Analysing The Macro Brewing Industrial Environment Commerce Essay

The macro-environment of the UK brewing industry are the major external and uncontrollable factors that influence its operating organizations decision making, as well as its performance and strategies. To identify and assess its key factors, using the PESTLE framework will provide a comprehensive list of influences and key drivers in six main categories, which are: political, economic, social, technological, legal, and environmental. This method allows businesses to consider and explore how their external environment might change so that they are prepared if things should change.

PESTLE analysis of the UK Brewing Industry

Political

The government plays a key role in how the brewing industry operates. The growing bad publicity concerning the so called ‘binge drink culture’ in the UK, has forced the government to take action against social behaviour. Current UK government proposals are seeking to tackle alcohol misuse, by implementing additional regulation and further punitive taxes. This has resulted in an increased cost burden on both the sector and its customers (Beer and Pub Association 2008). In the 2008 budget the duty of beer was increased to 9%, and through a tax escalator the treasury has mapped out a two per cent above inflation increase over the next four years.

The increasing availability of low cost alcohol in the UK has been closely examined by the government and local authorities. Scotland is close to implementing a minimum price on alcohol, which is only likely to affect the off-trade, while local authorities in Manchester are investigating the possibility of introducing a similar scheme (Keynote 2011 [ii] ). These policies could help local brewers to compete with larger supermarkets who are able to sell beer at lower prices.

A recent poll shows that the public are against the governments’ current policy agenda on tackling alcohol misuse through increased taxes. 61% of the public said they would not be willing to pay more tax on alcohol to prevent others from drinking. 82% said that higher taxes unfairly penalise sensible drinkers. While 86% say increased taxes will not significantly reduce binge drinking. Taking this into account this would affect the brewing industry because if these taxes were further implemented the purchasing of beer will drop. (Beer and Pub Association 2008)

Inflation is currently estimated at 4%, due to the increase in value-added-tax (VAT), which was introduced in January 2011. According to keynote (2011) this, coupled with “the likelihood of further taxes on alcohol to be announced in 2011 will mean that beer prices may witness significant increases over the next couple of years”.

Economic

It can be argued that economic factors are perhaps the most important to the brewing industry. In the current economic climate, it has become increasingly hard for the beer and pub sectors to experience growth and strive. The downturn is affecting both businesses and households throughout the UK. The ongoing credit crunch and continuing inflation increases is adding more and more pressure on individuals, families and businesses. Individuals generally have less disposable income and this in turn has meant that overall sales of alcohol in the UK have declined, in 2008. Expensive global commodities and rising energy prices are also having a severe effect, particularly in relation to input cost (Beer and Pub Association 2008).

Pubs raise almost twice as much tax with every pint sold compared to a pint sold in a supermarket. Beer sales in pubs and clubs create 18 jobs for every 3 jobs created by sales in supermarkets and off-licences. However, there were still a total of 44,000 jobs lost between 2000 and 2005. It is predicted a further 43,000 jobs will be lost over the next 5 years; this has a major effect on the local and rural economy because 85% of the products and materials used in brewing are produced in the UK (Beer and Pub Association 2008).

Social

There is increasing concern about the developing of a ‘binge culture’ in the UK. In recent time’s society as a whole has found it acceptable for individuals to drink large quantity of alcohol on a daily basis. More and more individuals are regularly going out to social events with the aim of consuming as much alcohol as possible getting drunk and misbehaving (Beer and Pub Association 2008). This has highlighted the need for dramatic changes to the way alcohol is advertised and distributed to the public.

Scottish and Newcastle Plc states that cut price offers of alcohol in supermarkets are “out of sync with the responsible drinking message” (Daily Mail 2006 [iii] ). The ability for giant supermarkets to sell below-cost alcohol has a detrimental effect on pubs because they are fundamentally unable to compete on price. The smoking ban also means that there is more likely to an increase drinking in the home (Daily Mail 2006 [iv] ) and away from pubs and bars.

