The Kentucky Bourbon industry dates back to the 18th century and is a multi-billion business. Bourbon is the only distilled spirit produced in the United States of America. Ninety-eight-percent of bourbon consumed in the United States and around the world is created, distilled, and aged in Kentucky.
Michael Porter developed the five forces framework for analysis of an industry in a competitive environment. The five forces framework includes factors such as competitive rivalry, threat of new entrants, suppliers' bargaining powers, threat of substitute product, and buyers' bargaining power. This research paper will provide an in-depth discussion into the competitive environment in the Kentucky bourbon industry using Porter's five forces framework.
According to Porter (2008), competitive rivalry is high when the overall market share is distributed among all firms in an industry. On the other hand, competitive rivalry is low if the overall market share is concentrated among few firms in an industry. The Kentucky bourbon industry has 19 distillers. The major players include Heaven Hill Distillers, Buffalo Trace Distillers, Jim Beam Group, Wild Turkey, Barton Brands, Four Roses Distillers, Brown-Forman Corp., and Markers Marks. The competitive rivalry in the Kentucky bourbon industry is high because no single distiller holds a very high portion of the overall market share.
Competition in the Kentucky bourbon industry is both price- and non-price based. For instance, over the past few years, a fall in the price of bottom-shelf bourbon has prompted distillers in the Kentucky bourbon industry to engage in price wars. In addition, in order to gain competitiveness in the industry, distillers have adopted an innovation strategy. Distillers in the Kentucky bourbon industry have expanded their distilling and storage capacity to allow their bourbon to age over a longer period.
Suppliers' Bargaining Power
The Kentucky bourbon industry is highly concentrated and heavily regulated which increases suppliers' bargaining power considerably. Distillers source their raw material in Kentucky or in nearby states. Sources of raw materials are governed and monitored by agencies in the industry. The major ingredient for the production of bourbon is corn. There are very few substitutes for sources of raw material in the Kentucky bourbon industry. For example, distillers require barrels for the production of bourbon, and there is only one approved supplier of barrels in the Kentucky bourbon industry, which increases suppliers bargaining power significantly.
Buyers' Bargaining Power
According to Hill and Jones (2007), buyers' bargaining power is high when there are many sellers and few buyers in an industry. Buyers in the Kentucky bourbon industry include restaurants, bars, and retailers. Although distillers in the Kentucky bourbon industry do not sell their product to the end consumers, there are many resellers in the market, which reduces buyers' bargaining power significantly. On the other hand, the cost of switching from one buyer to the next is significantly low; therefore, distillers have to meet and exceed their buyers' expectations.
Threat of New Entrants
The threat of new entrants in the Kentucky bourbon industry is considerably low. This is largely because of the standards and regulations governing production of bourbon in Kentucky. In addition, the capital required for venturing into the industry is significantly high thus discouraging new entrants. Finally, consumer loyalty in the industry hinders new entrants from entering into the Kentucky bourbon industry.
Threat of Substitute Goods
The threat of substitute goods in the Kentucky bourbon industry is relatively low. Even if bourbon faces a major threat from other alcoholic beverages such as vodka and beer, it has distinctive market niche that is loyal to the product. Consumer loyalty in the bourbon industry reduces the threat of substitute products. For instance, despite high-shelf bourbon being more expensive than bottom-shelf bourbon, its demand has risen significantly over the years. The rise in demand for high-shelf bourbon is largely attributed to its distinctive taste.
The Kentucky bourbon competitive environment is highly dynamic but presents a lucrative opportunity for distillers in the industry. It is characterized by high competitive rivalry, low threat of new entrant's high supplier bargaining power, low buyer bargaining power, and low threat of substitutes.
Hill, C., & Jones, G. (2007). Strategic management: An integrated approach. USA: Cengage Learning.
Porter, M. (1998). Competitive advantage: Creating and sustaining superior performance with a new introduction. New York: Simon and Schuster Publishers.