107-The Power of Low-End Products for Industry Leaders

An astute industry leader has to respond to divergent customer needs for product and price. The first place the leader must look for growing customer needs is at Price Points, products offering significant differences in product benefits and prices. Sometimes products at either the high-end, Performance Leader products, or the low-end, Price Leader products, drive industry growth. Here is an industry where volume leadership shifted from one Price Point to another. It turns out that the industry leaders were much better at parrying competitive thrusts at one end than they were at the other. Of course, they suffered as they stumbled.

Posted 5/26/09

Low-end products can save an industry’s bacon when the industry falls on hard times. Most low-priced products are what we call Price Leaders (see Audio Tip #83: Price Leader Products and Companies on StrategyStreet.com). These products offer less Function or Convenience than do the industry’s more important Standard Leader products, for common pricing savings of 25% or more. (See Audio Tip #81: Standard Leader Products and Companies on StrategyStreet.com.)

These Price Leader products are helping the domestic beer industry today. In the domestic beer industry, Price Leader products are called “sub-premium brands.” These brands saw sales gains of 8% over the last year. In contrast, the industry Standard Leader products, called “premium” beers, saw sales fall 1.4%. “Sub-premium” beers are keeping the industry moving forward. These “sub-premium” beers cost about 25% less than the premium beers, so they offer drinkers an attractive price alternative when the economy gets tough.

Most of the “sub-premium” beer volumes are products of the big brewing companies, including Anheuser-Busch InBev NV, SABMiller PLC, Molson Coors Brewing Company. (See the Perspective, “When Product Mix Matters” on StrategyStreet.com.) So the industry’s Standard Leader competitors have closed the door on erstwhile Price Leader, private label, suppliers of cheaper brews.

These Price Leader products also have a few cost advantages over the Standard Leader products. Most importantly, the big brewers rely on word-of-mouth and price-based impulse buys to generate sales. They spend very little on advertising these brands. On the other hand, they spend a great deal to advertise the “premium” Standard Leader brands. So, while profits are lower on the Price Leader products, the lower margins are nowhere in proportion to the lower prices these products seek.

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Update 2022:

For the last 10 years, the beer industry in the US has been flat. Volume grew by 1% in total but sales grew only 0.1%.  Despite the slow growth in the broader market, the number of breweries grew at a rate of nearly 13% from 2016 to 2020.  The larger companies seem to have succeeded in shutting the door against new entrants at the low end of the market. Instead, virtually all of the growth in the market is taking place at the higher end, in brewpubs, microbreweries, and superpremium beers and ales. The major brewers have yet to figure out how to slow the newer high-end entrants.  In this slow growing market, brewers are ramping up new product development to target fresh consumers. They are introducing hard seltzers, hard kombuchas, hard teas and coffees and CBD beverages, along with low alcohol and no alcohol beverages. These are examples of product proliferation in a challenging market.

Brewpubs, microbreweries and superpremium beers and ales are examples of Performance Leader products. These products compete on unique Functions. Go HERE to see a discussion about when to compete on new functions.

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Update 11/25

Let’s review some of the important developments in the US brewing industry since 2010.

The first thing you would notice is a highly unusual share shift from the large industry leaders, selling Standard Leader products, to smaller firms selling Performance Leader products. The industry leaders have been attacked from above rather than the more typical pattern from below. For examples, Anheuser Busch had a 48% market share in 2010 and roughly 38% today; Molson Coors had a 29% market share in 2010 but only 21.5 % today. The two leaders have lost 17 share points in 15 years. Smaller, Performance Leader companies such as Constellation Brands, selling Mexican beers, Heineken, selling high-end beer, Boston Beer and Diageo, of Guinness Stout fame, picked up most of that share. The high-end craft brewers gained share throughout the period.

The market leaders seem to have made half-hearted attempts to counter this trend. They benefited from the higher prices this trend produced for the industry. They emphasized their own Performance Leader products in their marketing and advertising. These efforts bore little in the way of results. Their volume of sales continued to slip.

In the meantime, economies of scale began to work against them. Normally, the largest companies in an industry enjoy significant economies of scale, granting them additional margins compared to competition, no matter the pricing environment. However, when market share and, especially, product volumes decline, economies of scale work against the industry leaders. Costs simply do not decline proportionately when sales volumes fall. 2010 was a difficult year for the brewing industry. Still, Anheuser Busch produced an ROE of 11.4% while Molson Coors earned a 9.5% ROE. Better years were just ahead until the volume losses started to bite. By 2024 Anheuser Busch produced a 7.5% ROE while Molson Coors yielded 8.4%.

Parenthetically, Pabst migrated to a Price Leader industry competitor and lost roughly 40% of its share from 2010 to 2025. Customers wanted a better or more distinctive taste much more than they wanted a lower price.

An industry leader would usually prefer to compete against challengers at the high-end rather than at the low end of the market. However, if industry leaders are losing share the story, as in this one, usually ends badly whether pricing is high or low. History proves that it is easy to lose share, but very difficult to regain it.

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