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Address the following questions: 1. Identify and assess the key factors in the macro environment that have, or might, affect the UK beer industry. (30 Marks) 2. Present a Five Forces analysis of the competitive environment of the UK beer industry and discuss the changing nature and effect of these forces. (30 Marks) 3. Against the background of a declining industry, the brewer and pub operator Adnams seem to be bucking the trends. Assess the strategic directions chosen by Adnams that have aided their progress. (40 Marks) Submission Deadline: 9. 0 am Monday 28 March 2011 (Business School Assignment Box and StudySpace Electronic Drop Box) Political In times where the ‘industry needs a supportive policy agenda, it is disappointing that the Government’s general policy direction seems destined to achieve the opposite. ‘ (A wake up for Westminster). It is evident that the Government is not favouring the beer industry. Furthermore, Governments tax and regulatory policy for tackling alcohol misuse is likely to increase further significant costs on the industry.
This suggests that the government is failing to address the problem and rather leaving the industry more weakened. According to ‘A recent Ernst & Young report calculated that Government revenue from the production and sales of beer equates to over ? 9 billion. ‘ (A wake up for Westminster). It is somewhat surprising considering the revenue the beer sales generates that the government has opted to be less favorable. Also considering the fact that the country is recovering from a recession it would make sense to generate as much revenue as possible.
However, maybe the government strongly beliefs that the beer industry will still make progress and would rather still impose higher tax. Economical Due to the economic downturn families now have less disposable income, which means less socialising outside and meeting up for a drink at the local pub. From the chart it is evident that going to pubs has dropped by 18. 2%, which is a significant decrease and two closures per week since 2000-2005 and have now reached 5 per day. (A wake up for Westminster). This shows that pubs are struggling to operate, as the drop in consumers is significantly low.
Furthermore, costs of running the pubs and materials have also increased. The ‘utilities cost have nearly doubled compared to three years ago. ‘ (A wake up for Westminster). Also considering the Government not helping on the cost side as the ‘beer tax escalator will further drive up the inflation. (9% beer duty increase)'(A wake up for Westminster). Looking at these statistics it can be proclaimed that pubs are forced to close down as rise in costs are exceeding sales margin. Due to the lack of profit there is no place for the pubs or any business in this weakened industry.
Although ‘the British beer and pub association reports that the overall market has declined by 5% by volume over 2009′(Drinks market watch). However, there is some cause for optimism as some brewers have reported growth in ale sales. ‘Marston’s beer-making division reported a 13% rise is sales for the year, while Green King’s own-brewed volumes have surged by 9. 8% over six months. (Drinks market watch). These results indicate that opportunities still exist for the Uk beer market. Social Changing consumer taste has also effected the beer industry.
Consumers now have various options such as sport events, cinemas or outdoor activities. This has impacted the pubs. Also all the need to be healthy and all the ads about less alcohol consumption has also played a part in the loss in profit for pubs. Unemployment and loss of jobs will have an effect on local communities from whom goods and materials are sourced, ‘44000 jobs were lost during 2000-05. ‘ (A wake up for Westminster). The loss of jobs will mean less money circulating around the local community, which could result to workers going on benefits. In theory this is something that the government would not want. The hope for the company is that emphasising heritage and taping into national pride will motivate UK consumers to drink more of the pedigree brand. ” (Market watch global round up) This suggests that the beer market is also relying on tradition and history to get through these tough times. ‘the primary one is that consumer moral in England is poor, and national pride subsequently low. “(Market watch: Global round up). Social factors such as this are affecting the beer market. Legal The smoking ban has meant that most consumers are not allowed to do as they wish and so some op to just stay home and buy from the retailers.
According to the case study ‘almost 60% percent of beer sales are sold in pubs, clubs and bars. ‘ (A wake up for Westminster) Considering drinking and smoking go hand in hand it can be said that one factor affects another. This in return also contributed to closures of pubs. It can be said that all four factors; politics, economical, social and legal are all intertwined as one factor affects another. In relation to politics the rules and regulations set by the government ultimately affects the economic side of the beer industry.
