Breweries in Canada February Going flat: Changing drinking patterns and low international demand will limit revenue growth

Transcription

1 Breweries in Canada February Going flat: Changing drinking patterns and low international demand will limit revenue growth IBISWorld Industry Report 31212CA Breweries in Canada February 2016 Nick Petrillo 2 About this Industry 2 Industry Definition 2 Main Activities 2 Similar Industries 3 Additional Resources 4 Industry at a Glance 5 Industry Performance 5 Executive Summary 5 Key External Drivers 7 Current Performance 9 Industry Outlook 11 Industry Life Cycle 13 Products & Markets 13 Supply Chains 13 Products & Services 15 Demand Determinants 15 Major Markets 16 International Trade 19 Business Locations 21 Competitive Landscape 21 Market Share Concentration 21 Key Success Factors 21 Cost Structure Benchmarks 23 Basis of Competition 24 Barriers to Entry 25 Industry Globalization 26 Major Companies 26 Anheuser-Busch InBev 27 Molson Coors Brewing Company 29 Operating Conditions 29 Capital Intensity 30 Technology & Systems 31 Revenue Volatility 31 Regulation & Policy 32 Industry Assistance 34 Key Statistics 34 Industry Data 34 Annual Change 34 Key Ratios 35 Jargon & Glossary info@ibisworld.ca

2 Breweries in Canada February About this Industry Industry Definition The Breweries industry primarily produces alcoholic beverages, such as beer, malt liquor and nonalcoholic beer, using water, barley, hops, yeast and other occasional adjuncts. Manufacturers of wine, spirits and other alcoholic beverages are not included in this industry. Main Activities The primary activities of this industry are Canned beer production Bottled beer production Draught beer production Non-alcoholic beer production The major products and services in this industry are Bottled beer Canned beer Draught beer Similar Industries 31211aCA Soda Production in Canada Establishments in this industry bottle, cap and market carbonated and uncarbonated soft drinks. Soft drink manufacturers often operate in the market for bottled water production bCA Bottled Water Production in Canada Establishments in this industry purify and bottle water for resale cCA Juice Production in Canada Establishments in this industry manufacture fruit and vegetable juices. This industry excludes producers of functional drinks, ready-to-drink teas and flavoured water products CA Distilleries in Canada Establishments in this industry distill ingredients such as grains, potatoes and sugars into spirits. These spirits are then bottled and sold CA Beer, Wine & Liquor Stores in Canada Establishments in this industry include government outlets and specialized stores licensed specifically to sell alcoholic beverages for off-premises consumption.

3 Breweries in Canada February About this Industry Additional Resources For additional information on this industry Beer Canada Brewers Association Brewers Association of Canada Brewing and Malting Barley Research Institute The Canadian Amateur Brewers Association IBISWorld writes over 400 Canadian industry reports to help you make better business decisions, faster. To see all reports, go to

4 Breweries in Canada February Industry at a Glance Breweries in 2016 Key Statistics Snapshot Revenue $6.7bn Annual Growth % Annual Growth % Profit $552.4m Exports $223.9m Businesses 351 Market Share Anheuser-Busch InBev 31.0% Molson Coors Brewing Company 26.9% % change Revenue vs. employment growth % change Per capita disposable income Year Year Revenue Employment p. 26 Products and services segmentation (2016) SOURCE: IBISWORLD Key External Drivers Per capita disposable income 9.7% Draught beer Per capita alcohol consumption World price of wheat World price of aluminum Canadian-dollar effective exchange rate index 47.4% Canned beer 42.9% Bottled beer p. 5 SOURCE: IBISWORLD Industry Structure Life Cycle Stage Mature Revenue Volatility Medium Capital Intensity High Industry Assistance Low Concentration Level Medium Regulation Level Technology Change Barriers to Entry Industry Globalization Competition Level Heavy Low High High High FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 34