Large consumptions of alcohol has caused many social problems in Britain and it is argued by Keynote (2011) that “A large number of people blame alcohol, in some way, for street violence, marital problems, lack of productivity at work and poor performance at school.” This has resulted in 78% of the UK population being in favour of introducing “cigarette-style packaging warnings for pregnant ladies and drivers” (Keynote 2011). These additional instructions could be detrimental to the brewing industry if implemented by the government because it deters customers from buying their products.

Technological

New innovative technology available this has significantly changed the processes within the industry. With developments in technology and equipment such as refrigeration and motorised transport allowed for the consolidation of the brewing industries around the world (Reader 2010) [ehowfoods]. It has also allowed brewing companies to experiment with using different flavours and textures to help them appeal to new customers for example the new flavours of cider that are widely available across the UK.

Advances in technology have also meant that breweries can become more efficient, reducing production costs. For example Adnams was able to save 30% off their energy costs by introducing new energy renewal technology (Adnams 2010). This resulted in increased profit margins.

Breweries were traditionally attached to public houses and supplied beer to their local area however improvements in distribution channels have meant that they can now supply their products globally. This has caused rapid expansion of brewing companies around the world. The use of Global Positioning systems (GPS), Electronic funds transfer (EFT) and portable data collection terminals at present is used by the majority of beer distributors to aid the distribution process (NWBA 2006).

Legal

UK legislation currently states that the legal limit of alcohol consumption before driving is 80 mg of alcohol per hundred millilitres of blood (Redchair, 2010). This will affect the brewing industry because sales in pubs, clubs and other venues that sell alcohol may suffer from a reduction of sales, since customers are now limited to no more than two pints of beer this means customers may not be able to consume as much beer if they are driving. The plans to reduce it to 50 mg would cause server decreases in sales which could then lead to orders from brewers declining because that would be equivalent to one drink to reach that limit.

The smoking ban has affected pubs across the UK, this ban has caused them to lose a large amount of trade (Telegraph, 2008). The smoking ban can have a direct effect on beer sales because 60% of beer sales are sold in pubs, clubs and bars (Wake up for Westminster case study). 365 licensees were surveyed by The Scottish Trade Association and the results revealed that since the smoking ban was introduced in March 2006 alcohol sales have fallen by more than 10%. Further surveys carried out by the Trade Association showed that 46% of pubs visits by regulars had dropped since the ban was put into effect and 51% of those regulars were spending less money than usual (BBC News, 2006).

Environmental

The brewing sector has reduced CO2 emissions by twice the amount since the 90s and is on track to make its target in the next few years. Emissions per hectolitre of beer produced have lowered by 49% since 1990 with the total emissions falling by 52%, shown in the graph below (The British Brewing Industry, 1976-2006).

Figure 1: UK, Industry and Brewing Sector Emissions

(Source: The British Brewing Industry, 1976-2006).

UK brewing companies roughly spend nearly £4 million per annum to meet the terms with current packaging waste obligations and aim to meet the recovery and recycle targets. An issue for vertically integrated brewers is that costs are predicted to drastically rise due to increased time taken to calculate obligated tonnages. Even though casks and kegs are included in the Packaging Waste Regulations the association sustain that they are essential parts of a wider beer dispense system, and at the end of their usage period the metal will be recycled into new kegs which means they never enter the UK waste system (The British Brewing Industry, 1976-2006 [v] ).

The Changing Nature of the Competitive Environment

The brewery industry is highly competitive and highly saturated business. There are a number of forces at work here all of which can provide an insight into how appealing the brewery industry is, in terms of whether it is the type of industry to enter or leave; if there is room to exert any type of influence and how the competitors within this industry affect its performance (Johnson, 2009). To help provide an analysis of the brewery industry and develop a business strategy, using Michael E. Porters Five Forces Model will determine its competitive intensity or attractiveness of a market.

