Brewing Industry Case Study

Module: Strategic Planning Process Lecturer: Michael Shovelin Date: 04th September 2010 Postassignment: Case example Global Forces and the European brewing industry ------------------------------------------------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 (Johnson et al. 2008, p. 91) of the book Exploring Corporate Strategy: Text and Cases by Johnson, Scholes and Whittington. 1.) Using the data from the case (and any other sources available), carry out for the European brewing industry (i) a PESTEL analysis and (ii) a five forces analysis. What do you conclude? (i) PESTEL analysis One tool to analyze the broad macro-environment is the PESTEL analysis. In the PESTEL analysis environmental influences are categorized into political, economical, 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 of 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. 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 has 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 influence on the beer price e.g. Heineken). Also, the increase of 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 any more to go out for dinner or having a beer. Through legal restrictions the demand for alcohol in public places could declines. 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 1

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 is 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 is 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 in 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) 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. Threat of substitutes There are a lot of products that can be seen as a substitute of 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 2

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 of changing 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 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 Morelo, 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 specialist 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 on going 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. 3

* 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 of packaging. Heineken complained of an 11 per cent rise in packaging costs. * Lack of innovation to meet consumers needs (changing tastes - flavoured beer) * They could stuck 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 economies of scale and a high financial power acquire Grolsch. Moreover, it would be good for Grolsch to offer products like the brewery Mohrenbru 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 flavoured beers) Have the right to 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 BergianInterBrew and BrazialianAmBev 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 more central coordination of purchasing including media and IT. 4

* 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 InBevs 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 Mohrenbru (Austria) Strengths: * Wide product range (MohrenPfiff, Mohren Special, MohrenRadler, MohrenKellerbier) * Complementary products (glasses, beer jugs, ...) * Additonally 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. References Johnson, Gerry, and Kevan Scholes and Richard Whittington.Exploring Corporate Strategy Text & Cases. 8th ed. Harlow: Pearson Education / Prentice Hall Financial Times, 2008. (1) http://www.thewatertreatmentplant.com/water-treatment-brewery-industry.html (2) http://record-eagle.com/business/x75056566/InBev-inherits-Anheuser-Busch-weaknesses (3) http://www.guardian.co.uk/business/2009/oct/13/heineken -newcastle-brown-ale-jobs (4) http://www.mohrenbrauerei.at/index.php?mid=5&smid=&ssmid=

Global Forces And The European Brewing Industry

Global forces and the European Brewing industry Case 1
Table of Contents Introduction PESTEL Porter s Five Forces Strengths & weakness of Companies Impact of Trends on the Companies Bibliography

2 .2 ..4 ..5 ..7 8.

Introduction This case shows how global forces have impact on European brewing industry and how these companies are trying to overcome the obstacles. In spite of restrictions and awareness campaigning runed by the government, these companies are trying to grow through acquisitions, alliances and closures within the industry. Companies are concentrating on expanding their existence into other markets. Some other companies are concentrating on innovation, branding. Moreover they are fighting on cost cutting such costs include packaging costs which will reduce the cost of overall manufacturing. PESTEL Political factors: * Government organising public events in order to make public aware about the effects of alcohol consumption on the health. * Government is imposing restrictions on consumption of beer and alcohol products. * If anyone is influenced by alcohol in doing crime they are fined with high penalty. (The European Brewing Industry, 1999) Economic factors: * The government restrictions have lead to increase in sales of alcohol in supermarket. * Government campaigning and restriction on drinking resulted in decrease in the sale of alcohol product consumption in clubs and pubs. * Companies are trying to achieve economic of scale through cost reduction. * Brewing companies are engaged in various marketing strategy to grow their market through acquisition, mergers and introducing premium products. * Super markets are offering cut price offers. * Heineken is facing problem in packaging cost (The European Brewing Industry, 1999). Socio culture factors: * Consumers are becoming more health conscious. * Growing unfriendly or aggressive behaviour towards binge drinkers. * People have started drinking wines in North European market. * Drinking in the pubs and clubs has been reduced. (Demographics of Europe) Technological factors: * Companies are transferring expertise and technology to achieve economic of scale, efficiency and cost reduction. * Centralization of production is done to increase efficiency and volume. * Trial breweries are established to enhance innovation. * Support from media and IT are taken. (European Brewing Industry, 1999). Environmental factor: 6

