The Beer Brewing Industry.

TECHNOLOGICAL

• Get online: The arrival of new technology during the last few years has meant that increasing number of products can now be bought over the Internet and drinks are no exception to this rule. Number of High Street off licence chains now offers an e-commerce facility and wide websites through which consumers can buy drinks and glasses.
• Major brewers are turning to the Internet as a marketing tool, for example both Guinness and Heineken have launched interactive websites designed to build up databases of their customers.
• There is increasing use of Internet as a sales channel with many retailers owning their own websites. Such site can provide brand information, competition, promotion details, sales information and prices.
• Innovations in premium lager based on brewing technology have taken place including ice beer, dry beer and cold-filtered beer. However brand marketing is powerful and the leading brands are ordinary products, brewed and packaged in a traditional manner.
• Most of the main brands are packaged in both bottle and can to take advantage of advances in packaging “Improvements in packaging have resulted to more attraction for beers. For example “major brewers are using glass packages because it gives them a premium image”(Beverage World).
• Several major brewers developed their own widget systems including devices for bottles as well as cans, but the result was the same, giving the ale and stout market a much-needed boost.  

ENVIRONMENTAL / ECOLOGICAL

• Breweries in this industry are becoming more ecologically conscious. This takes in the form of packaging developments.
• Manufacturers are now obliged by law to observe environmental and packaging waste legislation. Environmental legislation is bringing pressure to brewers and there have been major successes in raising the amount of post consumer domestic metal packaging recovered and reprocessed. Government regulations require can makers to collectively achieve 52% packaging recovery by 2001. In 1998 according to the Can Makers Information Service 36% of all aluminium cans were recycled.

Summary of PESTLE Analysis

It can be concluded from the PESTLE Analysis that the brewing industry has undergone reforms since the 1989 MMC Beer Orders Report. The external environment not only affects the industry as a whole, but also has company consequences. Key opportunities and threats facing the industry can be identified from such analysis, which have to overcome or circumvented by firms.

Many brewing firms are now increasingly diversifying out of brewing, and entering into other ventures. Bass and Whitbread have adopted this strategy.

The firms who have not diversified out of brewing have shifted strong emphasis from brewing operations towards catering outlets, such as pubs, which is likely to be unprofitable. This is due to the PESTLE factors, which has resulted to a fall in beer consumption. Legislation factors like strong drinking laws and that consumers are becoming more health conscious are the main reasons for this cause. Consumers are consequently drinking less of a higher quality.

Brewing firms within this industry cannot control the environment, but alternative they can play for change and respond. Changes cannot be managed however some factors of the environment can be influenced. For example, the legal environment can be influenced through political lobbying. Many large breweries attempted to lobby the government, to try and change MMC recommendations and legislation.

Two of the nation’s largest brewers Bass and Whitbread have sold their brewing operations to concentrate on their hotel and leisure interests. The remaining brewers will be searching for additional economies of scale, firstly on a national basis and then on a European, or possibly global scale.

Formerly one of the largest regional brewers, the Vaux Group decided to withdraw from brewing in 1998. Over a longer period several other brewers have withdrawn from brewing including Boddington’s, Whitbread and Greenall Group bought the beer brand.

The supply of beer in the UK is now more concentrated than ever despite the efforts of government to produce level playing fields for smaller companies. The top five companies have a 93% share of the UK beer supply. (See appendix 2)

Key opportunities and threats facing the brewing industry

Despite the impending shake-up of the UK brewing industry, either from the sale of brewers or OFT legislation, there are still opportunities for growth.

OPPORTUNITIES

• Growth developments of mergers, which gives economies of scale, cost advantages and high levels of profitability together with possible increases in diversification.