Porter’s Five Forces Analysis for the UK Brewery Industry

POTENTIAL ENTRANTS (MEDIUM RISK)

Barriers to entry

Scale & Experience

Access to supply/distribution channels

Legislation/ Government action

Differential (Flavoured to avoid competition

Industry is concentrated/low growth

BREWERS (HIGH)

Increased rivalry

Products are standardised

Competing on price/packaging

BUYERS (HIGH)

Concentrated buyers

(20% supermarkets: supermarkets can backward integrate if they can make their own beer/ competing again brewers)

Low switching costs

Buyer competition threats

SUPPLIERS (HIGH RISK)

Competition threats

High switching costs

Concentrated supplier (high)

SUSTITUES (VERY HIGH RISK)

Alco-pops

Wine

Price/Performance ratio

Extra Industry effects

The threat of the entry of new competitors:

Sales In the brewing industry have decreased by 5.6% since 2006 which has resulted in its overall market worth being estimated at over £17 billion. A prospective company planning to entering the brewery industry needs to take into account that it is a very expensive venture, as the price of general commodities and raw materials are continuously increasing and can be regarded as a capital intensive market as it can take a number of years to enter due to licensing requirements and initial production time that beer takes.

A strong knowledge base is required in understanding of the complexities of the industry, having some kind of experience is essential. Most of the leading industries have been established for a long time such as the brewery Anheuser-Busch InBev which was founded in 1316; and is currently the leading producer of larger in the UK.

Legislation is also another barrier to entry, as taxation on beer becomes increasing expensive. However facts shows there are now more than 700 breweries in Britain, the largest number since the Second World War and more per head of the population than anywhere else in the world.

The impetus behind the recent rise in brewers was the introduction in 2002 by Gordon Brown of the ‘small breweries’ relief’ scheme, also known as Progressive Beer Duty (PBD). Breweries that produce fewer than 60,000 hectolitres of beer a year, about ten million pints, qualify for a discount on the amount of duty they pay. Those producing fewer than 5,000hl (880,000 pints) qualify for the maximum 50 per cent discount [vi] .

Enhancing your marketing/brand image, utilizing patents, and creating alliances with associated products can minimize the threat of new entrants.

The intensity of competitive rivalry:

There seems to be an increase in rivalry in the brewery industry as firms battling to achieve market leader status. Anheuser-Busch InBev Uk, Heineken Uk, Molson Coors are the three top brands in the brewery industry.

Table 4.1: Market Share of the UK Beer and Brewery Industry by Company by Value (%), 2010

Company

Market Share (%)

Anheuser-Busch InBev UK

29.0

Heineken UK

27.0

Molson Coors Brewing Company

18.0

Carlsberg UK

11.0

Others

15.0

Total

100.0

(Keynote 2011)

Since 2009 InBev has been steadily accumulating their share in the beer and brewery market and now has the largest market share. This is primarily due to the increasing popularity of sub-premium lagers, such as the AB InBev brands Becks Vier and Stella Artois. They reported an increase in sales of 12.6% form £1.31bn to £1.48bn despite suffering a pre tax loss of £246.1m.

Stella Artois is a brand that has retained its position as the best-selling lager in the UK, despite increased competition from sub-premium brands and has also observed outstanding sales since its launch. The other three dominant brewing companies as indicated in table 4.1, have witnessed declines in their share of the UK market , Carlsberg’s share fell by 4%, Heineken’s by 3% and Molson Coors’ by 2%. The share of the market accounted for by smaller UK brewing companies (included under the ‘others’ heading) remained static on 2009 levels. (Keynote 2011).

Within the beer industry there are low switching costs as the product itself is standardised meaning consumer are free to purchase whichever beer they favours, however, consumers are very much brand loyal. Beer companies spend millions of dollars annually on advertising. The advertising is not necessarily created to increase demand, however create brand awareness. A new business will have to be prepared to invest heavily in advertising if there are to compete in the market Threats of rivals can be reduced by employing a variety of tactics. To minimize price competition, distinguish your product from your competitors’ by innovating or improving features also trying to form stronger relationships and build customer loyalty [vii] .