5 Breweries in Canada February Industry Performance Executive Summary Key External Drivers Current Performance Industry Outlook Life Cycle Stage Executive Summary Over the past five years, the Breweries industry benefited from massive growth in the popularity of craft beer. Although this resulted in large revenue and enterprise growth from a range of new small-scale breweries, consumers have shifted away from the traditional light and premium beer brands that currently represent the vast majority of sales for the industry s largest brewers. Consumers are increasingly electing to buy less beer in exchange for higherquality brands or, in some cases, reducing purchases of alcohol altogether. Due to changing preferences, consumers have shifted away from traditional light and premium beer brands Although industry revenue is expected to grow at an annualized rate of 4.9% to $6.7 billion over the five years to 2016, growth in the number of new breweries has stabilized since surging in Consequently, industry revenue is projected to grow only 0.9% in Major industry players, Anheuser- Busch InBev (AB InBev) and Molson Coors, are expected to generate the overwhelming majority of industry revenue in The planned merger between AB InBev and rival brewer SABMiller will likely result in the latter company relinquishing its majority stake in the North American MillerCoors joint venture that it operates alongside Molson Coors. International brewers have been significantly pressured because they depend on high-volume sales of their respective flagship value products, Budweiser and Molson Canadian, two brands that have experienced stagnant growth due to the growing popularity of craft beer. As industry players continue to innovate and market new products, profit is expected to account for 8.2% of revenue in IBISWorld projects that the price of wheat will remain relatively steady during the next five years, increasing at an annualized rate of only 0.2%. However, brewers may lose some profit due to increasing price-based competition and a projected 3.5% annualized increase in the cost of aluminum over the next five years. The Canadian dollar has struggled in comparison with its largest trading partners. The increasing strength of the US dollar has made Canadian beer relatively more expensive for US consumers, thereby reducing industry exports across its southern border. The continued strengthening of the US dollar will contribute to poor trade performance for an industry that is already experiencing waning interest among consumers in the United States. Consequently, industry revenue is forecast to expand at a minimal 0.1% annualized rate to $6.8 billion by Key External Drivers Per capita disposable income Disposable income growth is an important indicator of industry growth because greater purchasing power bolsters consumers discretionary alcoholic beverage purchases. During periods of economic growth, rising disposable income may encourage consumers to purchase either more beer or higher-margin brands. Per capita disposable income is expected to increase in 2016, representing a potential opportunity for the industry. Per capita alcohol consumption The average consumer s alcohol consumption patterns can serve as an indicator of demand for industry products. Consumers cultural and taste preferences can reduce drinking

6 Breweries in Canada February Industry Performance Key External Drivers continued frequency and affect sales of beer. For example, many people drink occasionally due to personal preference or for health reasons, which reduces alcohol consumption and, therefore, total sales volume. Per capita alcohol consumption is expected to decrease slowly during 2016, posing a potential threat to the industry. World price of wheat Malted cereal grains such as barley, rye and wheat are the primary ingredients required to produce beer. Therefore, sudden increases in the price of wheat and barley will impose a significant cost burden on industry brewers; increases in the global price of grain erode industry profit margins. The world price of wheat is expected to decline in World price of aluminum Aluminum canning is a very popular method of packaging beer. Aluminum cans have historically been the most cost-effective container for holding beer and limiting the beer s exposure to flavordamaging UV rays. An increase in the world price of aluminum will lead to higher costs for brewers who predominantly ship their products in aluminum cans instead of glass bottles. Consequently, rising aluminum prices hamper industry profitability. In 2016, the world price of aluminum is projected to decline. Canadian-dollar effective exchange rate index The Canadian-dollar effective exchange rate index (CERI) is a weighted average of bilateral exchange rates comparing the Canadian dollar with the currencies of the country s largest trading partners. The CERI uses the US dollar, the Euro, the Japanese yen, the UK pound, the Chinese yuan and the Mexican peso in its index. Depreciation in European currencies will likely encourage faster appreciation in the US dollar. As a result, the Canadian dollar and the CERI are expected to decline over Per capita disposable income 4 Per capita alcohol consumption % change 0 Liters Year Year SOURCE: IBISWORLD

7 Breweries in Canada February Industry Performance Current Performance Over the past five years, changing consumer preferences have boosted industry growth. Per capital alcohol consumption among Canadians has declined an annualized 0.2% over the five-year period, although substantial growth in the popularity of new craft breweries has propelled the industry in recent years. IBISWorld expects industry revenue to increase at an annualized rate of 4.9% to total $6.7 billion in the five years to 2016; however, this industry s recent explosive growth has begun to plateau. Consequently, industry revenue in 2016 is projected to increase a slim 0.9%. % change Industry revenue Year SOURCE: IBISWORLD An evolving industry The entire North American market for beer has experienced drastic change over the past five years. Major international brewing companies such as Anheuser Busch InBev (AB InBev) and SABMiller have either acquired or merged with large North American brewers that historically represent a large group of domestically owned and operated brands. In recent years, however, many small-scale, independently owned breweries have entered the industry. Although this has not resulted in any significant industry decline, an emerging disparity exists between large international brewers and their smaller domestic competitors. Profit, which is measured as earnings before interest and taxes, is projected to represent 8.2% of revenue for the average brewery in Both AB InBev and Molson Coors, however, boast profit margins that substantially exceed this average. Due to the economies of scale that come with major brewing operations across the country, the industry s largest players hold tremendous market share in the industry despite concerns that the popularity of standard premium beer is waning. As a result of these structural changes to the industry, the number of breweries in Canada has increased significantly. The total number of brewing enterprises is projected to increase at a 10.5% annualized rate to 351 in the five years to Industry employment is expected to grow an annualized 0.1% over the same period to 8,805 workers in 2016, indicating that the vast majority of the industry s new enterprises are small-scale breweries with very few employees.