Due to the lack of growth and profit there are closures, which means socially there are loss of jobs. Furthermore, from a legal aspect implemented laws such as no smoking also has an effect economically and socially. Rivalry An important point in this context is the possibility of differentiation. The flavour of beer is different and the companies use this way to differentiate. All breweries develop new kinds of beers and add for example lemonade to their standard product to try to differentiate or to di- versify in times of market maturity.
In 2005 there have taken place “over twice as many beer launches in the UK compared to the year before. ” (McCrorie, 2006) The opponents will al- ways watch you and react with counteractive measures, if a certain kind of new beer works well the opponents can copy it relatively easy. The standard products like premium lager taste different but the range of beer flavours among the main brands of the major brewers is not so wide because these beers are produced for the mass market which requires a “moderate” fla- vour what makes differentiation on this level much more difficult.
Smaller breweries try to differentiate by for example special tastes which fit the needs of a special region. These beers have become very successful on their level because customers search for new experiences concerning flavour. Bargaining power of buyers The most important thing is to define who the buyers are. Households and single end consumers have small bargaining power because they buy small amounts of beer compare to the whole market. The breweries purpose is not to deliver small amounts to single end costumers so they need the help of distributors.
Euromonitor (2006) explained that the pubs in the UK are the biggest distribution channel. However there is a trend to off-trade consumption, supermarkets start to sell bigger amount of beer since is cheaper there. Moreover the bargaining power of supermarkets is high because they are the biggest buyer of the beer industry. Furthermore bargaining power of retailers depends on their purchase volume. Big pub chains like JD Wetherspoon owning hundreds of single pubs can put big pressure on the breweries because of the amount of beer they purchase.
These pub chains are known as the biggest distribution channel in the on-trade industry. Even though single pubs do not have big bargaining power they could potentially put pressure on breweries because they order from wholesalers. It is very easy for the end consumer to switch from one brand to another. Therefore it is very important for the beer producers to market their products properly by gaining consumer loyalty. It could be assumed that the bargaining power of buyers has increased because of the big distributors putting pressure on the breweries. Threat of entry
To analyse the barriers to entry you have to differentiate between competing with the main players and competing on a lower level with small breweries in niche markets. On the one hand competing with the major breweries and their main brands is extremely hard. These breweries are part of international corporate groups with a huge financial background that have made their way by a lot of acquirements of smaller breweries and their established brands. These brewers profit from their high market share which implicates high economies of scale and the learning curve respectively.
It is possible to import beer and benefit from your exist- ing economies of scale but then you have additional transport costs. To compete with the big ones means a lot of capital requirements as well. New companies need relatively much money to build up big brewery constructions and a lot of marketing investments to get into the mar- ket on that level. When you enter the market you have to expect a massive retaliation of the competitors because they do not want to loose their market shares easily.
Today the beer mar- ket consists of hundreds of different beer flavours and beer mixtures what makes it hard to find a special one that is totally new and provides a base for sustainable success. A very im- portant aspect in this context is the access to distribution channels. You have to convince the powerful distributors to list your beer although they offer a lot of other brands at the moment that work good. On the other hand it is possible for new small- or microbreweries to compete in niche markets within the beer industry.
Brewery equipment for little amounts is not too expensive so that even pubs can brew their own beer. Distribution of own beer in own pubs or using local inde- pendent retailers which sell the beer is possible. These breweries have low economies of scale because they only produce little amounts so they can act on a high price level. To justify the high price the beer has to be exceptionally and differentiated to the rest what can cause prob- lems for new entrants because of the existing wide range of beers and established local brew- ers. Bargaining power of suppliers.
According to the BBPA report on the UK beer industry which states that 90% of the beer produced uses local produce. The UK produced some 6769 metric tonnes of barley and consumed 5014 metric tonnes (UK agriculture, 2011). The price, however, of malting barley has been increasing steadily from a price of ? 76 per in 2000 tonne to ? 123 in 2009, this represents a 3. 7% year on year rise. Barley is a commodity and thus its prices are determined globally. The rise of eastern breweries in China and India where consumption has risen exponentially has pushed up the prices of barley.
Beer drinking in China is growing fast, by nearly 10% a year according to Credit Suisse;s World Map of Beer (Economist, 2010) This would suggest that the supplier would have a higher bargaining power. However, there has been a rise in microbreweries brewing local ales suggesting a maintaining of the status quo. Furthermore, microbreweries and regional ones producing ales have seen a 5% rise in volumes over 2008-2009 (Brown 2010). According to CAMRA, 71 new microbreweries have opened in the past year, meaning that Britain has 711 in total (Mintel: Larger UK, 2009).