The threat of substitute products:

Substitutes in the brewery industry are thing such as wines, sprites and alco-pops. In the banking industry, high switching costs are in place to prevent customers switching to substitutes. However due to the low cost nature of beer it is not applicable here therefore customers have no obligation of loyalty. Although there are a number of substitute’s beer remains the most popular alcoholic drink within the male population in Britain, accounting for 60% of the market. The majority of people tend to consume beer on social basics so other forms of social gathering can be described as non direct substitute’s thing such

In order to decrease the threat of substitutes in the market and encourage customers, managers of new business in the brewery industry must carefully consider these alternatives and strategically address all the other options facing a prospective buyer. The treat of substitute in the brewery industry is medium as although there seems to be a lot of other alternative which consumers can go for the majority still purchase beer as their preferable choice of beverage [viii] .

The bargaining power of buyers:

The brewery industry have three main types of buyers-direct consumers, wholesalers/ retailers, and pubs /bars. Apart from the pubs and restaurant the main buyer of the brewery industry are the large supermarket Tesco, Sainsbury, ASDA, Morrison etc. Sales of beer have switched popularity from on-trade to off-trader meaning wholesalers and supermarkets have gain more bargained bargaining power.

It can be argued the industry overall has low buyer power as it consist of large companies supplying to a number of different buyers 85% of the market is shared between the four top companies and a large number of wholesalers. Regional buyers experience low power where as national buyers experience high bargaining power.

Beer is a standardised product which can be purchased from a number of other suppliers giving buyers a degree of power. Buyers also experience power in an industry when the products represent a relatively large expense for your customers; because beer is relatively low priced buyers will rarely feel the need to compare prices giving the buyer less power.

The brewery industry seems to have high/ medium buyers power due to the fact that direct consumers have multiple options for entertainment, and wholesalers and retail outlets have thousands of beer brands to choose from. Therefore, a new business owner must be creative in dealings with consumers, usually by offering loyalty programs and increasing perceived value [ix] .

The bargaining power of Suppliers:

The bargaining power of suppliers in the brewery industry can be preserved as low due to the fact there are a number of suppliers available to a brewery. The main supply decisions lies with the key product ingredients, hops, starch sources, Yeast and Clarifying agent also the packaging material the aluminium glass etc.

There are a number of farmers which can provide a new business with the raw material which it needs, leaving suppliers with less power. The suppliers cannot sell directly to customers, as a result they need the partnership with the breweries in order to survive and continue trading. This will give a new business more bargaining power with their suppliers.

However when the resources required are unique it becomes costly to switch suppliers. In the manufacturing of beer certain specialist ingredient such as enzymes are used in the manufacturing process, changing to another supplier may require a business to change their entire manufacturing process. This may be very costly and will reduce price negotiation leading to reduced bargaining power.

The increase in global demand for bio-fuels can be described as a problem for brewing industry. Bio-fuel IS produced by the usage of starch (corn/maize) and yeast fermentation to produce ethyl alcohol. This could give the starch and yeast crop suppliers powerful influence over the prices strengthening their bargaining power.

Contracts and positive relationships with suppliers and producers are another way new business can manage the uncertainty and power of suppliers [x] .