8 Breweries in Canada February Industry Performance Uncertain input prices Industry profitability has historically been erratic. Due to both the fickle nature of consumers drinking patterns and the significant price volatility of the industry s key inputs, industry profit is prone to sudden fluctuations. The world price of wheat, for example, represents a crucial cost for industry operators. Since cereal grains such as barley, rye, wheat and other adjuncts are significant expenses for brewers, increases in the cost of these grains will severely erode profit margins. Large brewers largely compete on the basis of price, thus an increase in the bulk price of cereal grains will likely translate to a reduction in the brewer s profit margin. For small-scale brewers of craft beer, increases in the price of ingredient inputs could lead the brewer to increase the price of their product, although this poses a challenge for breweries that already charge a premium on beers that use costly ingredients. The world price of wheat has declined at an 8.2% annualized rate over the five years to 2016, which has benefited both small and large brewers alike. The world price of aluminum also poses a threat to breweries that primarily package In recent years, many small-scale, independently owned breweries have entered the industry their products in aluminum cans. Over the five years to 2016, the world price of aluminum has declined by an annualized rate of 9.3%. Although the industry has benefited from declines in the price of raw aluminum, breweries are continually prone to sudden shocks in input prices that, although temporary, can have significant consequences regardless of the production scale of the brewery. Input price uncertainty creates a significant degree of fluctuation in industry profit margins. The industry s profit margin declined to 6.8% in 2013, despite reaching 10.2% in In 2016, industry profit is expected to account for 8.2% of total revenue, representing a gradual improvement in the years since the industry s sudden price hikes. Declining international sales Although Canada has historically been a net importer of beer, the industry has generated several prominent international brands. Canadian staples such as Labatt, Molson, Sleeman, Rickard s and craft brand Dieu du Ciel are widely available in Canada and have achieved some popularity throughout North America. Over the past five years, however, the value of Canadian beer exports has declined at an annualized rate of 1.2% to $223.9 million. This has occurred during a period in which total imports have increased considerably; in the five years to 2016, the value of industry imports has increased at a 4.3% annualized rate to $746.1 million. Much of the decline in exports may be attributable to changing US taste preferences. The United States overwhelmingly represents the largest market for Canadian beer exports, and recent consumer preferences for the country s emerging class of domestic craft beers accounts for much of this decline. Additionally, the majority of Canadian exports to the United States consist of traditional premium and light beer styles. Although the Canadian dollar has suffered against the US dollar, consumers may perceive imported Canadian beers as being too comparable in taste to similar domestic premium beers. These products may be less desirable considering the range of high-quality craft styles of beer throughout the United States.

9 Breweries in Canada February Industry Performance Industry Outlook Industry operators will likely face significant challenges as consumers shift away from traditional light beer consumption and international competition increases. Although the consumer shift toward craft beer has greatly benefited the industry s smaller producers, this has come at the expense of the industry s premium beer brands that generate the majority of the industry s revenue. In addition, consumers are less likely to purchase craft beer in large quantities, unlike premium beer brands that are comparably more affordable and purchased in higher quantities. Beer is also increasingly perceived as less healthy than wine, and substitution has slowed industry sales even as consumers have demonstrated significant interest in craft beer. Consequently, industry revenue is expected to grow at a minimal annualized rate of 0.1% over the next five years to $6.8 billion in 2021; revenue is projected to increase 0.5% in 2017 as marketing spending by major companies bolsters industry performance. Slow and steady With input prices stabilizing and the industry s largest companies slowing their merger and acquisition activity, the industry is not expected to undergo a structural overhaul similar to that of previous years. The world price of wheat, which has been steadily declining since its massive spike in 2011, will likely remain stable over the next five years. The world price of aluminum is projected to increase over the next five years, but at a manageable 3.5% annualized rate. The industry will likely remain in a holding pattern in the years to come. IBISWorld projects the number of industry enterprises to increase an annualized 2.3% The gradual influx of smaller breweries will slightly erode average industry profit to 394, while total industry employment will grow an annualized 0.6% rate to 9,067 workers. Barring significant input price shocks, average profit in the industry is anticipated to slip slightly to 8.1% of revenue in The gradual influx of smaller breweries will slightly erode average industry profit. Craft brewing and foreign competition The craft brewing phenomenon that has taken the US beer market by storm has not been as significant in Canada. This is largely due to the greater difficulty of entering the Canadian market. Since nearly every province regulates and distributes beer through provincial liquor control boards, the regulatory costs associated with establishing a new microbrewery are far greater for Canadian breweries than their US counterparts. US brewers have witnessed the gradual loosening of state distribution regulations in recent years, which has facilitated the surge in the number of US microbreweries. Additionally, the market for craft beer is not as large in Canada as in the United States. The United States has many more markets across a diverse range of climates that make many styles of beer suitable for brewing. Different types of surface water containing different ph levels and minerals play a key role in brewing variant styles of beer. In addition, the proximity between many major US commercial areas enables small-scale breweries to retail their products to a large market. There are far fewer metropolitan areas in Canada capable of sustaining small breweries,

