Beer Industry Case Study Essay Example for Free

Beer Industry Case Study Essay Beer industry is one of the oldest industries particular in EU as it is one of the biggest beer consumption markets. This industry has seen fluctuation of the demand and consumption of the beer over the last quarter of 20th century due to many factors. This analysis will look in to those factors by taking into account the case given and will analyze the general reasons, growth and effects of the industry keeping in mind the macro-environment and its main component such as political, legal, environmental, economical, technological, social- cultural, and international aspects. Furthermore industry analysis will be discussed in details by analyzing the critical factors such as the threats of new entrants, suppliers and buyers power on the industry, product substitutions, and alliance and merging of the companies. The details of micro-environment and industry analysis will be available in the appendices. In addition, current strategy, links between the micro-environment and industry analysis, will be discussed along with brief recommendations. The fore European brewing company will be analyzed in terms of strength and weakness. Current strategy The beer industry has been in the existence for as long as the barley have been harvested and used for the making of the beer. The drink is mixed with alcohol in order to give it tantalizing taste with addictive quality. The beer is used as an everyday drink by many around the world and it by creating a taste and demand in the market. It probably will not be controversial, if argued that it is in the top 5 most drinkable beverage in the world. The demand of the beer has increased significantly in the last half of the century and some cultural such as German has included it, as part of their culture and celebrates beer drinking festivals annually. The industry has been facing some threats in the market due to increased number of brewery companies, who over supplies cheap beer in the market, which could possibly kill the industry. Some other new and non-traditional threats such as increased health risks, potential abuse of the beer, new legal challenges, globalization and environmental has put a question mark on the future of the industry. These threats are real and the industry needs to address them effectively and efficiently in order to survive in the future. Some of the threats are addressed by adopting new strategies, such as being environmentally friendly production line, innovation, GM foods, and many more in order to be in the market and create consumer for the future. Summary of macro environment analysis Economic One of the biggest current threats almost on every business is the current financial crisis and the beer industry is not immune to it at all. The global crises have forced many workers out of their jobs, increased unemployment, which means less finance to purchase basics for a everyday life. Many had to cut unnecessary activities such as going to the local pub for a drink after work on regular basis or purchasing beer off the self from super markets. The uncertain financial times have dropped the consumer confidence and most of the people are afraid of spending any money on unnecessary activates. There is very strong evidence that consumers are saving money during these crunch times. Europe has been one of the hardest hit by the financial crisis, and some of the countries such as Island were almost to the brink of the bankruptcy. This uncertainty will have huge impact on the industry in short term and will affect the profitability. The usual willing buyers might cut down to consumption of the beer significantly or even chose to switch to a cheaper brand in the market, in order to fulfill their alcohol appetite. In terms of macro-environment, it simply means the buyers becomes price sensitive. The fuel price and beer have direct relationship, since the early stages of this crisis, the fuel prices had dropped significantly which means less overheads cost for the company in terms of logistics and supplies, however this drop in fuel prices may drop the beer price but it will not be enough to create a demand and increase sales for the beer in the market due to the financial crisis. Financial crisis would mean the availability of credit will be almost none existence for the company to borrow and carry their daily operations across the borders. Not only the credit will be a major issue, but the unavailability of the funds means, less money to compete in the market and high chances of being takeover, merged, and acquisitions with other major companies. Irrespective of the size of the company, the threats will remain hanging around their heads for as long as the markets picks up. The different taxation law around the European countries remains another challenge for the industry as despite being as a collective states and regulating a common taxation law around the Europe. The gradually increasing labor cost remains as a constant threat for the industry, regardless of the any other factor, it will be a long term threat to be dealt with on a regular basis. Political/Legal The expansions of EU will certainly be positive point towards the industry as it will increase the business boundaries and will create an open market. It also mean, increased customers to be targeted for the beer industry and at the same time it will increase competition among the existing breweries and the invader breweries. The competition will bring down the price for the customer and decrease the profitability for the business. The over consumption of alcohol due to many reason has forced the politician and law makers to make much more stricter legislation and rules with the use of alcohol in particular with drink driving. Forcing a very limited pubs and bars opening hours will reduce the consumption of the beer by a large margin. It is defiantly a negative effect on the business and high chance of getting harder in the near future. The well known negative effects of alcohol on the public health means