The European Brewing Industry
Analysis of the Corporate Environment
Student Name: Michael Lynch
Diploma in Personnel Management, 1999.
Subject: The Corporate Environment
PEST Analysis – The European Brewing Industry
- Poland, Hungary and the Czech Republic will join within five years- these countries have young populations with a desire for all things Western.
- ING Barings predicts growth in these economies to average 8% p.a. over the decade after which they join the EU.
- Europe is moving towards becoming a single market with a stable political environment.
- The current pressure on Europe from America and Australia to reduce agriculture subsidies could result in a change in the industry?s raw material supply base.
- VAT & Duty rates vary across Europe- VAT ranges from 15% in Luxembourg to 22% in Finland , while UK duty levels are seven times higher than those in France .
- Per Capita GDP in Europe has risen from $11,500 in 1989 to $16,800 in 1999 . GDP growth for 2000 is estimated to be 2.8% .
- Many stocks are now traded in Euros- investors can compare stocks across Europe easily and see which companies are lagging against their competitors.
- EMU has lowered interest rates- Spanish companies can now access the same interest rates as German companies, compared to four years ago when they paid 4.5 percentage points more in interest than German companies . This creates a level playing field for all European companies seeking access to capital.
Mergers & Acquisitions
- The value of M&A activity in the EU is $1.3 trillion per annum- a 400% increase on 1994 – this is leading to a pan-European economy.
Energy Costs & Availability
- Deregulation of state monopolies has brought more competition among suppliers and a fall in the price of gas and electricity.
Social & Cultural Environment
- World population is expected to grow from 6bn now to 9bn by 2050. The developing world accounts for 95% of this growth .
- People are becoming more health conscious, and more active in leisure and recreation.
- The consumer backlash against GM crops and protests at the WTO meeting signify how the values of consumers can affect the activities of businesses.
- The internet has redefined the concept of commerce, and has forced every organisation to look at the way it operates.
Impact on Costs
- Increased efficiency in production from new technologies has brought down unit costs, giving larger manufacturers huge economies of scale.
Key Strengths and Weaknesses
- Companies competing in the future will need to have the ability to make intelligent alliance and acquisition decisions as the need to gain economies of scale forces companies to seek growth opportunities.
- Successful companies will have to strike a balance between the forces of globalisation and the need to maintain a local focus on each market.
- Companies will need decision-makers who can respond quickly and effectively to changing markets and who can predict market changes before competitors.
- Companies will also need flexible practices in the areas of production and logistics to be able to respond to change.
- Companies operating in industries which have fallen foul of public opinion may not survive.
- A marketing strategy which ignores the diversity of cultures across Europe.
The Internal Resources of the Brewing Industry
?The goal of any strategist is to find a position in the industry where his or her company can best defend itself against the forces which exist in the industry, or to use them in its favour? .
The Brewing Industry will have to recognise the forces which define the industry, and examine how these will affect the performance of the industry in the future.
Threat of Entry
- Scale Economies
Anheuser Busch of the US has twice the capacity of any European brewer. AB could use its vast economies of scale, or its financial resources to acquire an established European brewer to enter the market.
- Product Differentiation
Harp Lager held 80% of the lager market in Ireland before Budweiser and Heineken launched massive brand building campaigns . Global brewers can spend large amounts to differentiate their brands from local brews. This strategy could be used by a non-European brewer wishing to gain market share.
- Access to Distribution Channels
A new beer would have to displace European brands from supermarket and bar shelves. Ownership of the distribution chain by existing brewers would make it difficult to achieve this. The power of retail chains would enable a new entrant to deal directly with them ? their buying power would give any new entrant significant economies of scale.
- Government Policy
The UK government has moved to limit the concentration of companies in the top end of the brewing industry – this offers a level of protection to British brewers against foreign rivals.
- Expected Retaliation
European industry growth is slow- UK production is to fall by 1 million barrels over 5 years – a new entrant could damage the financial position of European brewers.
- The brewing industry is an important customer of European grain producers- if beer sales fall, sales of grain also fall- it is in the best interests of the producers to promote reasonable pricing. Switching costs for the brewers are also low- it would be easy for the brewers to source grain elsewhere.
- The retailer?s market share is now 60% across Europe. 13% of the beer sold is own-label beer . Retailers can source these beers from any brewer, placing downward pressure on the price paid to brewers.
- The opportunity to integrate backwards by retailers is low, so retailers cannot use that threat to push down price.
- Consumers also have power over the brewers- there is no cost to the consumer for switching from one brew to another.
- Substitutes to beer include soft drinks, wine, cider, and spirits.
- Industry growth is slow- consumption dropped 0.5% between 1992 & 1998 -falling volumes have intensified competition between existing brewers as they try to maintain market share. A new entrant would have to take market share from the already suffering European brewers.
Key Strengths and Weaknesses of a Successful Company in the Future
- The ability to use imaginative branding to differentiate its products.
- Sufficient scale economies to fight new entrants.
- Reliable distribution channels.
- The ability to lobby government to influence policy.
- The development of long-term supplier relationships.
- An over-reliance on the retail chains.
- The inability to create switching costs to prevent consumers from switching from one beer to another.
- An over-reliance on the European market- there are few global brewers from Europe .
Diageo- SWOT Analysis
- Diageo displays the ability to build on the power of the Guinness brand to create new products such as Breo and Guinness Extra Cold.
- Diageo also shows the ability to differentiate its products through the use of proprietary technology- the patented ?widget? cans are an example.
- The brewing division of Diageo now has access to the distribution channels of the spirits division. When the benefits of the merger between Guinness and Grand Met are realised, the beer division will get the benefits of lower administrative, distribution, and marketing costs.
- Guinness as a brand is well established world-wide.