10 Breweries in Canada February Industry Performance Craft brewing and foreign competition continued and the transportation costs associated with delivering small-scale batches of beer to remote locations across Canada are prohibitive. Although small-scale breweries will continue to play a large role in shaping the Breweries industry for years to come, a resurgence in local breweries akin to the craft beer renaissance currently emerging in the United States is unlikely. The Breweries industry is also projected to experience slight growth in total exports. IBISWorld projects industry exports to increase at an annualized rate of 1.7% over the next five years to $243.5 million in Industry imports, which improved over the past five years, are expected to pick up further in response to stronger consumer demand for foreign brands. Total imports are expected to increase at an annualized rate of 5.2% to $962.7 million over the five years to 2021.

11 Breweries in Canada February Industry Performance Life Cycle Stage Per capita alcohol consumption has shown steady signs of decline The industry s largest companies are consolidating to achieve greater market share The brewing process has experienced little technological change % Growth in share of economy Maturity Company consolidation; level of economic importance stable Quality Growth High growth in economic importance; weaker companies close down; developed technology and markets Key Features of a Mature Industry Revenue grows at same pace as economy Company numbers stabilize; M&A stage Established technology & processes Total market acceptance of product & brand Rationalization of low margin products & brands 10 5 Sawmills & Wood Production Quantity Growth Many new companies; minor growth in economic importance; substantial technology change 0 Breweries Beer, Wine & Spirit Wholesaling -5 Flour Milling Bottled Water Production Soda Production Decline Shrinking economic importance % Growth in number of establishments SOURCE:

12 Breweries in Canada February Industry Performance Industry Life Cycle This industry is Mature Consumer shifts toward craft beverages and away from traditional light beer is a major factor behind the industry s performance during the past five years. With consumers trading up in their alcoholic beverage choices, they are reaching for higher-priced beer as well as substitutes like wine and spirits. Although this has enabled brewers to boost prices for their higher-end products, overall sales volumes have stagnated and in some cases declined. Lower sales volumes and substitution toward high-end products is posing a challenge for major companies like Molson Coors, since their operations are largely based on heavily marketing value brands. Molson Canadian and Coors Light, despite recent declines in popularity, currently represent more than half of the company s domestic beer sales. Declining volume has led to higher per-unit production costs. Breweries are raising their prices as a result, and these price increases are also taking into account volatile input prices for wheat, hops and packaging materials. Consequently, industry value added (IVA), which measures the industry s contribution to the economy, is expected to increase at a steady 1.1% annualized rate during the 10 years to 2021, while GDP rises at a projected 1.9% average annual rate during the same period. This rate of IVA growth implies that the industry is currently in the mature stage of its life cycle.

13 Breweries in Canada February Products & Markets Supply Chain Products & Services Demand Determinants Major Markets International Trade Business Locations Supply Chain KEY BUYING INDUSTRIES 41322CA 99CA Beer, Wine & Spirit Wholesaling in Canada Wholesale distributors are a vital link in the supply chain for alcohol. Most beer manufacturers are required to sell their products to private or provincial wholesalers, who then deliver these products to retail locations and drinking establishments. Consumers in Canada Individual consumers are the final purchaser of industry beverages, although some may purchase beer directly from small-scale brewpubs and establishments that are licensed to sell beer for on-premises consumption. KEY SELLING INDUSTRIES 31121CA 32111CA 32221CA 32311CA 32721CA 42451CA Flour Milling in Canada Brewers purchase malted grains from mills. Malt comes from barley or other grains that have been germinated by soaking them in water and then kiln-drying them in order to develop the enzymes needed for fermentation. Sawmills & Wood Production in Canada Wooden pallets are used to transport the final product to end users such as retailers, bars and clubs. Cardboard Box & Container Manufacturing in Canada Paperboard containers are used to package bottles and cans of beer for transportation. Printing in Canada Brewers adhere printed labels on their products to both market their product and to fulfill government labeling standards. Glass Product Manufacturing in Canada New and recycled glass bottles are purchased in bulk for bottling. Corn, Wheat & Soybean Wholesaling in Canada Malted barley, wheat, corn, hops and other flavor adjuncts are purchased from industry wholesalers. Products & Services According to the latest industry survey conducted by Beer Canada in 2014, the industry has experienced a sharp increase in the number of licensed breweries as well as higher production volumes. Over the past five years, canned beer surpassed beer bottled in glass for the first time, representing a surprising change for an industry that has typically benefited from significant glass bottle recycling programs. Bottled beer Bottled beer has for decades been the standard packaging for the industry s products. Beer bottles are made of glass and often come in brown or green hues. Clear bottles are rare, due to their susceptibility to flavour-spoiling UV light. Although glass bottles are the standard packaging material for most brewers, the relative heaviness of glass ultimately adds to their transportations costs. As a result, some brewers have replaced some bottled beer production with forms of canned beer packaging. This has caused bottled beer to decline as a share of the industry s products over the past five years, representing an estimated 42.9% in Canned beer An estimated 47.4% of industry products are packaged in aluminum cans, representing a robust increase over the past five years. There are many reasons for the sudden surge in popularity of