that it would cost more to the government’s health sector annual budgets. The government will try to decrees the consumption of alcohol as much as possible as alcohol related health cost are rising on the government. It is a negative effect on the industry as customers are discouraged to drink alcohol as it carries health risks. Other factors may also include to limitation on the issued licenses for the breweries to make beer, which means less breweries. Over all the political side of the macro-environment remains negative for the industry in short and long terms as anti-alcohol sentiments are echoed in the legal and political section of the EU. Technological The advancement of the technology has affected the way businesses are operated and products are produced. The use of robot in the brewery for the propose of production line, assembly line and in particular packaging of the product has been used significantly and reduced the reliability of the labour and their costs and overheads. The on time tracking of the barley to the brewery and finished product to the stores are made much easy as GPS are used to track the movement of the product and on time deliveries are made possible. On the other hand it may in occur as a one-off purchase cost to the company, but the long term use and benefits outweigh the costs. The advancement in technology will be able to make mini home brewery, so the customers could have their own personal brewery at home. It will be a negative effect on the industry, as customer will make their own beer at home, however the home brewery will not be able to compete with the taste produced by the master brewer for the major brands. Environmental The climate change will affect the industry as unpredicted weather patterns are expected, which will affect the crops produced for the brewery. In this case the imports of barley from other countries cannot be ruled out, but the importation will carry transportation costs with it and it will certainly be passed on the customers at end of the supply chain. The climate change has affected Europe in many ways, as some parts are getting too cold for the barley to be grown and some parts are totally opposite to it. Climate change has affected the supply of water for the farmers, as less water simply means less crop for the industry. The industry does not have any alternative to use for the beer making as barley remains the one and only key ingredients. Water is not only required for the crops to grow but also for the making of the beer in the brewery, a good quality water will be hard to find in the future. The Genetically Modified (GM) crops could possibly be an option, which requires less water to grow and gives a batter taste to the beer. However the GM is still in the experimental stages and there are question in terms of reliability and health benefits with the GM. Social-cultural The social and cultural effects on the beer industry will be mix as demographically arguing that European populations are getting old but at the same time they are replaced by ever binge drinking younger population, however the replacement are not sufficient enough. The female buying power have increased as more and more European female are working and socializing outside and have the money to spend. The new fruity flavored beer are specifically designed for the female and it has been very successful to capture the feminine side of the industry. It is positive sign for the future of the industry. The increased EU population has been effected by a very reasonable number of Islamic community, who does not consumer beer due to religious reasons. It will carry negative effect on the industry unless non-alcoholic beers are produced to target this section of the industry. The excessive consumption of beer has not been approved by the society as a whole due to the valid reasons such as increased obesity, alcohol related violence and health related issues and underage drinking. It will be a negative effect on the industry and will be carried away in the future. International The international side of the beer market seems to be very interesting in regards to the political shifts of power from West to Asian region. In the near future the growing Asian market will play heavily on the industry as more and more beers are brewed and consumed in Asian region. European companies will have to make strategic moves towards the Asian market and possibly will be required to make alliances in order to survive. The shift will not affect the European market and it possible means decrees in the beer cost as beer produced in Asian will come to the European market for the customers. Globalization has promoted the free trade, which has opened new market and dropped the tariffs but it may result as negative to the European breweries as the cheap Asian beer will pour in the market. The cross border business might have some barriers as the taxation and tariff law differs from one state to another. Summary of industry environment Threats of new entrants The threats of a new entrants remains reasonably low as it is subjected to the scale of operation for the new entrants. Business within the local or regional area will require very little set up capital, however on an a broad scale of import and export across to the EU will require much bigger capital, logistics and distribution channels. The new entrants will face the brand loyalty and product differentiation as the existing customers already have mature tastes for their brands available in the market. Certainly the threats remain high for the current players, however the survival in this tight industry might be very hard as existing brands have very strong marketing knowledge and established customers. Bargaining power of supplies In this industry the barley suppliers does not have much of bargaining power as the alternative use of the crops are very limited and the suppliers does not have much of a choice. The number of suppliers out weights the buyers and there are huge number of buyers but the major beer companies purchase barley in huge