Overestimating Barriers to Entry: The Rise of Craft Distillers

The alcoholic beverage industry has experienced a significant change in the past few years, as a wave of new entrants has emerged.  A large number of "craft distillers" have exploded onto the scene.  According to the American Distilling Institute, the number of small distilleries has risen tenfold over the past ten years.  According to a recent article in the Wall Street Journal, the large players are taking notice. They don't want to get caught unprepared, as they were to some extent when craft beer began to disrupt their business.  

The rise of craft beer and craft distilleries raises an important strategy point.  For years, people argued that the barriers to entry in markets such as beer and distilled spirits were high because of economies of scale, brand equity, route to market advantages, and the extensive advertising and marketing required to launch a new product.  What's happened?  How have startups cracked these markets?  It's become easier to enter these days for a variety of reasons.  Perhaps most importantly, one can launch a new brand more easily today than in the past.  You don't need traditional marketing and advertising approaches, which can be very expensive.  You can use guerrilla marketing and social media to introduce a new product.  Authenticity has become a key product attribute for consumers, and entrants can play on that trend.  Retailers are looking for new, high margin, premium products to add to their portfolio.  Deregulation has occurred, with some laws restricting the sale of alcohol at certain days, times, and locations coming off the books.  Moreover, some rules restricting production have changed as well.  

What's the broader lesson here?  Economies of scale might be significant, but we can't overestimate their ability to prevent entry.   Niche players can still emerge.  Other entry barriers can decline, precipitating entry despite scale disadvantages.   Moreover, some advantages of being small often are overlooked.  While no one niche player may take substantial share, as a group they may create a significant disruption in the marketplace.  The strategic threat is not from one particular entry, but from a class of entrants.  That's a concept that incumbent players in many industries should keep top of mind.