The Strategic Directions of Adnams

Adnams is a British brewery founded in 1890 in Southwold, Suffolk [xi] . Adnams journey of progression in spite of declines in the brewery industry started in October 2004, when the government called on the alcohol industry to stop encouraging binge drinking as it related to problems were costing the UK £200bn a year. During this time Adnams placed themselves as being a provider of alcohol that their customers drink as a source of enjoyment, relaxation and a central feature of social life for many. As a result of the economic downturn Adnams reported at 64 % decrease in operations profits and a 0.6% decrease in sale in 2008, as a result of changes in customer spending habits due to the recession, many people started to drink within their homes. (Data monitor 2009)

To overcome the changes Adnams was facing, decisions were made to:

Minimise their environmental impact

Maximise their operational efficiency and,

Achieve and maintain a superior return on investment [xii] 

The aim of Adnams short term strategy was to help recover from the low profits made in 2008. To achieve this Adnams decided to freeze the beer prices at the level it was during 2008, till the end of 2009, which made them standout from their competitors, which turned out to be very successful because Adnams reported increase in their profit in 2009 of “£922,000 compared to £142,000 for the same period in 2008” (Data monitor 2009).

The disadvantage this posed on Adnams was for them to now remain a low-price trader. Adnams Southwold main long term strategic plans are to have minimal environmental impact, focus on trending products, maximum operational efficiency and superior returns on investment (Green Suffolk 2011).

Minimize Environmental Impact

Adnams began to make changes in how the brewery process operates to reduce its impact on the environment. In October 2006 Adnams built their environmentally friendly distribution centre, which has the biggest green roof in the UK, with solar panels providing 80% of its hot water and reed beds purify the waste water (bbc.co.uk). All the walls are built from blocks made of lime, quarry waste, and hemp.

The impact of the eco-friendly warehouse has been very beneficial on the environment. Suffolk Country Council reported that due to the renewable environmentally friendly materials used to build the warehouse, there has been a CO2 emissions saving of over 450 tonnes (Green Suffolk 2011). Not only has the hemp and lime stone prevented a high CO2 emission in the atmosphere, it also acts as an effective sound insulator, which means that the noise pollution has been cut down. The sustainability strategy which Adnams has undertaken has given the organisation a positive image and also adds value to their products.

Maximize operational efficiency

Adnams vowed to maintain its price freeze for an additional 6 months, and in order to uphold this promise they have adopted a price reduction strategy through increased efficiency.

As brewing involves using a lot of boiling water, instead of Adnams allowing the steam produced to disappear into the atmosphere it is captured by its new technology and used to make the following brew, which cuts down on the amount of gas used by 30%; and the amount of water used to make one pint of beer from 6 pints of water to 3.5 pints and are finding ways to reduce this further (Annual report 2009). And with the partnership with British gas, Adnams started a project to turn brewery waste into green gas that can be for the national grid in February 2010 and actually started being pumped into the national grid in August 2010 heating 235 homes (bbc.co.uk)

Returns on Investments

The increased efficiency has meant that profit margins have remained high in spite of the economic downturn; this leads to their third strategic plan of achieving superior returns on investments. In 2009 Adnams had a profit margin of 6.06% compared to its competitors Heineken UK with -11.93% and Molson Coors UK with 2.13%. Since 2002 Adnams has always maintained a positive profit margin further ensuring a greater return on capital employed.

While Adnams competitors have a negative ROCE, Adnams have managed to maintain their return on capital employed and shareholders’ funds [xiii] .

Ansoff’s matrix identifies four different strategies that businesses could operate to take maximum advantage of market and product opportunities which will be used to help highlight the strategies Adnams undertook. Adnams adopted a product development approach as they developed new products in the existing market by “exploiting new technology in order to remain competitive” (Lynch 2006). Adnams has also been able to create a diverse product portfolio, including seasonal and standard beers covering all four areas of the Boston matrix (see appendices).

The strategic directions that Adnams have undertaken that have attributed to their progression are in market development, product development, and market penetration consolidation.

Source: thestudentroom.co.uk (2010) available at: http://www.thestudentroom.co.uk/showthread.php?t=455066

Adnams identified that in 2008 “the market for green, ethical and fair-trade goods is valued at £15bn and growing 9% per year” (Turney 2008 [xiv] ), and identified the changes in consumer tastes and adapted to meet their needs, so in 2008 the new carbon neutral beer was introduced, which focused on using their resources and core competences to retain competitive advantage. This approach ties into the neo-classical economic theory that takes a resourced based view of strategy where “one firm outperforms another if it has superior ability to develop, use and protect core competences and resources, which are the foundations for creating the future” (Stacy 2007).