• Deregulation of the licensing laws is allowing beer to be sold more flexibly, to bring UK into line with Europe. While it is not likely that this will result in a huge increase in the amount of beer bought in pubs, it should nevertheless stimulate the market.
• Drinkers in the UK, especially among the younger age groups, remain remarkable receptive towards new products.
• Consumers appear happy to accept both the mega brand and the niche products.
• Expansion of outlet, where there are new types for leisure eating drinking sectors. It creates opportunities for brewers to capture this developing market.
• Increase in low and non-alcohol drinks: therefore increases supply to supermarkets.
• Harmonisation of duty rates: which affects cross border trade.
• The arrival of Europe’s largest brewer, Interbrew, onto the market is likely to shift the focus towards imported lager products.
• The powerful multiple grocers have an interest in stocking beers as well as the market leaders in bulk packs.

THREATS

• Increase in production costs and reducing profits due to the life cycle of the industry, i.e. mature declining market as a whole.
• Increase in cross channel shopping due to lower rates. Cross channel trade is expected to grow, because of lower cheaper fares, affecting profit margin of brewers.
• Supermarket chains own label brands is expected to grow, due to the function of low price and their distribution power.
• Changes in the prices of substitutes may also affect the profitability of brewers in this market.
• Changes in drinking patterns, where consumers are drinking beer at home. This therefore increases power of supermarkets due to low prices and they have control of which brands to stock; reducing strength of brewers.
• Development of mergers can also be a threat, particularly if they are allowed to proceed since it may weaken the small firms in the markets.

PORTER'S FIVE FORCES ANALYSIS ON THE BREWING INDUSTRY

Porter’s five forces analysis ‘‘is a means of identifying the forces which affect the level of competition in an industry’’(Johnson & Scholes).

 

Threat of potential new entrants

• The threat to entry is low due to moderate entry barriers. This depends on the country, but includes the following:
• Large capital requirements needed to set up and expand as well as high economies of scale, forcing entrants to come in at large scale or to accept cost disadvantages.
• Access to distribution channels between different countries may make entry difficult with established brewers controlling a large part of retail outlets.
• Different regulations in different countries; some nations adopt various tactics to discourage new entrants into home markets. Germany, for example, has purity laws, whereby every brewer has to comply with strict standards set by the government. Whilst, Denmark enforce a policy of returnable bottles indicating firms have set up plants to collect their bottles, which is expensive and cuts profitability.
• Fairly strong brand identification supported by heavy advertising and marketing campaigns, together with rising sponsorship. Guinness, for example, “signed £10m deal to become the first worldwide sponsor, and official beer supplier of the 1999 Rugby World Cup tournament”(Marketing, 24th July 1997). This results to customer loyalty.

• The market have become increasingly concentrated during the last few years and now largely restricted to specialist brewers, therefore barriers to entry are relatively high on a national level, given the fact that very powerful brewers now control most of the market. Despite the concentrated national structure barriers to entry are not particularly high for those interested enough in beer to invest in real ale production, either for local pubs or for gaining a supermarket listing. Therefore it is polarisation, rather than concentration, which characterises the brewing industry. Demand for real ales and idiosyncratic beers are still strong enough to support a fragmented lower structure despite the steady expansion of multinational brands such as Stella Artois and Budweiser.
• The greater emphasis on the promotion of leading brands was also considered likely to raise barriers to entry and expansion and lead to brand rationalisation and so less consumer choice (Competition Commission report May 2000). It was found that any new entry would be on a fair large scale to be cost competitive, with a nation-wide distribution system if wishing to compete on national basis.

Intensity of rivalry

• High intensity of rivalry

• A few big breweries dominate the European brewing industry. The industry is in the maturity decline stage. High competitive market, which has reached over capacity. Profitability and sales are falling, making it hard for firms to gain market share.

• Brewers are increasingly under pressure in seeking competitive advantage. Slow industry growth, therefore only way for firms to gain market share is to take it from other breweries.
• Firms adopt differentiation strategies, such as, investing heavily in improving their public houses to attract consumers. They compete through non-price competition, such as, extensive advertising of brand names targeted at different buyer profiles. Image building is vital among consumers as they stick to favourite beer. For example, brewers, sponsor several clubs.
• Rivalry is heightened for firms when operating within the individual markets. There are full of local brewers, and have brand loyalty and strong market for its brands. Occurs in Northern Europe, where traditional barriers are hard to break down.
• Mergers have led to increase in concentration levels in this market. This makes it difficult for new entry to occur since larger firms have a lot of capital at their disposal.

