Brewing Industry Assignment

Brewing Industry Assignment Words: 2335

This assignment is based on the case example ”Global forces and the European brewing industry’ and relates to two questions raised in chapter 2 at the end of the case example of the book ‘Exploring Corporate Strategy: Text and Cases’ by Johnson, Scholes and Whittington. Using the data from the case (and any other sources available), carry out for the European brewing industry a PESTEL analysis and a five forces analysis. What do you conclude? PESTEL analysis One tool to analyze the broad macro-environment is the PESTEL analysis. In the PESTEL analysis environmental influences are categorized into political, economic, social, technological, environmental and legal aspects. It helps to identify how future trends might influence an organization and furthermore, to identify the key drivers of change to create scenarios for the possible future.

Political factors There is an overall decline in consumption of Beer in Europe as many traditional key markets have been made increasingly aware of the social problems associated with alcohol consumption. Factors could be the active campaign of European governments against drunken driving, binge-drinking and consequently the long-term health and fitness problems. Economic factors In the case study there is the talk of the overall decline of European beer consumption, while there was an increase in emerging markets (e. g. China, Brazil) around the world.

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This could be because of the government campaigns which caused a shift in sales from the ‘on-trade’ (beer consumed in pubs or restaurants) to the off-trade (retail/supermarkets). Moreover, the success of German supermarkets like Aldi and Lidl with their own ‘private label’ beers rather than the brewery-branded beers have an influence on the European brewing industry. Supermarkets are offering cut-price offers. Also the rise of the main purchasing costs like packaging, raw material and energy will have an influence on the beer price e. g. Heineken).

Also, the increase in fuel prices which will affect the distribution network, thus transportation costs will increase. Besides, due to the economic crises, the breach between rich and poor is steadily growing and thus many people cannot afford anymore to go out for dinner or having a beer. Through legal restrictions, the demand for alcohol in public places could decline. Furthermore, acquisitions, licensing and strategic alliances have occurred because the leading brewers battle to control the market. The global pressures for consolidation due to overcapacity within the industry are another point that influences this industry.

There is a growing trend towards cross-border mergers and acquisitions. Introduction of higher-priced premium products let sales values raise. If there are natural disasters like previously the fires in Russia this has an impact on the prices of the raw material. Social/cultural factors Wines have become increasingly popular in the Northern European markets. People may rethink their lifestyle and prefer drinking a good wine instead of beer and ‘binge drinking’. This could be because wine is associated with the upper class and people with a higher income.

Moreover, people are getting more and more health conscious and therefore, will drink in moderation. Furthermore, there is a rising demand for premium and fruit-flavored beers and also an increasing demand for ‘private-label’ beers. There will also be an increasing acceptance of pan European brands. Besides, the importance of supermarkets in distribution and the growth of own-label products will rise. Technological factors Research and development are important in the brewing industry due to the changes in consumer tastes. People demand alcohol in different flavors, with low calorie, with low alcohol, seasonal beer and so on.

Through technology it is possible to produce more although raw material stays the same, furthermore, the quality is getting better, the alcohol has a longer durability and is produced more efficiently and quickly. New harvesting and production technologies help to increase process efficiency. Environmental factors People are getting more and more aware of the environment and it is necessary that companies do everything to prevent environmental pollution. It is important that the environmental load through the brewing process is as low as possible. Reusability and recycling are important.

The brewing industry, for example, treats their effluents so that they can use it again for irrigation. Through this, they save energy and minimize sludge disposal costs. (1) Legal factors Besides, when comparing Europe with the United States one can see that in America it is forbidden to drink in public places in contrast to Europe where you can drink alcohol wherever you want. This could lead to new laws that forbid drinking alcohol in the public. This is a threat that might come really quickly when comparing the new law about the restrictions on smoking in public places like pubs and restaurants.

Moreover, a few years ago it was allowed to have a blood alcohol level of 0. 8 parts per thousand. This was changed to 0. 5 parts per thousand. So it is not unlikely that the government changes this law again to further price down this limit or completely forbid to drink and drive. As you could read in the case study in the United Kingdom there is a growing hostility towards excessive alcohol consumption in pubs and clubs and this could also happen everywhere in Europe. Furthermore, there is the threat that politics could put up the age of teenagers from 16 to 18 to allow to drink alcohol.

