,Case Study One: GIobaI forces and the Western European brewing industry"

Question One: Using the data from the case, carry out for the Western European brewing
industry (i) a PESTEL anaIysis and (ii) a five forces anaIysis. What do you concIude?
AII references in this assignment to "the case" refer to the case study: "GIobaI forces and
the Western European brewing industry"

A Porter Five Forces analysis and a PESTEL analysis help analyzing the Western European
brewing industry's attractiveness and external changes.
The PESTEL analysis of the macro-environment identifies the main external factors influencing the
brewing industry as the following:

PESTEL anaIysis for the European brewing industry
ollLlcal urlnk drlvlng leglslaLlon nPS healLh campalgns agalnsL excesslve alcohol consumpLlon
more pressure on producers Lo be soclally responslble
Lconomlc
growLh of Aslan economles decllne of maLure Luropean markeL shlfL Lo offLrade
supermarkeLs offer low prlces and challenglng brewers
Cverall decrease ln Luropean beer consumpLlon
Soclal
lncrease of beer consumpLlon ln SouLhern Lurope changlng soclal Lrends ln Lurope
preference for subsLlLuLes wlne and exoLlc beers
awareness of healLh lssues and dangers of blnge drlnklng
1echnologlcal
advanced Lechnology and lnnovaLlon lmprove manufacLurlng processes and economles of
scale producLlon of speclallLles such as exLracold and Lrlple fllLered
lnLerneL presence lmproves brandlng and adverLlslng opporLunlLles
LnvlronmenLal
packaglng such as glass and cans are recycled Lo reduce wasLe growlng envlronmenLally
frlendly behavlour of large brewers


Legal
hlgher penalLles for drlnk drlvlng sLrlcLer llcenslng laws and closlng Llmes low resLrlcLlons
on mergers of Luropean brewers regulaLlons on prlce flxlng by Lu commlsslon




Porter's five forces model helps to identify the attractiveness of an industry and shows where
competitive power lies within an industry. n the following table the five forces and their main factors
are listed, while the "+ indicates the strength of each force.

Porter's Five Forces ModeI for the European brewing industry
uyers ++ reLallers lncreaslngly compeLlLlve and powerful wlLh own label beer
offerlng low prlces Lo aLLracL cusLomers offLrade shlfL has lncreased buyers power
Suppllers ++
hlghly consolldaLed ln packaglng lndusLry brewers maln purchaslng cosLs are
packaglng cosLs
becomlng more powerful as lnLernaLlonal companles domlnaLe Lhe lndusLry
SubsLlLuLes + no swlLchlng cosLs for consumers hlgh demand for exoLlc producLs and wlne ln Lurope

new LnLranLs + hlgh caplLal lnvesLmenL no legal enLry barrlers lncreased number of lmporLs
LhreaL of Chlnese brewerles lncreased lnLernaLlonallsaLlon Lhrough acqulslLlons
CompeLlLlve
8lvalry
decreaslng demand ln markeL wlLh many players lncreases rlvalry compeLlLlon Lakes
place ln prlclng hlsLory of prlce flxlng Large brewerles seek Lo Lake over compeLlLors

