- Why did Coors's competitive position in the U.S. brewing industry deteriorate between the mid-1970s and the mid-1980s?
Sales of Coors’s beer declined for the first time in two decades in 1975 by 4%. But the sales performance of the company was quite impressive from the beginning mainly because of quality and geographic advantage. In 1873, Adolph Coors, Sr. started to sell beer in Colorado. In 1933, four years after the prohibition was lifted, the sales volume was 90,000 barrels. Year by year compounded annual sales growth of the company was 11.2% from 1933 to 1974. Exhibit 1 summarizes the position of Coors compared to its competitors.
Coors had several strategic and operational disadvantages compared to its competitors before new management started to address those in 1985. The company got through it as one of the most successful companies in the USA because of strong sales growth till 1974. However as other competitors started to extend their capacity to grab more market share and focused on more aggressive market penetration, Coors lost some of its market share to its competitors. In the mid-1970s, the industry’s capacity utilization peaked to around 90% where Coors’s capacity utilization went down to 84%. Moreover, all of the major brewers except Coors operated several breweries respectively. So the company had to bear significant shipping cost in its distribution channel.
Till 1975, the company confined itself in 11 states. However, all of the major brewers had operational presence in all of the states in the USA. So Coors did not have geographical diversification for its product.
In addition, beer prices declined in real term since World War II. Input costs as percentage of sales price increased from 35% in 1945 to 50-60% range by 1985. Operational efficiency becomes a major concern for the beer companies’ profitability. Economies of scale have considerable impact on packaging cost. As sales of the Coors became stagnant after 1975, the company failed to save its packaging costs.
Moreover, Marketing and product segmentations are the two tools to differentiate in the industry. Coors refrained itself from any major marketing expenditure till late seventies. In addition, the company operated in the premium beer segment only at that time period. So the company suffered from strategic disadvantages in the face of dwindling demand for its products.
- What must Coors do to improve its future prospects?
Coors was the most expensive beer in America from raw materials perspective. Coors emphasized on quality and self-reliance for its raw materials. In addition, its premium hops were purchased from both domestic and European suppliers. The company should focus to cost means of sourcing its production raw materials. Coors stressed more on cans in its packaging strategy than did other US brewers: 69% versus an average of 57% for the industry as a whole in 1985. Market share of canned beer is expected to increase in the coming days. To reduce packaging cost, Coors must have to attain the benefits of economies of scale.
In addition, Coors had emphasized on both quality and scale in the area of production. It had two unique aspects of its brewing process. First, Coors had longer brewing cycle aging its beer for 70 days compared to an average of 20 to 30 days for other brewers. The company had to employ more assets for the process than the average brewers: in 1984, assets per barrel of capacity amounted to USD 57 for Coors, USD 45 for Anheuser-Busch, USD 43 for Miller and USD 16 for Heileman. Moreover, Coors had to store its beer in refrigerated warehouses as its beer was draft. So the company did not save any cost from skipping pasteurization. Coors should focus on reducing the aging time of its beer by shifting from drafted beer to pasteurization. It can employ this freed up capital to advertising and capacity expansion.
In 1977, average capacity utilization of Coors had fallen to 84% from historical average capacity utilization range of 90% to 95%. Coors enjoyed geographical advantage compared to its competitors in its market because beer production capacity within some of its markets was below local demand. Coors filled those vacuums because of its production facility in Colorado was closure to most of those markets. However, in the late seventies and early eighties, its competitors started to react to make up those vacuums by adding additional capacity. Coors also faced several labor strikes and occasional suits by federal agencies over the years because of its operational practices. Coors should focus on geographical diversification and focus on industry best practices for labor management.
The distribution policy of Coors was not favorable for wholesalers. Wholesalers had to destroy Coors beer unsold longer than 60 days at their expenses. It had one of the industry’s most extensive distributor monitoring programs. Coors did not sell its beers to bars that refused to sell them exclusively. It restricted geographic distribution of its beer and wholesalers were not allowed to cut prices. In 1976, the company started to expand its distribution territory. This national rollout increased the median distance Coors shipped from 800 miles in 1977 to 1,500 miles by 1985. So Coors had to bear extra shipping cost. Coors should establish additional production facilities in some other strategically located geographical areas. So that it can lessen its shipping distances from production facilities. In addition, the company should soften its distribution policy to attract more wholesalers to carry its product as prime product line.
Coors marketing policy was ignored till late seventies. The company marketed its beer by the virtue of its drinkability. Coors can concentrate on aggressive advertising and it can introduce new product in non-premium beer categories.