If drunken people are involved in an accident or in a crime they are fined with a higher penalty. (ii) A five forces analysis The five forces analysis helps to determine the impact of the threat of new entrants, substitutes, buyers, and rivals on profitability in an industry or sector. (Johnson et al. 2008, p. 59) The threat of entry The threat of entry depends on the height of barriers to entry. I think that the threat of entry in European Brewing industry is very low due to the mergers and acquisitions of the past years.

Through consolidations, breweries stabilize their competitive position. As there are only a few really big brewing companies with a lot of power the financial effort for new entrants would be too high to enter this market. Moreover, because of the strong brand and the loyalty of existing consumers in Europe, it would not be easy for new entrants to challenge well-established leaders. The threat of substitutes There is a lot of products that can be seen as a substitute for beer like wine, fruit-flavored and exotic beers as well as soft- and energy drinks.

In the case example wines becoming increasingly popular in the Northern European markets. Table 1 in the case example shows that there was a significant decrease in beer consumption in Denmark and Norway which confirms the increase of wines in those countries. Power of buyers Due to Government campaigning against drunken driving and binge drinking there was a shift from ‘on-trade’ to ‘off-trade’. Through this, large supermarket chains (industry concentration increases) like Tesco or Carrefour gain the power of buyers and thus have a high bargaining power.

This means that large supermarket chains, for instance, pretend the price they are willing to pay. Through the power of buyers and their ability to change easily the brand (supplier), the brewing industry comes under pressure. Power of suppliers In the case example they write that the Brewers’ main purchasing costs are packaging, raw materials, and energy. The power of suppliers of packaging I believe is very high. There are only a few suppliers of glass- and PET- (polyethylene terephthalate) bottles available and therefore, they have a high power.

To change the supplier could lead to high switching costs as they have to buy a new machine or adapt the existing machine. The main raw materials for brewing are water, malt, hops, yeast, and barley. The power of suppliers of these materials I think is low because there are a great number of suppliers available. The power of the supplier of energy is very high as there is a concentration of suppliers. Competitive rivalry Competitive rivalry means that there are organizations with similar products and services aimed at the same customer group.

In my opinion competitive rivalry in this industry is very high because * product differentiation is very low * acquisitions, licensing and strategic alliances (gain market share) * consolidations due to overcapacity within the industry Table 3 shows the world’s top 10 brewery companies by volume in 2005 which accounted for around half of world beer volumes. InBev, Anheuser-Busch, SABMiller, and Heineken reached about 33% of the volume of beer drunken around the world. Approximately 15% was reached by Morello, Carlsberg, Coors, TsingTao, Baltic Brewery Holdings and Asahi.

The European brewing industry I believe is saturated and started to decline and thus competitive rivalry will still exist on a high level. Barriers to entry within EU are reducing leading to cross-border mergers. My conclusion is that either you can be one of the big players or one of the many small specialists and regional breweries like Grolsch, Cobra Beer … For the four breweries outlined above (or breweries of your own choice) explain: (a) how these trends will impact differently on these different companies; and (b) the relative strengths and weaknesses of each company (a) Heineken

Heineken is the biggest of the European brewery businesses. As Europe is a saturated market Heineken focuses also ongoing overseas. They use locally acquired companies to introduce their beer they have a good strategy to further expand their market share. The same strategy they could apply in Europe. As the European market is saturated they could acquire small specialist and regional breweries like Grolsch and thus grow. (b) Strengths: * Leader in the European brewery business * 5 % of sales in Asia-Pacific * 17% of sales in Americas * Strong brands: Heineken, Amstel Family controlled stability and independence * Introduce brand to new markets overseas by using locally acquired companies * Strengthens local companies by transferring expertise and technology * Economies of scale for Heineken and the local beers. * Have a vision! Priorities of action: * Accelerate revenue growth * Improve cost efficiency and reduction * Speed up strategy implementation * Focus on markets where they believe they can win. Weaknesses: * Price increase in packaging. Heineken complained of an 11 percent rise in packaging costs. Lack of innovation to meet consumers needs (changing tastes – flavored beer) * They could stick in a rut because it is a family-controlled ownership. And they do things as they always have done. Grolsch (a) how these trends will impact differently on these different companies Grolsch will invest in innovation and branding to make their brand stronger by striking green bottles and its unique swing-tops. Furthermore, through strong and distinctive beers they want to succeed. As they are a medium-sized company it would be wise to join strategic alliances to strengthen its position.