14 Breweries in Canada February Products & Markets Products & Services continued Products and services segmentation (2016) 9.7% Draught beer 47.4% Canned beer 42.9% Bottled beer Total $6.7bn canned beer. For producers, aluminum is a far lighter material than glass that reduces the overall bulk and transportation costs associated with shipping bottled beer. Additionally, compared with glass, aluminum is relatively inexpensive to purchase from metal manufacturers. Consumers have also taken to canned beer over the past five years. Although beer packaged in cans may once have been perceived as being exclusively light, subpremium and bottom-shelf in terms of quality, canned alternatives of many premium craft beers have entered the market in recent years. Because canned beer is more cost-effective for producers to manufacture, they can pass along some of the cost savings to consumers. Aluminum cans have given consumers far greater exposure to higher-priced brands without any negative consequences to flavor. In fact, craft beer producers regard aluminum containers as a much better packaging material than glass. Although dark amber glass bottles significantly reduce the likelihood of UV light exposure and the potential SOURCE: IBISWORLD skunking effects it can have on beers, aluminum cans block virtually all possibility of the product s taste being compromised due to UV exposure. Many breweries have also used aluminum cans as an opportunity to create elaborate product labels and designs, since cans provide greater surface area for printed labels than traditional glass bottles. Draught beer Beer Canada reports that a slim 9.7% of the beer produced in Canada is packaged and distributed in bulk. Draught beer production includes beer that is served from barrels, such as standard pressurized kegs or more traditional casks. Kegs are commonly constructed from aluminum or steel, are force-carbonated using nitrogen or carbon dioxide and are sold in bulk sizes ranging from 20.0 to 58.6 litres. Conversely, casks are constructed using metal or wooden housing and carry beer that is neither carbonated nor pasteurized. Draught beer is most commonly sold to private drinking establishments and individual consumers hosting events and private functions.

15 Breweries in Canada February Products & Markets Demand Determinants Demand for beer varies depending on many factors. Customer demand for a specific brand may fluctuate depending on the perceived attractiveness of other brewers products. Additionally, beer substitutes such as wine, spirits and nonalcoholic beverages can increase in popularity and negatively impact sales of beer. Over the past several years, demand for beer has steadily increased compared with these close substitutes, and the industry has responded to growing demand by expanding its offerings of seasonal, premium and specialty beer styles. Marketing also influences the public s demand for beer. Major companies that brew very similar, mildly flavoured products typically dedicate large portions of revenue toward promotional campaigns. High-profile celebrity endorsements, major advertising campaigns, novel packaging materials and complex bottle designs all heavily contribute to the industry s high marketing costs, and these campaigns have a major impact on consumers purchasing decisions. Government intervention can influence demand through regulation and taxation. The most common forms of government regulation of alcoholic beverages pertain to retail sales. Minimum drinking ages, limits on hours of sale, limits on the size of alcohol purchases, mandatory minimum retail prices and excise taxes are all designed to limit overconsumption and control the sale of alcohol. Throughout much of Canada, the distribution and sale of beer is controlled by provincial regulatory bodies rather than private wholesalers and merchants. Demographics also play a significant role in determining demand for alcohol. Demand for alcoholic beverages tends to be higher among households with higher levels of disposable income. IBISWorld estimates that households earning the top 20.0% of income spend 60.0% more on beer from retailers than the average household and 80.0% more on beer at licensed drinking establishments. Age may also determine the taste preferences of consumers. Per capita consumption of beer is higher among 18- to 34-yearolds than other age groups, while purchases of wine remain strong among consumers aged 35 and older. Major Markets Major market segmentation (2016) 0.8% Women aged 65 and older 8.4% Women aged 45 to % Men aged 35 to % Women aged 35 to % Men aged 65 and older 30.5% Men aged 19 to 34 Total $6.7bn 14.9% Women aged 19 to % Men aged 45 to 64 SOURCE: IBISWORLD