volumes and has the upper hand. The bargaining power may increase in case of a natural disaster, which could destroy the crop of an entire regain and decreases the quantity demanded for the beer market, but the chances of it happening is very less. The suppliers might have an alternative option of forward integration as to enter in the brewery industry, however the life within the industry may be short lived due to monopolistic nature of the industry by the brewers. The demand for a skilled master brewer remains very high and the skill supplier has the upper hand in this case. Bargaining power of buyers According to the analysis in the appendix 2, the buyer seems to be in a much stronger position then the suppliers. Due to the very nature of the critical product barley, which can not be stored and needs to be sold to the buyers as soon as its harvested. The buyers uses the volume perches power to negotiate with the suppliers and gets a better price. The number of suppliers are increasing within the European market and in some case the raw product could possibly be imported from Asian and South American destination with much cheaper price. Over all the buyers have the power to control the industry and manipulate in many ways. Substitutes The substitutes available in the market are one of the real threat to this industry as the negative effects of the alcohol are coming forward, which are backed by strong scientific evidence. The number of substitutes such as Water, milk, soft drinks, wine, tea, coffee, energy drinks, and traditional cultural drinks are and most of them almost posses no health threats of any kind. In fact the substitutes are well accepted socially, legally, economically and does not have any age restriction of any kind when consumed. Industry rivalry The issue of rivalry depends on the sector of market controlled by the companies. In general Europe has a very high number of companies operating within the EU. Europe has one of the highest consumption of beer then US and Asian market, so competitors has very good reasons to be in EU market. Some of the companies are merging in order to create an oligopoly or even a pure-monopolistic markets to drive out others from the industry. Generally the rivalry remains very high at all times, with the other companies in the industries. Interconnections between two analyses The beer industry is one of the oldest industry and growing over times. It has seen some fluctuations over the last half of the 20th century, but it has not deterred it any way. The macro-environment’s components faces constant changes as factors such as environmental, economical, political, and technological are interrelated to one and other. These factors are beyond the control of the industry and the industry does not have any other choice to adapt the micro-environmental changes in order to survive. The effects of the micro-environment carries on the industry and many ways such as environmental changes will increase or decrease the power of suppliers and buyers. The ever changing weather pattern does not guarantee crops for the next year and breweries remains uncertain at all time. The globalization remains another unavoidable factor affecting the macro-environment and the industry as whole. Recommendations what will it take in 2015 to be an industry leader and who may that be? Recommendation and 2015 directions * The future of the industry remains clear as long as the industry remains flexible to change. * The environmentally friendly approaches needs to be taken on for the production and packaging. * Globalization is a fact and EU beer industry needs to make changes, accept players coming from USA and Asian markets. The same could be expected to USA and Asian markets. * In order to gain maximum market shares, merger with other companies should be encouraged as it will decrease the operational cost, exchange of expertise in particular master brewer. It will make them a strong player in the industry. * More investment are required in area of new flavor. * GM barley needs to experimented as it could possibly provide benefits both ways. * Non-alcoholic beer should be produced to target the growing Islamic community in EU and in the Middle East. * Geographic expansion needs to be considered out of EU. * In order to reduce the harsher law against the use of excessive alcohol, industry needs to educate their customer and advice them of moderate drinking habits. * With the assistance of the transportation department, Community based programs should be designed to educate the new drivers, of the dangers of the drink driving. The strength and weakness of the fore brewing companies As appendix 3 provides detail list of the weakness and strength of the fore brewing industry as 1. Heiniken ( The Netherlands) Strengths One of the biggest brewery in Europe as with the sales of more than 8bn pound in 2006, it’s a global company expending in to Asian markets and US by 5% and 17 percents. Weakness The weakness of the Heiniken would be as it has given more attention to the EU and ignored the ever growing Asian market. It may be enjoying the current EU market but the future holds with the Asian and Sub-continents. The future will be bright if the company considers moves in to other markets and makes alliances with intended region. 2. Grolsch (The Netherland) Strengths It is one of the oldest brewery with experience of all time. It has moved out of its European bases in to the US market and has successfully make alliance. It is one of the most innovative brewery and has a specialized experimental brewery. More then 50% of the products are exported out of Europe. Weaknesses The only weakness of the Grolsh would that it uses only one brewery to produce all it productions. The distance between the only brewery and some of the markets are enormous, which occurs in to huge logistics and transportation cost. The future looks very good as it does not rely on one market and the some of the new experimental beer could become market leading brands. 