CONCLUSION

TABLE OF APPENDICES

Appendix 1

Boston Matrix

Appendix 2

Meeting Logs

Appendix 1: Boston Matrix

Appendix 2: Meeting Logs

Meeting Title:

Strategic Management Assignment

Date:

22nd February 2011

Time:

12:00

Location:

Kingston Hill Campus (Library Resource Centre)

Meeting No.

1

Attendees:

Alfred Okanlawon, Andrina Beau-Pierre, Damian Brooks, Rosetta Azah-Thomas, Jermaine Randolph

Topics:

Familiarize ourselves with one another and exchange contact details

Ensure everyone has a copy of the case study

Skim over the case study and brainstorm possible routes for questions 1, 2 and 3

Next meeting date: 1st March 2011

By the next meeting everyone should have read and understood the case study fully, and made bullet points for each question.

Meeting Title:

Strategic Management Assignment

Date:

1st March 2011

Time:

12:00

Location:

Kingston Hill Campus (Library Resource Centre)

Meeting No.

2

Attendees:

Alfred Okanlawon, Andrina Beau-Pierre, Damian Brooks, Rosetta Azah-Thomas, Jermaine Randolph

Topics:

Gather all the notes made for each question

Decide who will do which question

Next meeting date: 8th March 2011

By the next meeting everyone should have made a start on their assigned question so that everyone can read over it and offer suggestions

Meeting Title:

Strategic Management Assignment

Date:

17th March 2011

Time:

14:00

Location:

Kingston Hill Campus (Mid Level)

Meeting No.

3

Attendees:

Alfred Okanlawon, Andrina Beau-Pierre, Damian Brooks, Rosetta Azah-Thomas, Jermaine Randolph

Topics:

Combined the work that everyone has done so far individually for each question

Whatever is left to do everyone should do, and we will bring it together for the next meeting

Next meeting date: 22nd March 2011

By the next meeting all the questions will be answered by everyone and put together collectively and everyone will read the assignment and take notes on which sections they feel are irrelevant so that it will be cut down to make relevant together so that everyone is happy with its content

Meeting Title:

Strategic Management Assignment

Date:

22nd March 2011

Time:

11:00

Location:

Kingston Hill Campus (LRC Second Floor)

Meeting No.

4

Attendees:

Alfred Okanlawon, Andrina Beau-Pierre, Damian Brooks, Rosetta Azah-Thomas, Jermaine Randolph

Topics:

To put everyone’s contribution to the assignment together

To read and discuss why sections of the assignment are irrelevant

Next meeting date: 24th March 2011

Meeting Title:

Strategic Management Assignment

Date:

24nd March 2011

Time:

13:00

Location:

Kingston Hill Campus (LRC Level 2)

Meeting No.

5

Attendees:

Alfred Okanlawon, Andrina Beau-Pierre, Damian Brooks, Rosetta Azah-Thomas, Jermaine Randolph

Topics:

To take out sections that everyone agrees are irrelevant

Meeting Title:

Strategic Management Assignment

Date:

25th March 2011

Time:

15:00

Location:

Kingston Hill Campus (LRC Level 2)

Meeting No.

6

Attendees:

Alfred Okanlawon, Andrina Beau-Pierre, Damian Brooks, Rosetta Azah-Thomas, Jermaine Randolph

Topics:

To take out sections that everyone agrees are irrelevant and add finishing touches

Meeting Title:

Strategic Management Assignment

Date:

26th March 2011

Time:

13:00

Location:

Kingston Hill Campus ()

Meeting No.

Attendees:

Alfred Okanlawon, Andrina Beau-Pierre, Damian Brooks, Rosetta Azah-Thomas, Jermaine Randolph

Topics:

Read over the amended assignment and write up the introduction and conclusion