Entry Barriers in Liquor Industry

ENTRY BARRIERS IN LIQUOR INDUSTRY When a new firm enters into an industry it can affect all of the firms that are currently in that industry. â€Å"new entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents cost inflated as a result, reducing profitability. †24Therefore as new firms enter into an industry the entire industry’s potential for sustained profits is reduced due to the increased amount of competition in that industry. Some factors help reduce the threat of entry as they act as barriers that prevent new firms from entering into an industry. These factors include economies of scale, product differentiation, capital requirements, access to distribution channels, and government regulations. When these factors reduce the threat of entry, the profit potential for the industry increases. Economies of Scale. Economies of scale is defined as the â€Å"declines in unit costs of a product as the absolute volume per period increase† Therefore the greater quantity of a product that is produced the lower the cost of each will be to the producer. This creates an advantage for a high volume producer like those seen in the brewing industry. Economies of scale in the brewing industry also exist in areas other than in production and these include purchasing, distribution, and advertising. For example, national brewers achieve economies of scale in advertising through bulk media purchases and umbrella brand marketing. Local-craft brewers spend more than twice that spent by large brewers on marketing and advertising per barrel. 25 One company in particular, which is Anheuser-Busch, has done an extremely good job in exploiting the economies of scale that are present in the brewing industry. Anheuser-Busch has been able to leverage its 45 percent U. S. market share into 75 percent of the industry’s operating profits through significant economies of scale in the areas of raw material procurement, manufacturing efficiency and marketing. †26 As shown here there are substantial economies of scale available in the national beer brewing industry. This is a good factor for firms that are currently in the industry as the y can take advantage of these unit cost breaks and while doing so also discourage the entry of new firms into the industry. Product Differentiation. in general, people cannot tell the difference between brands of beer. Second, more expensive brands do not cost proportionately more to make than â€Å"economy† beer. Capital Requirements. The capital requirements necessary to compete on the national level against the established firms are extremely high. These high costs of operation and construction expenses act as a barrier to entry for firms that are considering trying to compete in this industry on the highest level. Access to Distribution Channels. When a new firm is trying to enter into an industry it can find that existing competitors may have ties with [distribution] channels based on long relationships. Government Regulation. The government's excise policy is subject to a lot of sudden changes. The manufacturers sometimes just need to get their L-1 licenses renewed and at times they need to apply afresh, like in the year 2001. In 1993, the L-1 license holders were allowed to set up 5 ‘dedicated' shops in Delhi in which they could sell their approved brands in addition to having them sold in the government retail shops. The policy was withdrawn in an ad-hoc manner in 1994. On being questioned about the effects of this policy, an official in one of the country's leading breweries said that the introduction of this policy had led to an increase in their revenue by almost 30% which they have lost out on since the policy got crushed. Recently, the government's policy to open up 45 private liquor shops was quashed by the cabinet, because it meant that the MLA's power in the issue of a no-objection certificate for the setting up of a retail outlet would be questioned. Had this policy been implemented, the government would have earned Rs. 7. 5 lakhs on each vend as license fees annually.