++

Discussion and analysis
ne of the main factors affecting the brewing industry negatively is the political campaigning against
drink driving and its legal implications. EU wide regulations have become tighter in terms of drink
driving and underage drinking and there are higher penalties for crimes influenced by alcohol. n the
UK regulations have been implemented that stop bars, pubs and restaurant from selling alcohol
after a certain time, depending on their license. Additionally the NHS campaigns against alcohol
abuse to raise awareness of health issues and alcohol consumption. This has led to a decrease of
beer consumption of 9000000 litres in the UK between 2003 and 2007 (Table 1). These political
restrictions have had negative effects on the industry. The results are an increase of beer sold in
supermarkets and a decrease of beer sold in pubs and bars. This shift from on-trade to off-trade
represents a challenge for European brewers as retailers have become very powerful. The case
argues that more than one fifth of beer volume is sold through retailers and these are offering their
"own label low-price beer.
As the market is at a mature, declining stage in Europe, there has been huge growth in markets like
China and South America. European brewers are trying to grow their market share by aggressive
takeovers, acquisition and mergers, which is a result of the economic changes taking place in the
brewing industry's environment. Although sales volumes are declining in Europe, sales values are
rising as companies introduce premium products and exotic products at higher prices. However, a
big share of these premium products is imported from non-European countries (Table 2). According
to the case, Heineken saw an 11% rise in packaging costs, which are the brewers' main purchasing
costs, in 2006, as the packaging industry raised their prices for cans and bottles.
The economic recession has affected the European market negatively, but beer is a relatively cheap
product, which makes the brewing industry quite stable during a recession. ther negative impacts
on brewers are caused by social trends. Political and economic changes, such as regulations on
licensing laws and the shift to off-trade have led to a rise in drinking at home, instead of in pubs and
bars. The shift to off-trade is supported by changing lifestyles, more focus on health and fitness, and
an overall tendency to prefer wine and exotic premium products, such as flavoured beers (Table 1).
This trend is dominant in Westerns and Northern Europe, whereas in Southern Europe where the
consumption of beer is steadily growing. This factor can be related to the growing middle class in
Europe and could explain the growing demand in emerging economies, such as China and Brazil.
Technological innovations have positively affected the brewing industry. Production and efficiency
have been improved and le to economies of scale. Advanced technology enabled brewers to be
innovative, develop new products, such as ice cold, and triple filtered beers. The internet offers new
opportunities for brand building and advertising the brand globally.
Brewing companies are increasingly acting environmentally friendly and many have CSR
programmes in place. Energy use, C2 emissions, recycling and water use are important factors,
breweries are considering to protect the environment. AB-nBev (2011) is aiming to reduce 99% of
its waste by 2012.
Legal changes have both broadened and restricted trading opportunities for the brewing industry.
n a global level, trade barriers have been removed to enable free trade with the EU and other
nations, such as the US and China. n the UK however, government regulations have tightened
licensing laws and reduced the alcohol limit for drink driving. EU wide there have been problems
with price fixing arrangements between large brewers, which is because of competitive pressure,
mergers, acquisitions, and growing consolidation in the European market.
The analysis of Porter's Five Forces Model shows that there are many threats to the European
brewing industry. The threat of new entrants is medium due to increasing acquisition and
consolidation and the high capital investment required to enter the market. However, there are no
legal entry barriers and there is a growing market for imported beers (Table 2) which allowed
Chinese brewers to enter the European market.
n addition, the bargaining power of suppliers is very high. There are only a few large, international
suppliers in the industry that can increase prices anytime and there is no substitute available for the
brewers, which could be seen in the 11% hike in packaging costs Heineken experienced in 2006.
Another equally powerful threat are the buyers, which includes retailers and individual customers.
For customers the switching costs are very low, but for individual sales, this does not severely affect
the industry. The retailers, such as supermarkets represent strong competition as around one fifth of
beer is sold through supermarkets and "own label beer is sold at the supermarkets' profit. n
industrialised economies, this challenges brewers even more to be innovative and to develop new
products and advertising strategies.
The threat of substitutes to the brewing industry is medium, with wine, exotic beers and cider being
the main threats. There are no switching costs for consumers and the change of consumer
consumption indicates a strong interest towards substitutes in Western Europe. However,
consumers who like beer and a brand will stick to their favourite as beer is not as differentiated.
Competitive Rivalry is very high as there are a few strong players in a consolidated market with not
much differentiation. So competition takes place in pricing which has let to price-fixing cartels and
high penalties imposed by the EU commission. This can be solved by product innovation and
differentiation, such as the introduction of premium products. The overall decrease of beer
consumption in Western Europe has led to more competition and aggressive acquisitions to
increase market shares.
The PESTEL analysis has shown there are negative political, legal, economic and social impacts on
the brewing industry, but also positive technological and environmental, which increase the
industry's innovation and productivity.
The European brewing industry is at a mature stage, with decreasing demand and slow growth
where bargaining power of suppliers and buyers is high. Threat of new entrants is medium as the
market is very consolidated and has strong players which makes it more difficult to enter. Demand is
decreasing not only due to economic changes but also social changes and the availability of
substitutes. Therefore, the European market is not attractive to enter. Brewers will instead look into
Asian and Eastern European markets to increase growth rates as the European brewing industry
will continue to consolidate. Aggressive marketing strategies and premium products will support the
growth of market shares in emerging economies, where the market for beer is steadily growing.
Question two
For the three breweries outIined above, expIain:
(a) How these trends wiII impact differentIy on these different companies; and
(b) The reIative strengths and weaknesses of each company