- A chain of Irish pubs across Europe provides a guaranteed distribution channel and the chance for promotions at the point of sale. These pubs helped to achieve a 9% volume growth in Europe this year .
- The strategy of licensing production rather than investing directly in overseas breweries cuts down on the company?s fixed asset investments and the provides the opportunity to exit any underperforming markets quite cheaply.
- Even though Guinness products are available world-wide, $1.45bn of the company?s $3,520bn turnover comes from the Irish market. Such an over-reliance would have an impact on the group?s performance if the Irish economy were to go into recession.
- The specialist beer market is growing rapidly, and consumers are willing to pay significantly higher prices for them . The Diageo brand portfolio does not include any speciality beers.
- Diageo has only two lagers in its portfolio, neither of which are international brands. This weak portfolio means that Diageo is lagging behind in the lager sector, the largest part of the beer market .
- The company?s tactic of licensing the brewing of its products in overseas markets could be a source of weakness. This method of international expansion could prove risky – there is a danger that overseas agents pay more attention to their own domestic brands than those of Diageo.
- The brewing division of Diageo accounts for only 17% of the overall group turnover – there is a danger that management resources could be focused on the larger spirits and restaurant divisions to the detriment of Guinness.
- EU expansion will bring new markets and millions of potential customers.
- Population growth in the developing world will bring additional customers in the future.
- Chinese beer consumption is growing by 10% p.a.- it is now the second largest market behind the US . Diageo could acquire a Chinese brewer to gain access to the market for its major brands, while also using some of the brands of the acquired company to meet the global demand for speciality beers.
- The growing popularity of specialist beers – consumers of these beers are not particularly price sensitive, and they offer higher margins than ordinary beer.
- UK supermarkets are to cut the number of slow-selling beer lines stocked , a move which would cut off a major distribution channel for small brands like Harp. Even though Harp has a small share of the British market, any such move by the retailers would cut out the only lager Diageo offers.
- EMU will bring price transparency and could expose the practice where beers are sold and priced as ordinary beers in one country and as premium beers in another.
- An increasingly health conscious society could cause a fall in beer sales.
- The rapidly consolidating beer industry could make Diageo an insignificant player if it fails to make its own acquisitions or seek partnerships.
- The current public opposition to GM foods may focus on GM ingredients in beer.
- Microbreweries pose a threat to the major brewers- these microbreweries give people the chance to experiment with beers other than mass-market beers.
Diageo- Current Strategy
- Diageo is banking on the emergence of a small number of global beer brands.
- The company?s focus on four Irish beer brands could prove to be a mistake- local beer brands still dominate the world market. The current strategy does not reflect the reality of the world beer market in which the top ten brewers only hold one-third of the market .
- It is difficult to understand why Guinness sold Cruzcampo in Spain to Heineken, one of its main rivals. This deal has given Heineken a massive market share in Spain, and removed another potentially valuable brand from the Diageo portfolio.
- Diageo?s core strategy is to ?grow the volume of the Guinness Stout brand world-wide by attracting new consumers in developed and emerging markets? . Unlike Heineken , Diageo does not acquire the brands of foreign brewers- instead, it enters license agreements with overseas breweries to produce the Guinness brands.
- This method is linked to the company?s strategy of concentrating on a few core brands.
- Licensing agreements give the benefit of the expertise and market knowledge of local brewers, while minimising the capital investment required to enter new markets.
- However, there is a danger that local partners will not see the promotion of Guinness products to be as important as the success of their own existing brands.
- The concentration on Irish beer brands may hinder any planned moves by Diageo into Asia where stout and ale would be very much a small component of the beer market.
- Guinness invests heavily in advertising, and has proved with the launch of Kilkenny its ability to build a major new product from scratch through high levels of advertising.
- In Ireland, Guinness sponsors the Cork Jazz Festival and the Hurling Championship. Heineken?s sponsorship strategy seems wiser- it sponsors music concerts aimed at younger drinkers, generating loyalty from an early age. Patrick Conway of Murphy?s describes the flaws in the Guinness strategy- ?If your brand is not recruiting younger drinkers, it?s losing lifespan?
- Stressing the ?Irishness? of the products may not be of relevance potential customers in Asia and Africa.
Steps to Improve the Performance of Diageo Over the Next Three Years
- The company should seek to gain a competitive advantage over rivals by seeking out synergies between itself and the other branches of the group. For example, the opportunity exists to market its products in the Burger King restaurants where possible.
- Whitbread in the UK, which owns the Stella Artois brand, is currently considering the disposal of its brewing operations . Such an acquisition would provide Guinness with a premium beer in the form of Stella Artois, which it could use to tap into the speciality beer market.
- Because local brands make up the majority of world beer sales, Diageo is limiting its growth potential by keeping its product portfolio small. The company should seek out the acquisition of local beers in foreign markets. These local beers would then provide a platform on which to introduce Diageo?s existing beers into new markets.
- One possible acquisition would be a Central European brewer in advance of the region?s entry to the EU.
- The company also needs to acquire a major mainstream lager as Harp is not performing well in the world lager market.
- The company should take control of overseas production, and move away from the licensing policy it employs. This would give the company more control over the marketing and production of its products.
- Diageo needs to build strong partnerships with retail customers to temper their growing power. Category management and promotional activities could provide strong future growth .
- These partnerships could also help Diageo to take advantage of the own label beer market, which now accounts for 13% of the total market in Europe .
Investment in Technology
- Diageo needs to keep up to date with new advances in production technologies which can bring lower production costs. Cost savings from new technology could be diverted into marketing as the need for product differentiation through branding increases.
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www.irish-times.ie, Murphy?s Share of Beer Market Rises to 16.3%, March 14, 1997.
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