Bargaining power of suppliers

• The bargaining power of suppliers is low in the brewing industry.

• Some of the breweries have contracts with hops and yeast farms. These small suppliers do not have much control.
• The degree of threat of forward integration by suppliers, wishing more closely to control their own market outlets. Ownership and control of retail outlets by UK brewers has, in particular, been the subject of significant government intervention seeking to reduce the market power of brewing companies and to increase competition in the on and off licences trade. (Source: T Morden)

Bargaining power of buyers

• The bargaining power of buyers is high – Retail outlets can influence final choices.
• This is attributable to the increase power of supermarkets within Europe, which has led to growth in home consumption trade.
• Independent pub chains also have some power but through tied estates, which limits the buying power especially in the UK.
• Supermarkets have high bargaining power as they buy in bulk to exert discounts, which is often delivered to the chains own distribution centres rather than the individual stores. With limited shelf space and many brands, brewers have to compete against each other.

Substitutes

• Low threats of direct substitutes, but are growing.
• Substitutes include soft drinks, low alcohol beers, non-alcohol beers and as well as mineral water. However most of the brewers are involved in these segments.
• Apart from wine and spirits, these substitutes are not close as it is unlikely buyers will switch to other substitutes-due to the low cross elasticity of demand.
• Pure fruit juice
• Hot drinks

The main forces that drive industry profitability

The industry profitability is driven by the structure of the industry. The five forces are linked and any change in one is likely to affect the other forces.

Using this analysis, the main drivers of change and profitability in an industry that is mature, are the buyer power and competitive rivalry. Buyer power is an important driver since retail outlets have greater control over brewers in stocking brands, forcing them to compete with each other. The supermarkets have greater control because they buy in bulk.

Competitive rivalry is another driver since brewers don’t compete by price but profits can be influenced by segmentation and advertising. Industry life cycle is influencing the nature of competitive rivalry. The brewery industry has reached maturity, which therefore indicates that standards are established and rapid growth can only be achieved by taking other firms customers.

Life cycle model applied to Brewing industry

However, low entry threat allows incumbents to maintain profits in the industry, since it is difficult for new entrants to enter this market. Substitutes also posses a low threat and again protect the long-run profitability of these firms.

Although, Porter model has helped to explain profitability within this industry, it doesn’t account for macro environment factors.

Analysis of key groups within the brewing industry

Strategic group analysis is based on the “idea that groups of firms with similar strategic characteristics within an industry are in more direct competition with one another than other groups of firms in the same industry with dissimilar strategic characteristic” (M S Hunt). “ It provides insight into the competitive structure of industries and opportunities and constraints for developments” (Johnson & Scholes).

There are three stages to strategic group analysis adopted within the European Brewing industry.

Strategic Groups in the Brewing Industry.

Stage 1: The Brewing industry can be understood by “Strategic Grouping” of firms with similar strategic characteristics.

European 

                                                        

        Heineken                        Carlsberg                Interbrew

                                                S&N                        Diageo

Regional        Grolsh

                Holsten                                                        Danone

                                                                             Bass

                                                Whitbread

                

                                

            German

                    Regional-Brewers

National

            Non - Diversified                                                Diversified

                                   

Level of Diversification

Stage 1: Shows the strategic group map of the industry. The strategic characteristics used are geographical scope and diversification. It looks at the extent to which major players are European, regional or national and the extent to which they have diversified into non-brewing activities.

From this map, it can be perceived that the major players have spaced out accommodating new areas. For example, Interbrew competes at the European level. Interbrew’s strategy is to add value and generate growth within their businesses. This is evident from their substantial interests other than brewing.