16 Breweries in Canada February Products & Markets Major Markets continued Beer consumption among men Men continue to dominate Canadian beer consumption, drinking an estimated 71.5% of beer in terms of volume. Men aged 19 to 34 will drink an estimated 30.5% of beer sold domestically in 2016, because they are more likely to purchase beer in high quantities and buy a variety of craft brews to sample. Men in this age range are not only the most likely to drink beer, but also typically drink a greater volume of beer than other age groups. This is especially true among younger drinkers between the ages of 19 to 24. Men between the ages of 35 and 44 consume 13.6% of the industry s products. This demographic represents a broad range of alcoholic beverage consumers who hold disparate product preferences and consumption habits. The increasing popularity of craft and local beer styles has played a significant role in broadening the consumption preferences of this demographic. Meanwhile, men aged 45 to 64 are expected to drink 24.0% of the beer produced in 2016, as many in this segment substitute purchases of beer with wine or spirits due to higher disposable incomes and shifting healthoriented attitudes. Similarly, men aged older than 65 are estimated to drink just 3.4% of the beer produced in 2016 and generally do not represent a significant share of the industry s targeted marketing activities. Beer consumption among women Because women consume beer less frequently than men, they represent a smaller market for the Breweries industry. Although consumption by women has increased during the past five years, women are estimated to drink only 28.5% of the beer sold in Canada. Breweries are introducing new products that have performed well with female test groups, such as sweetened beers like Molson Sublime or Labatt Blue Light Lime. Low-calorie products are also increasingly marketed toward women as brewers seek to tap this growing market. Women aged 19 to 34 are estimated to drink 14.9% of the beer sold in Canada in 2016, surpassing all other female age groups as they try newer products. This demographic has been particularly receptive to new types of local and craft beer. Women aged 35 to 44 are expected to consume 4.4% of the beer produced in Beer consumption among older women is generally low, as substitute beverages such as wine and mixed beverages are often more popular within this age range. Women aged 45 to 64 consume an estimated 8.4% of the industry s products, and women aged 65 or older are anticipated to drink 0.8%. International Trade The Canadian market for beer is relatively self-sufficient, with domestic brewers fulfilling most of the domestic demand for alcoholic beverages. However, Canada does participate in the international market for beer and is a net importer of beers from Belgium, Mexico, the Netherlands and the United States. Beer imports have steadily increased in recent years, owing to consumers gradual shift in taste preferences toward diverse types of foreign craft beer. Conversely, Canadian beer exports have experienced inconsistent performance over the past five years due to increasing competition from foreign breweries. Imports During the past five years, the continued strength of the Canadian dollar has made foreign products relatively inexpensive for Canadians. As a result, imported beer sales have increased, climbing at a 4.3% annualized rate since 2011 to $746.1

17 Breweries in Canada February Products & Markets International Trade continued Level & Trend Exports in the industry are Low and Steady Imports in the industry are Medium and Increasing million in Canadian beer imports come from many different countries, although imports from the United States, the Netherlands, Mexico and Belgium consistently rank as the most popular foreign beer brands. Brands such as Budweiser, Bud Light, Coors Light, Miller Lite, Heineken, Grolsch, Modelo, Dos Equis and Duvel are popular imported brands that are widely available across Canada. Continually expanding advertising campaigns and consistent consumer approval of these brands will likely lead to continued growth in beer imports over the next five years. Exports Export growth has been inconsistent over the past five years, although a growing number of Canadian craft breweries has introduced a minor degree of international appeal to some of the industry s newest companies. Foreign demand for Canadian beer often depends on US taste preferences, since the United $ million Industry trade balance Year Exports Imports Balance States represents the overwhelming majority of the industry s export market. In recent years, US taste preferences have shifted away from foreign and domestic premium brands toward local and regional craft styles, thereby reducing overall interest in Canadian exports among US drinkers. With US consumers increasingly looking domestically for 22 SOURCE: IBISWORLD Exports To... Imports From % Other 0.7% Japan 0.8% Australia 1.1% Ireland 12.2% Mexico 9.9% Belgium 32.1% Other 95.5% United States 21.3% Netherlands 24.5% United States Year: 2015 Total $223.9m SIZE OF CHARTS DOES NOT REPRESENT ACTUAL DATA Total $746.1m SOURCE: USITC

18 Breweries in Canada February Products & Markets International Trade continued their beer purchases, this trend is expected to cause industry exports to decline at an annualized rate of 1.2% to $223.9 million in 2016.

19 Breweries in Canada February Products & Markets Business Locations 2016 Establishments (%) Less than 5% 5% to less than 20% 20% to less than 40% 40% or more YT NT NORTHERN TERRITORIES 0.4 NU BC 26.5 AB 4.5 SK 1.2 MB 1.2 ON 34.3 QC 22.4 NL 1.6 NB 2.4 NS 4.9 PE 0.4 SOURCE: IBISWORLD