Otherwise, it could easily be that big players that have a vast economy of scale and a high financial power acquire Grolsch. Moreover, it would be good for Grolsch to offer products like the brewery “Mohrenbrau” in Austria. They offer for instance beer noodles, beer mustard, beer jam, beer cosmetic and so on. (4) (b) Strengths: * Very experienced – established in 1615! * Different products (Grolsch premium lager and new flavored beers) Have the right to the sale and distribute the valued US Miller brand. * Centralized production on a single new Dutch brewery increase efficiency and volume. * Trial brewery to support innovation Weakness: * Medium-size international brewing company * Less financial power * € 313m in 2005 in contrast to Heineken € 11,8bn * Single Dutch brewery – if a problem occurs no beer can be produced. InBev (Belgium/Brazil) (a) how these trends will impact differently on these different companies InBev had a turnover of € 13,3bn in 2006 and was (at that time) the largest brewer in the world. Through further acquisitions of well established (strong brands) and innovative breweries, it could strengthen its position.

Furthermore, because they have such a strong financial power they could do equity investments to expand their position. Concentrate on building strong brands! (b) Strengths: * Largest brewer in the world (merger of Belgian Interbrew and Brazilian AmBev in 2004) * Second largest brewer in China (7 % annual growth – largest single market by volume) * Holding number one and number two positions in 20 different countries * Strong financial power * Strong brands like Beck’s and Stella Artois. * Through the acquisition with Anheuser-Busch in 2008 they now have the King of Beers, Budweiser and Bud Light. 2) * They have a strategy: * Transform itself from the biggest brewing company in the world to the best by * Building global brands. * Increasing efficiency * Through the more central coordination of purchasing including media and IT. * From the optimization of its inherited network of breweries. * From the sharing of best practice across sites internationally * Emphasize organic growth. Weakness: * They bought Anheuser-Busch in 2008 whose sales of the Budweiser and Bud Light brands where declining since 2003. Maybe due to the shift of ownership of the largest U.

S. brewer into InBev’s’ hands the decrease in sales could get much worse. (2) * Inherited network of breweries * Scottish and Newcastle (UK) (a) how these trends will impact differently on these different companies Scottish and Newcastle is European focused. It was acquired by Heineken in October 2009. (3) (b) Their strengths were: * Strong brands ( John Smiths, Kronenbourg, Kanterbrau, Baltika and Fosters) * Fourth largest brewer in Europe (volume terms) * Market leader in UK, France and Russia * Investment in Baltic Beverages fast-growing markets 20 per cent stake in CBC (fifth largest brewery) * In USA second largest importer of foreign beers * Emphasize development of innovative and premium beers * Identify their weakness like inefficient breweries and close them down. Their weaknesses were: * Too less financial power Mohrenbrau (Austria) Strengths: * Wide product range (Mohren Pfiff, Mohren Special, Mohren Radler, Mohren Kellerbier) * Complementary products (glasses, beer jugs, … ) * Additionally products like beer chocolate, beer mustard, beer noodles … * Strong local brand Oldest and latest brewery in Vorarlberg (1834) * Online shop * Innovation and high tech machines Weakness: * Less financial power * Regional (but starting to expand – for instance Scandinavia) In conclusion I believe that the mergers and acquisitions during the past years will continue. Big players will buy smaller companies to expand their range of products or to break into new markets (other countries). In the future, I think mergers will occur in the emerging markets where beer consumption is raising.

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