In contrast, lager production which tends to be in large-scale breweries are declining due to a change in taste of consumers. Yet the mergers and acquisitions of the day are creating super breweries and thus increasing their bargaining power over barley and hop produce. Please see chart to illustrate this. Figure 24: Estimated volume share of lager market, by company, 2008 (Mintel, 2009) Threat substitutes. Alistair Darling imposed a series of taxes on all forms of alcohol from 2008, with beer seeing a 26% hike and British wine drinkers becoming some of the most severely taxed in Europe.
Between 2004 and 2010, beer, spirits, wine and cider and perry saw rises of 38%, 22%, 37% and 41% in duty respectively (Mintel: Consumer attitudes to drinking, 2010). This governmental policy, which has been reversed on cider at least, makes it severely taxed compared with beer and wine and yet there has been a growth in consumption in cider. The policy on alcohol duty has pushed more sales to off-trade retailers like Tesco, Sainsbry, Asda and Morrisons which have the market power to sell them at a lower costs than on-trade venues like pubs and bars.
This shift from on-trade to off-trade may not seem like a big change in the consumption of beer levels countrywide but it has all the hallmarks of a societal change in attitude. This is reflected in the rise in sale of Wine form off-trade retailers. The change in direction has had a knock on affect on breweries and their profit margins as this would increase packaging costs and more in the way of advertising than previously of selling recyclable kegs to pubs and bars which they leased out. Mintel’s research shows that men are much ore likely to gravitate towards wine as a compromise choice when drinking at home but tend to drink lager in pubs. Drinking more at home has become more appealing to both sexes (Mintel: Wine, 2008) Further research identifies that a fifth of men buy different types of alcohol in the supermarket than when they do in the pub. In contrast, women are much more consistent in the type of alcohol they buy, regardless of location (In-home drinking – UK, June 2009). Figure 15: Market share in value sales of alcohol market, by alcohol type, 2008
In contrast to Wine, Cider remains the star performer in terms of increasing volume sales in the five-year period to 2009 and consumer research has found that cider is now drunk by almost two fifths of consumers (Mintel: Consumer attitudes to drinking, 2010). Rose wine on the other hand has managed to do what white and red wine have been trying to do for years: appeal to the younger demographic. Rose has the advantage in appealing almost equally to every age group, from 18-24-year-olds to the over-55s Mintel: Consumer attitudes to drinking, 2010). Introducing Adnams
Adnams sell a choice of beers from Cask to Ale and controls a chain of 84 pubs throughout East Anglia. Adnams has transformed itself into one of the countries most environmentally friendly brewer. Over six years Adnams has invested roughly 15 million pounds in order to be able to enter an energy and water intensive industry and to also refresh its brand image through its greener image by creating carbon-neutral beer. (Financial Times 2010) Strategic directions chosen The strategic direction that Adnams have decided to uptake would be considered to be diversification as defined in “Fundamentals of strategy” (2010). Diversification is strictly a strategy that takes the organisation away from both it existing markets and its existing products. ” According to this definition Adnams have diversified into a new market and towards a new product but it still retains its sole purpose of brewery. This is why Adnams have strategically chosen to have taken this direction as it leads to efficiency gains, it allows to stretch the cooperate parenting capabilities into new markets whilst same time increases their market power.
On a basic level in figure number one if we were to place Adnams strategic decisions in an Ansoff Matrix we would see Adnams bordering in between, market development and diversification it would be like so Figure number 1 Evidence regarding this is that Adnams have successfully completed its construction towards an anaerobic digestion plant within the United Kingdom, using a sister company called “Adnams Bio Energy LTD” owned by CPG group. In an agreement with British Gas and National Grid, which allows the digestion plant to be able to feed biome thane into the country national Grid (Business green 2010).
Such energy resources would move the company towards it main goals of being environmentally friendly brewery as Adnams chief executive stated ” The reality of being able to convert our brewing waste and local food waste to power Adnams brewery and vehicles and the wider community is very exciting”. Strategically Adnams have diversified itself as a company moving towards newer markets but in doing so it has also been developing it’s own market with such use of the anaerobic digestion plants.