20 Breweries in Canada February Products & Markets Business Locations Due to the high transportation costs required to ship a heavy product such as beer, breweries are commonly located near the major markets they serve most. As a result, industry establishments are overwhelmingly concentrated in provinces with densely populated metropolitan areas: Ontario, British Columbia and Quebec. Ontario holds a leading 34.3% of industry establishments due to high demand for beer from Toronto and surrounding suburban areas, and even from US distributors across the border that may wish to import Canadian brands for US consumers. British Columbia holds 26.5% of industry breweries despite representing only 13.3% of the Canadian population. This is largely due to the commercial dominance of Vancouver as well as the province s convenient ground transportation access to Washington state and California. Quebec holds 22.4% of industry breweries, falling closely in line with the province s 23.1% share of the Canadian population. Large populations in Montreal and Quebec City help stimulate demand for beer in the province, and shipping activity to and from the cities of Hull and Gatineau support the steady trade of alcoholic beverages throughout the province. Access to raw materials is an additional factor that determines the locations of industry businesses. Only % Distribution of establishments vs. population Alberta British Columbia Manitoba Establishments Population New Brunswick Newfoundland Northern Territories Nova Scotia Ontario Prince Edward Island Quebec Saskatchewan SOURCE: IBISWORLD 2.4% of the industry s breweries are located New Brunswick, for example, due to lack of access to fresh inputs like barley, hops and adequate brewing water. Although such areas may have an increasing number of nanobreweries, homebrewers and pubs that operate outside the scope of the industry, regions such as New Brunswick, Prince Edward Island, Manitoba, Saskatchewan and the Yukon do not possess sufficient means of transportation or large enough populations to sustain a significant number of industry breweries.

21 Breweries in Canada February Competitive Landscape Market Share Concentration Key Success Factors Cost Structure Benchmarks Basis of Competition Barriers to Entry Industry Globalization Market Share Concentration Level Concentration in this industry is Medium The three largest breweries in Canada are expected to generate 61.7% of industry revenue in Foreign investment over the past decade has led to fundamental restructuring of the industry in the form of intense consolidation and rising market share for international beverage behemoths. Major international brewers have developed significant market share through economies of scale in production, which allow these companies to produce large quantities of beer at a low per-unit cost, heavily market these products through a variety of advertising channels and generate operating margins that are significantly higher than the margins of the industry s independent, regional brewers. Consequently, the industry continues to be represented by both an increasingly high number of small brewers and a select few major international brewers. As these major international brewers continue to acquire the production facilities of popular Canadian and foreign brands, industry concentration is anticipated to increase over the next five years. Key Success Factors IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are: Effective quality control Brewers operating large batches must ensure that their product is made in a regulated and sanitary environment, the ingredients are measured consistently and precisely, fermentation occurs uniformly and final packaging is consistent. Economies of scale Breweries that can manufacture beer on the largest scale possible can purchase wholesale ingredients at a cheaper bulk cost and sell their products at a lower retail price. Having a cost effective distribution system Breweries are typically more efficient when streamlining distribution agreements with provincial entities and wholesalers. Economies of scope Brewers that produce a variety of beer styles can achieve a marketing advantage by appealing to a greater range of customer tastes. Establishment of brand names Successful branding through label design and heavy marketing is critical to success in a brand-centric market. Cost Structure Benchmarks Profit Industry profit, defined as earnings before interest and taxes, fell slightly over the five years to 2016 to 8.2% of revenue. The industry s largest breweries typically yield much higher profit margins as a result of significant economies of scale, while smaller breweries are often unable to spread large fixed costs over similarly large product output. This differentiation among companies profit is the result of high variable costs and the bargaining power that larger players have over suppliers and distributors. Larger companies with greater economies of scale can typically produce higher quantities of beer at a far lower cost per unit, especially when these companies brew styles that require few or very low-cost adjunct ingredients. Purchases Raw ingredient purchases represent the largest component of brewers expenses, and purchases are estimated to represent 40.0% of the industry s revenue. Basic materials include packaging, principally glass, aluminum and corrugated

22 Breweries in Canada February Competitive Landscape Cost Structure Benchmarks continued cardboard, and these costs have fluctuated wildly over the past five years as a result of volatile commodity prices. Major purchases of barley, wheat, hops, sugar, corn, rice and mineral additives and preservatives, which are both critical ingredients for ensuring proper water quality, have mostly declined over the past five years in response to falling global grain prices. The price of hops can experience significant variation each season depending on the climate of various source regions. Fluctuations in price often have a significant impact on a brewer s overall costs and may even impact the final retail price. Over the five years to 2021, prices of raw ingredients are projected to decline overall. Wages During the past five years, wages have remained relatively steady as a share of revenue, accounting for an estimated 6.7% in Both industry employment and average industry wages have stagnated over the past five years, which is consistent with the industry s minimal revenue growth in recent years. It is possible for many expanding breweries to transition wage expenses toward investments in more efficient capital, but these investments have not been drastic over the past five years. Other Marketing costs have escalated to an estimated 4.5% of revenue in 2016 due to rising advertising spending by the industry s largest companies. Brewers are competing against not only new industry entrants but also against an increasing number of wine, distilled spirit and soft drink manufacturers. Other costs, such as rent, utilities, taxes, fees, administrative expenses and government licensing, have been stable and will continue to represent a significant component of revenue. Sector vs. Industry Costs Average Costs of all Industries in sector (2016) Industry Costs (2016) Percentage of revenue np r o fi t n Wages n Purchases n Depreciation n Marketing n Rent & Utilities n Other SOURCE: IBISWORLD