3. InBev (Belgium/Brazil) Strengths The largest brewery in the world as it is merger of the two companies. It is the largest market power to manipulate the price. It has gained big sector in to the Asian markets and are very innovative and environmentally conscious. Weakness Their does not seems to any weakness except the ignoring of the US market. The future seems to be very bright as it has the capacity and resources to grow and lead the market. 4. Scottish and Newcastle (UK) Strengths It is the 4th largest in Europe and 4 major established brand in the Europe. It looks in to the future and has tried to shares into the other bewaring companies. Weakness The company is not a big one and has tried to stretch it self into other breweries. The over reliance on the 4 brands has stopped them of innovation with new brands of beer. The future in European market seems to be well underway successfully but the entrance in the Asian market might be very risky as some of the major companies are well established in that market. APPENDICES Appendix 1 Macro-environment analysis Factor | Issues | Effects on Industry | Rulings | Economic | * The economic downturn * Increased unemployment * Uncertain financial times * Job insecurity of the customers * Global recession * Expansion of Euro * Tariffs and taxes * The increasing oil price * Labour cost | Controversial, as it may or may not increase the demand for beer. Could mean less money to spend on of going out for drinks at pubs and bars. People tend to save money as times are uncertainIt could possibly bring a very positive effect on the brewery business as the expansion will increased market boundaries with more customers to target. The expansion might be good on one hand, but on the other it will increase the Tariffs on the product as it has to go through many state borders. The taxation law varies from on EU country to the others, it will affect the profitability in short and long terms. The inevitable increasing oil price will need to be passed on the customer eventually. The labour market will demand an increase in their pay in the future, which will have to be included in the beer price. | +/-__++/-+/-__Final rulingsNeutral | Political/Legal| * Expansion of EU * Greater concern from politicians about effects of alcohol * Stronger legislation around drink-driving * Legislation on the pollutions * Marketing campaigns around effects of binge-drinking * Competition policy Licensing controls| It will increase the customer approaches as the boundaries will be diminished, creating open borders will encourage competition among the business within EU. The negative affects of alcohol will make the politician to take drastic action as to limit the use alcohol to reduce certain effects of it. The well known effects of alcohol, will put pressure on the customers to decrease the amount of consumption at pubs. Tighter legislation on the pollutions will put pressure to be environmentally clean industry. Health sector and public outcry will force the government to make stricter law for the use of beer. It may not be as an issue as the EU is very flexible with the licensing. | +____+Final rulingNegative | Technological| * Efficient production systems * GPS for tracking transportation Logistics and supply chain management * Product enhancements Bottling and packaging alternatives * Mini home Brewing | With use of robot in the production and assembly line will become efficient and effective also decreases the overheads Will monitor and make sure the product gets on time with the efficient routs to the customs and suppliers. It may incur some cost to the industry. The packaging and bottling cost will decrees with the use of alternative packaging such as plastics and papers. The compact mini home brewery will have minimal effect on the market as some of the customer will produce their own beer at home. | +++ +Final Ruling Positive | Environmental | * Climate change Variable * Seasonality of weather * Natural disasters * GM products * Pollution * Water scarcity * Energy costs| The increased outcry will affect the industry as the climate change will affect the production of crop by the farmers. The unpredictable weather with variation in rain pattern will put doubts the crops. The changing climate has made the nature unpredictable as Europe is getting colder every year and barley cannot be grown in a cold environment. The GM product will be beneficial to the industry as it will assist to produce the specific kind of crop, resistant to the pesticide and herbicides with maximum yield. As a result of the production, the industry will produce different kinds of wastes or pollutions. Beer brewing requires good quality water and it good quality water will be scares in the future. The energy cost will increase most of the source of energies are extracted from scares natural resources. | ___+_ _ _Final RulingNegative | Socio-Culture| * Ageing population * Feminine buying power * Increased multiculturalism * Peer pressure * Stress-relieving * Binge drinking * concerns about obesity * Alcohol related health issues * Under-age drinking| The EU population is getting old, it will not make much of difference on the industry as the younger binge drinker will replace them. Female are coming in the market with money to spend and adopting the beer tastes. EU’s population has increased significantly by multicultural, Islamic community, who does not drink beer. With the youth, the peer pressure makes them to act alike and promotes binge drinking culture. The current economic down turn has resulted into job losses, which has resulted into high level of stress. excessive beer is used as stress-relieving. Obesity is not accepted socially and considered to be unhealthy. Beer may be blamed to be one of the causes and it would affect the industry in future. The modern research has found strong reasons on the side effects of the alcohol and continued to do so. It will affect the business in long term. One of the unacceptable issues will be the underage drinking; however it may not be an issue when supervised. | ++ _++__+/-Final ruling Positive | International| * Shift in geo-political power to Asia * Increased awareness and global consumption of alcohol * Alternative religious aspects on alcohol * Falling tariffs * Global alliances * Globalization| Increased political power means increased income, which means more demand for the beer in the Asian market. New findings and Research increase the global awareness, most of them awareness appears to be advising to decrease the consumption of the beer. The increasing religious influences globally means less beer consumption as most of the religions discourages the use of alcohols such as Islamic religion with more than followers. The globalization has promoted the free trade among the states, which results in falling tariffs. The global alliances of the companies will help to increase their power in the market and act like a monopolistic. The globalization opens new markets and drops the tariffs, but it may result badly for the EU as the cheap Asian beer might pour in the market. | +__+++Final ruling Positive | Appendix 2 Details of Industry Analysis Factor| Issue Analysis| Rating of the Threat| Threat of New Entrants | Market Type:Monopolistic, with many number of brewer, Entry conditions: Relatively easy, with limited resource required on small level production. Product Differentiation: It is one of the key factors in this industry, the new comer will be required to create different and an acceptable taste for the customers, who already has matured tastes and brand loyalty with available brands in the market. Switching Cost: The switching cost for the buyers is very low as the product price is very low and trying another brand does not cost as much. Brand Loyalty: Most of the customer have a very strong brand loyalty and it will be very had to break that cycle in the market. EU well known brand such as Heineken, Inbev, Baltika, and Coopers. Logistics requirements:The new comer will have to establish a chain of logistics and supply from suppliers and to the brewery to the customers. Capital requirement:a very low capital is needed to enter in the market at a local level, however as on the international level the capital requirements will be medium to high. Globalization:Due to the globalization and open market, non EU players with cheap labor cost could enter in the EU and penetrate the market with cheap brands. Islamic countries:The market will not be allowed to enter in some of the Islamic countries as the consumption of alcohol is prohibited. | LowHigh LowHighLowMedium Medium Medium Low | Bargaining Power of Supplier| Master Brewer: The human capital of master brewer has the power of switching the company and move to another one of even changing jobs. Barley suppliers: The barley suppliers does not have much of choice to sell the crop to the brewery as the alternative use of the barley are very limited. Presents of substitute input:There is no other substitute for barley to be used in the making of the beer, so the supplier could have power in this regards. Due to a very high number of suppliers in the market, this power eliminates itself. Threats of forward integration:The supplier could possibly enter in the market as the entrances are too easy. In this case the suppliers will have huge impact on the industry. Switching cost of supplier: The numbers of suppliers are enormous as the buyers could easily switch suppliers in the market. It gives less power to the suppliers. | High Medium Medium Low Low | Bargaining Power of Buyers| Presents of substitute: A buyer does have power in the market as the product will needs to be purchased within a short time as use of barley in other products are very limited and it cannot be stored for a long time. Impotents of volume to buyers:The high volume of purchase decreases the power of supplier and increases the power of buyers. Buyers concentration: There are less buyers compared to the number of suppliers in the market for the use of barley, which means more power for the buyers to bargain with the suppliers. | High Low Low | Power of Substitutes | Strong substitutes : There are a very large number of substitute available in the market for the end user, such as Water, milk, soft drinks, wine, tea, coffee, energy drinks, and traditional cultural drinks. Most of the entire alternative has less or no side effects at all in the human body, which makes them all time favorite and increased in their demand for the future. | High | Appendix 3 Four Brewing Companies in EU Company| Strength| Weakness| Future outlook| Heiniken( The Netherlands)| * Biggest brewery in EU * 2006 sales 8bn pound * 5 % sales in Asia * 17% in US * Family business * Uses local business to sell their products | * More attention into EU and forget the ever growing Asian market * Very tight controlled due to family business in nature| Positive in EU, but negative in the Asian and US market. Over all in a good health. | Grolsch (The Netherland)| * One of the oldest * Medium size * Has alliances with US * Innovative with products * Licensed to export 50% of their products overseas * Has specialized brewery for experiment | * Centralizes brewery, uses only one brewery for the production| Looks good compared to its size and exports 50%. The innovation and experimental beer might capture market in the future. | InBev (Belgium/Brazil)| * Merger of two companies * The largest brewery in the world * Market power * Second largest in Chinese market * Looks for innovations * Environmentally conscious | | Very good and bright future due to the innovations, size, market power, environmentally awareness. | Scottish and Newcastle (UK)| * 4th largest in EU * 4 major established brands * Has global approach by purchasing shares in other brewing company. | * Over stretched company due to its size. * Lack of innovation with new tastes. | The future seems to be in doubt as company is entering to Asian market where the biggest brewery are well established brands. | REFERNCES Hubbard, G Rice, J Beamish, P 2008, Strategic Management: Thinking, Analysis, Action, 3rd edn. , Pearson Prentice Hall, French Forest, NSW, Austra