The more beers the better? Exploring the link between vertical integration in the brewery sector and beer diversity in pubs

Abstract

The brewery sector worldwide is going through a process of concentration, with a decreasing amount of producers. Horizontal integration, a process in which breweries take over other breweries exists already several decades. Policy intervention sets a limit to the degree of market power a brewery can obtain by taking over competitive breweries. As a result, breweries have been seeking other strategies. Vertical integration is a practice of market behaviour where firms may decide to combine technologically different production processes, distribution processes, marketing processes or any other economic process. A common practice in Belgium was the conclusion of exclusivity contracts with bars. These vertical integration arrangements have been criticized a lot and blamed for such issues as increasing beer prices, decreasing pub keeping margins, exclusion and increasing entry barriers. This last issue is the research topic of this paper. Exclusivity contracts are hypothesized to increase barriers to entry in the brewery market for newcomers by seriously diminishing market opportunities. What is more, smaller breweries, that have fewer opportunities to conclude exclusivity contracts, are allegedly driven out of the market. Finally, it is also hypothesized that these contracts have adverse effects for the consumers, as they are purported to result in decreasing beer diversity in pubs and stores. This study has empirically tested the hypothesis that the diversity of beers in the minority of independent pubs in Belgium is higher than in pubs with an exclusivity contract. The survey consists of a sample of 250 bars, representing 1% of all Belgian bars. The data collection was performed by observation and by questioning 250 bar owners. All pubs combined, 338 different beers were found. However, the average beer diversity in a pub was 21. Regression analysis revealed that beer diversity was negatively affected by having an exclusivity contract, at significant level 0.05. Other variables that influence beer diversity – from the few that were included in the analysis – are pub type and location.