The Eagle has Floundered – An analysis of the Penrose Effect on Budweiser.

Essay by keithshortenUniversity, Master'sA-, April 2007

download word file, 16 pages 5.0

Downloaded 100 times

By the mid 1970s the battle for dominance in the US beer market had been convincingly won by Anheuser Busch, makers of Budweiser. It had prevailed over its near rival in the beer market, Miller Brewing Co. and subsequently it had large cash flows and was looking to expand out of the slowing beer market.

Executives identified synergies between their core beer business and the snack food market. It was believed that snacks could be distributed by their incumbent distributors on their beer routes to taverns and supermarkets.

In 1979 Anheuser launched Eagle Snack foods (hereafter, "Eagle") which they built up through series of acquisitions. It quickly became apparent however that the synergies in the distribution of the products were not easily recognised.

Despite the distribution problems Eagle initially succeeded, capturing 4.6% of the snack food industry by remaining small and limiting itself to supplying airlines and taverns.

At the time Eagle was acquired by Anheuser, the snack food market was dominated by one player: With 41% of the market Frito-Lay, owned by soft-drinks giant PepsiCo, remained unconcerned by the entrant, to the benefit of Eagle.

Continuing on their early prosperity in the late 1980s Eagle, who had been progressively boosting quality also began expanding their product range. This expansion brought Eagle into direct competition with Frito-Lay whose Doritos brand had long dominated the tortilla market.

Frito-Lay suddenly took note of this threat and launched an aggressive defence of their position spearheaded by new CEO and Vietnam war veteran Fredrigo Enrico.

Frito-Lay launched an array of new products whilst upgrading their distribution channels, cutting costs and launching an aggressive marketing campaign. Using its dominance in the Tortilla market Frito-Lay subsidised its entry into the potato chip market undercutting all other players in the market on price.

The result was...