smoother and is of higher quality. Purity and simplicity is increasingly
seen as a point of pride within brewing, giving a further advantage to firms with few ingredients and
pre-existing low production costs.

Possibility of collusion and Market Interdependence

There does not appear to be any evidence of collusion in the UK beer market but certain anti-
competitive practices are evident – even if not explicitly prohibited. Due to the high demand for
certain commercial lagers such as Carling and Carlsberg, most pub chains that are owned by brewing
companies such as Marston are forced to stock rival brands in order to satisfy consumer tastes and
demand. Although JD Wetherspoon is not a brewing company, they provide an example of how
brewers and brewer-publicans exist in a state of co-dependency. In December 2014, Heineken
refused to supply a new JD Wetherspoon pub with their Heineken lager in protest of them charging
3 EUR a pint compared to an average price of roughly 5 EUR throughout Ireland. JD Wetherspoon
initially removed all Heineken drinks from all pubs, risking sales of £60m a year, before caving the
following month and agreeing to not stock Heineken lager but instead stock other Heineken owned
brands. Allowing a product to be sold at a cheaper rate in some outlets than others reduces the
potential for supernormal profits obtained through an inelasticity of demand stemming from a
powerful brand name and consumer loyalty[6].

Market price leaders

With the recent spike in lighter beers, the beer industry has displayed increasing aspects of
homogeneity – however, moved no closer to perfect competition. Supermarket deals such as ‘2 for
£15’ offers push the sales of cans of beer in high volume at standard price points for crates or
multipacks. As such, there is little price differentiation, as beers are so similar in many respects that
a kinked demand curve exists. If a beer were to increase in price for a single unit or can to such an
extent that it became ineligible or unprofitable for a supermarket to include it in their multi-buy
offers, then they would suffer a large loss of sales in the casual and off-trade markets. However, in
the on-trade market, beers which have negotiated agreements with retailers such as JD
Wetherspoon are sold at lower prices than the rest, even if only by 10 or 20 pence. In a pub when
people are making purchases with impaired rationality and in a state of intoxication, many are likely
to purchase the absolute cheapest pint of beer that the establishment offer.
Abnormal Profits
American brands are increasingly moving into the UK market and beers such as Coors Light and
Budweiser are becoming more common. These firms specialise in low-cost, high volume ‘Pilsner’
beers. These firms benefit from enormous economies of scale and cheaper costs of production in
their domestic market. Beer excise duties, costs of water extraction in the brewing process and raw
material costs are all lower in the United States of America and as such these firms can enjoy
cheaper operation and higher profits; allowing them to invest heavily in the UK market in the hopes
of gaining a very profitable hold. As such, in recent years the beer industry has become somewhat of
a contested market. This effect will surely only be worsened in the wake of the vote to leave the
European Union, which has worsened the value of GBP against USD[7] and means that firms which
produce and export their product with costs in USD are able to then sell their product at a much
higher GBP price once in the UK. These foreign firms receive supernormal profit as a result.

Barriers to Entry
Existing firms in the market are operating with such huge economies of scale that it is hard for
smaller firms to compete in the same sub-markets, such as canned lager. Instead, small firms are
making rapid entries in the real ale and craft beer markets. In 2014, three new breweries were
opening every week in the UK[8], with the UK being the country with the most breweries per capita in
the world[9]. The real ale and craft beer markets are industries with relatively low demand compared
to some sectors of the market that also have high costs of production. As such, large companies
have traditionally been unwilling to invest in the market, and tax cuts for small breweries
(introduced in 2002) provide an incentive for individuals to produce. Producers of less than 5,000
hectolitres p.a. receive a 50% reduction in excise duty, with further tiered relief for production up to
60,000 hectolitres[10].

Conclusion
Traditionally, beer in the UK has been a competitive market due to the prevalence of consumer
tastes for real ale and cask-conditioned beer which has relatively high costs of production, combined
with the relatively low sale prices of beer in the on-trade sector (especially in the North of England).
However, since roughly 1985, consumer tastes have been changing from Ale and Stout to Lager and
Pilsner: much cheaper beers to produce, but that have not been accompanied by a change in
average prices – rather, a large increase. This caused potential for abnormal profits and an incentive
for many foreign firms from countries where these beers were already popular and with developed
producers, such as European Lager beers and American Pilsner beers like Stella Artois and Coors
Light. However, there is a recent trend in increasing real ale production which is causing a current
growth in microbreweries and small ale producers due to campaigning of groups such as CAMRA and
a subsequent swing in the favour of real ales in off-trade demand. The market can be said to be an
oligopoly – but one which is lessening as consumer tastes change.

References
[1] Euromonitor, (2017) ‘Beer in the United Kingdom’. Available at:
http://www.euromonitor.com/beer-in-the-united-kingdom/report [Accessed 29 January 2018]

[2] Loretz, Simon (2014) ‘When helping the small hurts the middle: Beer excise duties and
concentration’. Available at: https://www.uni-
salzburg.at/fileadmin/multimedia/SOWI/documents/working_papers/wp2014_no05.pdf [Accessed
29 January 2018]

[3] Wearden, Graeme (2008) ‘Scottish & Newcastle accepts 800p a share takeover bid’. Available at:
https://www.theguardian.com/business/2008/jan/25/scottishandnewcastle [Accessed 29 January
2018]

[4] Capper, Alison (2014) ‘A Nuffield Farming Scholarships Trust Report’ Nuffield UK p15

[5] Waterson, Michael (2009) ‘Beer – The ties that bind’ Warwick University p1

[6] Farrell, Sean (2015) ‘Wetherspoon settles Heineken Dispute’. Available at:
https://www.theguardian.com/business/2015/jan/05/wetherspoon-settles-heineken-dispute
[Accessed 29 January 2018]

[7] Alison, Capper (2016) ‘Pound slumps to 31-year low following Brexit vote’. Available at:
https://www.theguardian.com/business/2016/jun/23/british-pound-given-boost-by-projected-
remain-win-in-eu-referendum [Accessed 29 January 2018]

[8] Brown, Pete (2015) ‘The Cask Report 2014-15’ Casque Marque p3

[9] Cabras, Ignazio (2015) ‘British Beer’ SIBA p2

[10] HM Revenue and Customs (2017) ‘Excise Notice 226: Beer Duty’ Available at:
https://www.gov.uk/government/publications/excise-notice-226-beer-duty/excise-notice-226-beer-
duty--2 [Accessed 29 January 2018]