Also by working with British Gas and National Grid they have created a strategic alliance to obtain the resources that are required for the organisation. Using a consortia alliance with British Gas and National grid they are focused towards their main goals and objectives, this works for Adnams as it allows the organisation to get all the resources and expertise into this area and market they are unfamiliar with, but also works well for British Gas as it allows them to be able to power 47,000 homes with renewable Gas. The Engineer 2010) From Business to Corporate level strategy Adnams have moved from a business strategy, towards a corporate level strategy. Adnams Core Values and mission statement are clear indicators that Adnams are developing a clear corporate level strategy towards its organisation and adding value activities from the corporates parent”. Which are depicting clear visions and goals that Adnams as an organisation should follow and motivate business unit managers. Such core values Adnams adhere o are ” making sure that our impact on society is a positive one” along with few other key core values such as: Sustainability, Quality, Environment, community and pride. (Adnams website). Adnams have unrelatedly diversified themselves and spread the risks and also escaped from current business that is currently stunting in growth and profitability. We can see from previous years profit margin before the anaerobic digestion plant was built and can analyse how much of a difference such strategic directions have aided Adnams financially in towards building the plant. Figure number 2) Strategic Evaluation Suitability has been an area of concern for Adnams as although it has been able to meet environmental and capability issues with regards towards it reason to diversify but with doing so they have received criticism by their stakeholders, towards it acceptability and returns. A Letter sent by CPG group to Adnams stated its worrying views of Adnams towards “it poor performance, its refusal to reform its share structure, and the lack of consultation with shareholders ahead of radical commitments. Chairman of Adnams along with the board responded to this and believed that what they have chosen to do is “Strategically Sound” and that in the long run their strategy is justifiable, as a “traditional strategy” wouldn’t work in Adnams case in such a competitive and changing market. Adnams board have made clear that all strategy is for the long run and have accepted that in previous years they did not meet the standards in regards towards its financial returns in 2008 and 2007 due to its cost in setting up the expansion and development which cost 2. 5 million pounds. Refrences Brown, P. (2010) The cask report: Britain’s national drink. [online]. Available at: http://www. caskreport. co. uk (Accessed 8 March 2011) Mintel (2008) ‘Lager’, Mintel [Online]. Available at: http://academic. mintel. com/sinatra/oxygen_academic/search_results/show&/display/id=394592 (Accessed 7 March 2011) Mintel (2009) ‘Wine’, Mintel [Online]. Available at: http://academic. mintel. com/sinatra/oxygen_academic/search_results/show&/d isplay/id=393956 (Accessed 7 March 2011) Mintel (2009) ‘In-home Drinking’, Mintel [Online].
Available at: http://academic. mintel. com/sinatra/oxygen_academic/search_results/show&/display/id=39463 (Accessed 7 March 2011) Mintel (2010) ‘Consumers Attitudes to Drinking’, Mintel [Online]. Available at: http://academic. mintel. com/sinatra/oxygen_academic/search_results/show&/display/id=394631/display/id=479840 (Accessed 7 March 2011) UK Agriculture (2011) Barley Statistics. Available at: http://www. ukagriculture. com/statistics/farming_statistics. cfm (Accessed 7 March 2011) Economist (2010) ‘All pints east’, 17 August [Online].
Available at: http://www. economist. com/node/16839104 (Accessed at 14 March) Sources MarketWatch: Drinks; Jan2010, Vol. 9 Issue 1, p12-12, 1p http://web. ebscohost. com/bsi/detail? vid=5&hid=18&sid=14e332e7-80ee-488e-b999-16d912365e6f%40sessionmgr113&bdata=JnNpdGU9YnNpLWxpdmU%3d#db=buh&AN=47565616 MarketWatch: Global Round-up; Jan2010, Vol. 9 Issue 1, p40-41, 2p http://web. ebscohost. com/bsi/detail? vid=5&hid=19&sid=14e332e7-80ee-488e-b999-16d912365e6f%40sessionmgr113&bdata=JnNpdGU9YnNpLWxpdmU%3d#db=buh&AN=47597966