23 Breweries in Canada February Competitive Landscape Basis of Competition Level & Trend Competition in this industry is High and the trend is Increasing A recent influx of small, local breweries into the industry has created additional competition for the few major breweries that have dominated the Canadian beer market in recent decades. The industry consists of a small number of major international alcoholic beverage producers, many domestic and regional brewers and a new class of upstart brewers throughout the country. Major imported brands, such as Heineken, present the largest source of competition to all of the industry s domestic brewers. Internal competition Because the Breweries industry produces many types of beer that cater to a wide range of customer taste preferences, many small-scale breweries emphasize seasonal flavours, limited-edition styles and new brands rather than compete exclusively on price. Conversely, the industry s larger beer brands, such as Molson, Moosehead and Sleeman, are produced and marketed with the brands cost-effectiveness in mind, and competition from major beer manufacturers is of little concern to local microbrewers whose products are geared toward connoisseurs and those who prefer more intricate styles of beer. Therefore, industry competition is based primarily on brand, quality and retail pricing. In general, marketing efforts typically focus on male consumers aged 19 to 25 years, because this demographic represents the market in which consumers are most likely to try new beer products. Alternative marketing techniques like beer tastings and brewery tours have become common among both small and large brewers, while major brewers tend to focus their advertising efforts toward celebrity endorsements and primetime TV spots. Consumers show significant brand loyalty, making it difficult for new entrants to capture market share from established brands. Competition for brand loyalty has intensified on a regional level and, as a result, many regional players have aggressively sought to expand their geographic market reach. Competition has also increased with the rise of the craft-brewing segment in the past five years. Internal competition is anticipated to continue growing over the next five years. External competition Competition from other beverages and foreign producers is escalating. Imports increased over the five years to 2016, as consolidation among the industry s largest beer brands compelled consumers to increase purchases of major foreign brands. Other beverage industries are also posing a major threat to the industry, offering drinks that compete directly with beer. Not only is wine becoming increasingly popular among 18- to 35-year-olds, but there are also new adult drink categories emerging that are aimed at consumers in this age range. These include low-sugar sodas that are marketed as healthy alternatives, relaxation drinks and exotic juices that retailers, restaurants and other establishments are increasingly selling alongside beer.

24 Breweries in Canada February Competitive Landscape Barriers to Entry Level & Trend Barriers to Entry in this industry are High and Steady Different barriers exist depending on whether a new operator wishes to enter the Breweries industry as a small local brewer or as a large regional producer. Entry for craft brewers, for example, can be facilitated by the option to purchase turnkey facilities, but starting a largescale production facility will require significant cash investments and substantial purchases of capital equipment. Before a new brewer can even enter the industry, however, it must fulfill major regulatory obligations. The manufacture and distribution of alcohol in Canada is highly regulated, and most provinces require that all breweries distribute their products through provincial liquor boards. Licensing fees, audits and excise taxes on production also compound the total costs breweries incur on a regular basis. Barriers to entry include the sunk costs and other high ongoing capital requirements necessary to operate large brewing operations. Many major brewers can ship large quantities of beer because they have preexisting agreements with distributors. Establishing relationships with distributors is an important component of achieving success in the industry, and new entrants will face the challenge of developing these relationships from the bottom up. A lack of major relationships in the industry is a significant issue for new breweries; since distribution is heavily regulated and limited on a regional basis, distribution opportunities are scarce. Shelf space in retail outlets is limited and major breweries are often the first to claim retail space as a result of their large distribution contracts and heavy negotiating clout with wholesalers and retailers. Barriers to Entry checklist Competition Concentration Life Cycle Stage Capital Intensity Technology Change Regulation & Policy Industry Assistance High Medium Mature High Low Heavy Low SOURCE: IBISWORLD Brewers benefit from establishing economies of scale throughout the brewing process. As fermenting tanks, bottling facilities and ingredient contracts expand, the cost to produce a single bottle of beer substantially declines. As a result, prospective entrants may struggle for success in the industry unless substantial upfront investment is made on large brewing equipment. Although the industry has experienced steady growth in smallscale microbreweries over the past five years, many of these breweries cannot support national distribution and thus achieve far smaller profit margins than larger brewers. Entering the industry is costly for new breweries of all sizes, and increasing competition among the industry s smallest brewers has made it even more difficult for new entrants to achieve success. Economies of scale enable greater profit margins, which the industry s largest breweries direct toward major advertising campaigns. The major marketing activities of the industry s largest companies make it difficult for new entrants to set themselves apart from established brands. Brand recognition is difficult to establish by word of mouth, and this poses an additional challenge to small-scale brewers.