Entry Barriers in Liquor Industry

ENTRY BARRIERS IN LIQUOR INDUSTRY When a new firm enters into an perseverance it pile affect all of the firms that ar currently in that sedulousness. new entrants to an patience bring new capacity, the desire to gain market share, and often firm resources. Prices posterior be bid down or incumbents constitute blow up as a result, reducing profitability. 24Therefore as new firms enter into an industry the entire industrys potential for sustained profits is trim due to the growingd amount of competition in that industry. Some factors serve well reduce the threat of entry as they act as barriers that oppose new firms from entering into an industry.These factors include economies of racing shell, intersection differentiation, capital requirements, access to dispersion 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 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(prenominal) provide be to the producer. This creates an advantage for a high volume producer equivalent those seen in the brewing industry.Economies of scale in the brewing industry as well as exist in areas other than in production and these include purchasing, distribution, and advertising. For example, bailiwick brewers achieve economies of scale in advertising through bulk media purchases and comprehensive brand marketing. Local-craft brewers spend more than twice that spent by self-aggrandizing brewers on marketing and advertising per barrel. 25 One company in particular, which is Anheuser-Busch, has done an passing entire job in exploiting the economies of scale that are present in the brewing industry. Anheuser-Busch has been able to leverage its 45 share U. S. market share into 75 percent of the industrys operating(a) profits through significant economies of scale in the areas of raw literal procurement, manufacturing efficiency and marketing. 26 As shown here there are real economies of scale available in the national beer brewing industry. This is a good factor for firms that are currently in the industry as they can take advantage of these unit cost breaks and while doing so as well as discourage the entry of new firms into the industry.Product Differentiation. in general, people cannot utter the difference between brands of beer. Second, more expensive brands do not cost proportionately more to make than economy beer. Capital Requirements. The capital requirements required 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 nerve-racking 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 allow ties with distribution channels based on long relationships. Government Regulation. The governments excise policy is subject to a lot of sudden changes. The manufacturers sometimes just take on to get their L-1 licenses renewed and at times they need to apply afresh, same(p) 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 interchange in the government retail shops. The policy was withdrawn in an ad-hoc bearing in 1994.On being questioned about the effects of this policy, an official in one of the countrys leading breweries said that the introduction of this policy had led to an increase in their revenue by almost 30% which they have disconnected out on since the policy got crushed. Recently, the governments policy to open up 45 private liquor shops was quashed by the cabinet, be cause it meant that the MLAs 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.