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The number of craft breweries in the United States has skyrocketed over the past four decades, from fewer than 100 in the 1980s to more than 9,700 in 2022. Craft breweries now make up nearly 25 percent of the broader $115 billion US beer market, according to the Brewers Association, which represents small and independent craft brewers.
As competition intensifies in local markets, a brewery tends to spend less on advertising. That’s because when advertising has what economists call “informational effects,” companies have an incentive to strategically underadvertise to avoid competition, according to Iowa State PhD student Sriparna Goswami and Iowa State’s Donghyuk Kim. In a study of 84 craft breweries, they find that companies advertised less in more competitive local markets.
Advertising has informational effects when it educates consumers about a brand, the researchers explain. These shoppers sometimes then look around to see what competing products exist, and the added competition they create puts pressure on prices. Companies wanting to avoid such competition may cut back on advertising. “The resulting underadvertising motive is stronger if advertising exerts positive spillovers on rival products, making consumers more likely to consider rival products as well,” Goswami says.
Goswami and Kim analyzed weekly brand-level advertising spending using Nielsen Ad Intel Data housed at Chicago Booth’s Kilts Center for Marketing and granular craft-beer-production data from the Brewers Association for 2016 to 2019.
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Why Craft Beer’s Rise Is a Warning Flag for All Sorts of Big BrandsThe craft breweries were dispersed among 73 counties, with each brewery sitting at the border of a Nielsen designated market area. Nielsen measures local television viewing data in DMAs, which are often used by marketers, researchers, and other analysts.
“The natural market of a craft brewery is inherently local. Breweries located near DMA borders are exposed to similar markets but different competitors—along with their advertising—on either side of the border,” says Goswami. The sample allowed the researchers to compare the breweries’ advertising spending across these DMAs.
Informative advertising typically does two things: directly increases market share by providing product information to consumers and indirectly intensifies price competition, the researchers write. In the case of their study, as local competition expanded, breweries increased their promotional spending less aggressively in more competitive local markets. When total rival advertising dollars increased by 1 percent, a company with two competitors raised its advertising by 0.2 percentage points less than a company facing just one competitor, the researchers estimate.
“In planning its advertising strategy, a brewery should consider its market position, the density of competitors in its area, and the current level of consumer awareness,” Goswami says. “This understanding will enable it to allocate its advertising budget more effectively, choosing between informative advertising efforts and more brand-focused strategies based on the specific market dynamics it faces.”
The findings may have implications for other nascent industries. In emerging markets with low consumer awareness, marketers may benefit from conducting generic, informational campaigns that raise the overall profile of a group of goods, Goswami says.
Sriparna Goswami and Donghyuk Kim, “Informative Advertising and Competition in Craft Beer Markets,” Working paper, March 2024.
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