* European brewers market in Germany and United Kingdom is decreasing and gr owing around the world with 7% annual growth in China. * German retailer s sales are increasing from local private brands rather than brewery-branded. * Merger and acquisition are carried on by the companies to overcome competition and to have better control over growth. * Shift in sales from on-trade to off-trade. (Europa, 2010). Legal Factors: * In the European countries, the advertisements which are related to Alcohol consumption in large volume are forced to apply certain laws by Government. * The laws in European countries are strictly against Drinking and Driving, under age drinking and Domestic violence consuming alcohol has compelled many customers to reduce the consumption of drinking. (Institute of Alcohol Studies, 2009). Porter s Five Force Analysis After doing the environment (Europe) analysis of brewing industry using PESTEL, now we study the entire brewing industry internally, using porters five force analysis. FORCE1: Threat from Substitute Product Three important components of brewage industry are Distillers, Wineries and Beer Manufacturers. Due to socio-cultural changes, the European consumers turned health conscious and were looking for substitutes like wine, fruit flavored exotic beers which resulted in unstable market of traditional beer in European brewing industry. FORCE2: Bargaining power of Suppliers The important supplier for the brewing industry is packing industry for raw material procurement like barely and bottling. The European packaging industry is concentrated by international players like CROWN (for tins) and OWENS-ILLIENOIS (for bottling). Since being highly dependent on concentrated suppliers, the bargaining of these suppliers will be very high in the future. To reduce this high bargaining power of these suppliers, the brewing companies should achieve central coordination with their suppliers using information Technology and Media. FORCE3: Bargaining power of Customers or Buyers The availability of substitutes, health consciousness and off-trade supply of beer, the bargaining power of customer became very high. One fifth of the sales of beer were through off-trade, more options were available for the customers in the form of exotic flavored beer, wines. The government promotion against drinking alcohol also badly affected the brewing industry which resulted in heavy competition between the brewers benefiting the customers. Therefore due to these reasons, the bargaining power of the customers is very high. FORCE 4: Threat of the entry of new Competitors The threat of new entry into European Brewery industry is very less. Because it is almost a saturated market which is in mature stage of industry life cycle. If a new company will enter into the industry its investment should be highly capital intensive and it is a specific product where innovation is very hard. The level of competition is very high therefore it will not sustain for a long time in market. Therefore it is very hard for a new entry to come in to European brewing industry. FORCE 5: Intensity of competitive rivalry The European market is highly competitive because of low product differentiation, lack of product innovation, high entry and exit barriers resulting in acquisition and strategic alliances of the existing players to attain the market share. The industry is in growth stage of industry life cycle which means the market is saturated therefore there is a high intensive competition in the market. HEINEKEN: Strengths: * It has the biggest market share in European brewery business with a sale of 11.8bn. * The company has more stability and independence to grow steadily as it is family controlled 7

business. * Enters new market through acquiring locally established companies. * Use experts and new technologies. Weakness: * Lacking experts in top level as whole business is controlled by family members who may not have in-depth knowledge. GROLSCH Strengths: * It has huge export business, where half of its sale comes from overseas. * Innovation and branding are core strategy. * Centralization of production helps to improve efficiency and volume. * Manufacturer of flavoured beers. Weakness: * Lack of proper marketing strategy in local market. * Sales of company are much lesser than other competitors like Heineken. INBEV: Strengths: * Largest brewer in the world. * It is second largest brewer in China, which have 7% annual growth in beer consumption. * They follow the principal of central coordination purchase which help to achieve more efficiency. * Got well known international like Beck s and Stella Artois which helps in marketing. Weakness: * Lack of innovation. * Lack of product differentiation. They don t have anything different from other brewers being the market leader. Scottish and Newcastle: Strength: * It is market leader in UK, France and Russia. * Forth largest brewer in Europe in terms of volume. * They take risk by investing in new places like Ukraine and Baltic countries. * Emphasises on development of innovative and premium beers. Weakness: * They are closing their inefficient breweries instead of finding solution to the problem, so they lack proper coordination. * Loosing market share by closing the breweries. Impact of Trends on the Companies Heineken (Netherlands): * Due to the restriction on the alcoholic products in Europe, so it is obvious that there would be negative impact on Heineken Company as it is a Europe based company. * This company always transferring their effective expertise and latest technology to their targeting countries to promote their domestic players. * It is shown in the case that there is decreasement in beer consumption across Europe, so they are looking for the new places and searching for opportunities. Grolsch (Netherlands) This company is having the authority from the government to sell the appreciated Americas miller brand in this country. As it is shown in the case that more than half of the sale came overseas, so there was no greater impact of restrictions and awareness on this company. The production of this company is like as a enhancing competence in trend. InBev (Belgium/Brazil) 8

* There was no great effect on this company of restrictions, because it is a leading company global wise. * It is not a European company, so it is another reason for little impact. * They are keeping their strategy by acquisitions. Scottish and Newcastle (UK) * This company is a largest company in UK. * Masses of United Kingdom showed great resistance to binge drinking which is not good for the company. * This company is keeping busy itself by throughout the world. * This company is focusing to invent the new products and always eliminate the uneconomical ones. Bibliography Ageing Population and Lifestyle Changes Drive Demand for Orthopaedic Biomaterials in Europe.(n.d.).Retrieved March 9, 2010, from http://www.prnewswire.co.uk/cgi/news/release?id=174134 Demographics of Europe.(n.d.). Retrieved March 9, 2010, from Absolute Astronomy: http://www.absoluteastronomy.com/topics/Demographics_of_Europe Europa. (2010, February 17). Retrieved March 10, 2010, from European Union website: http://europa.eu/pol/env/index_en.htm EUROPA. (2010, february 17). Retrieved march 10, 2010, from European union website: http://europa.eu/pol/rights/index_en.htm EUROPA. (2010, february 17). Retrieved march 10, 2010, from European Union website: http://europa.eu/pol/health/index_en.htm EUROPA. (2010, february 17). Retrieved march 10, 2010, from European Union website: http://europa.eu/legislation_summaries/employment_and_social_ policy/index_en.htm European Brewing Industry. (1999). Retrieved March 9, 2010, from www.The20European20Brewing20Industry,20Theses_26_Dissertations,20College%20Term20Papers .com Institute of Alcohol Studies.(2009). Alcohol in Europe A Public Health Perspective.Retrieved March 10, 2010, from Institute of Alcohol Studies: http://www.ias.org.uk/resources/publications/theglobe/globe200602/gl200602_p3.html#Anchor Evaluating-3800 The European Brewing Industry. (1999). Retrieved from College Term Papers Web Site: http://www.collegetermpapers.com/TermPapers/Theses_&_Dissertations/The_European_Brewing_ Industry.shtml