This map also helps to show which companies are in direct competition with each other.

Since its acquisitions of Courage in 1995, S&N have become the largest brewers nationally in the UK, and have moved up the rankings by being the largest brewer in Europe. The main reasons for this was because of strategy conquest to become market leader, giving access to national and regional brands (i.e. Fosters, John Smith and Newcastle Brown). It had also accompanied with strength in sales. This combination has made S&N have good geographical mix with many opportunities to grow in the future. S &N’s main purpose now is to take advantage of Europe, which has become a large consumer. Their emergence strategy is to continue building its brands at this level. S & N are diversified, but not as high as Bass.

Carlsberg is placed at the top of the map, operates at European level and diversified. 30% of Carlsberg sales represent non-beer activities. These include wine & spirits and supplying plants to the beverages and food industries. Whilst, Grolsch competes at regionally in Europe as well as brew in own country. Their interests only include brewing, but their exports are growing.

Stage 2: Summary of “Mobility barriers”. These are barriers, which prevents groups to enter another.

Mobility barriers Stage 2: Shows the mobility barriers taking place in this industry. It is easier for some players to shift groups than others. Both Heineken and Carlsberg are concerned with staying where they are, and being the dominant players within their group. They should focus on consolidate their positions. They have reached the European level of the industry, but Heineken has scope for expanding their non-brewing activities. They have restricted this as they have “a position of leadership in the industry in selling more premium beers nationally and new markets (Reuter News, 25 Sept 97). They are however looking to grow in the US and other countries outside Europe, which is not difficult since their reputation for quality brands should make it attractive to emerge into new segments confidently.

Stage 3: “Strategic space analysis” which helps firms to identify strategic key opportunities within the industry.

Stage 3: illustrates the strategic opportunities within the industry. There are 2 vacant spaces identified, which could provide opportunities for new strategies and new strategic groups. Space A is an attractive space, since it offers high profitability levels and economies of scale. This space would be suitable for large companies particularly placement of mergers. It also provides opportunities for increasing size of the market, particularly since there are high entry barriers. This would deter entry and protect long-run profitability. This would be suitable for S&N because they already have 20 pubs in Europe; most are based on Scottish theme pubs. S&N should be encouraged to grow their chain. “They already have high concentration of pubs in Italy, France, Germany, Sweden and Spain”. They are also experimenting with new theme pubs, operating 2 café Oz Australian bars in Paris. S&N are also proposing to set up its own restaurant chain (Reuters, 31st Oct 97). If this opportunity goes head, S&N would become more diversified, and hence fill up space A.

Space B has limited opportunity for growth taking place at regionally level. This attracts entrants with small budgets and may face high costs of production and cost disadvantages. Little scope for expanding its activities. Entrants will normally compete at a regional context in Europe and operate in niche markets (small volume at a high price).  

CONCLUSION

It can be concluded that because of market saturation and slow growth within the industry there has been growth in mergers and acquisitions. This is likely to continue; therefore brewers are seeking ways for external growth.

The future of this industry will consist of few firms supplying large proportion of the market and would probably squeeze out the smaller firms. This results in low competition for large brewers in their path for growth development.

The shrinking range of available beers has made life difficult for the UK's regional brewers. Some have given up brewing, while others, such as Greene King, have merged into larger units. However, there is also speculation over the future of many of the nationals' domestic beer brands, with the market leader Scottish & Newcastle intent on building an international structure based on its newly acquired Kronenbourg lager brand, and much of the brewing industry coming under foreign control.

In contrast to the profound supply-side changes, the beer market is a mature, static one, dependent on conditions such as heat waves or football tournaments to boost growth significantly. The immediate future of the market depends on the outcome of a government decision to force Interbrew, which bought both Whitbread and Bass Brewers, to dispose of Bass Brewers.

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APPENDIX 1

UK excise duty rates on beer, 1993-2000

* per percentage of ABV
Source: HMCE/HM Treasury/Mintel

APPENDIX 2

Source: Key Note