Answer to part (a)

A-B nBev

A-B nBev is the largest Brewer worldwide after the acquisition of nBev in 2008. t has followed an
aggressive strategy of acquisitions and mergers and is therefore highly competitive. t is the
strongest player in the market and has bargaining power over suppliers and buyers, which makes it
relatively resilient to the Porter's Five Forces and external factors. However, after the expensive
acquisition in 2008, the company withdrew from the Chinese market. n the future, the company will
see less organic growth as it already took over the biggest rivals.

Greene King

Greene King is specialized in running pubs and brewing in the UK and is the largest British brewer.
Applying the Five Forces Model, Greene King is in high rivalry with international brewers entering
the UK market. The company successfully managed to reduce competition in the domestic market
by acquisitions. The shift to off-trade could affect the company negatively in the future as they are
heavily depending on their over 2000 pubs in the UK. The case indicates that around 50 pubs per
week were closed during the recession in 2009.


Tsing Tao

Tsing Tao profits from the economic and social changes in Europe. The company has taken
advantage of the demand for exotic beers and has increased its exports that account for 50% of
China's beer exports and is Chinese brand leader in the US according to the case. The company
aims to build an international brand in the home and Western market. The low exchange rate allows
cheaper exports.


Answer to part (b)

A-B nBev

As the largest brewer worldwide, A-B nBev owns over 300 brands, including Stella Artois, Heineken
and Becks, which are top selling beers bringing high margins. Another strength is the company's
high efficiency due to it owning a large network of breweries which allows them to achieve
economies of scale and adds value. Advanced technology and expertise in different plants allows
for innovation that gave the company the advantage to enter the soft drink market in South America
and lower the threat of substitutes.
Weaknesses are that the company followed a costly and aggressive strategy of acquisitions and let
them no choice but to pull out of the Chinese market and sell Eastern and Central European
operations in order to afford the acquisition.
Greene King
Greene King is a strong player in the UK market but only in the UK market. t is small compared to
global players such as A-B nBev and takeovers are a possible threat. t has no presence
internationally and is dependent on the UK market. Sales volume has been decreasing in the UK
and is negatively affected by the governement changes and restrictions in the UK, which affect the
company's ontrade sales.
Strengths are that Greene King also sells to supermarkets directly and owns UK brands, such as
ld Speckled Hen. t strategy of operating in on- and off-trade gave the company a competitive
advantage in its domestic market. wning its own breweries and only focusing on a few brands
results in lower production costs and higher margins. verall they are in a strong position in the UK
market but not able to compete with global players which can result in possible takeovers if no
change of strategy is being implemented.

Tsing Tao

The analysis shows great potential for growth in the Western market, where exotic beer is in high
demand. The company is present in 62 countries and has experienced steady growth. n Europe it
is still in a niche market and mostly only available in supermarkets and Chinese retailers but it has
potential for growth if branded and marketed properly. ts Chinese heritage could be seen as a
disadvantage as Chinese products are not associated with high quality. The company could have
better opportunities if it put more emphasis on its German roots to differentiate itself in the
international market. Weaknesses are that the company is dependent on exports and focuses less
on the domestic market. n the Chinese market, it faces less competition and less foreign
competitors due to legal restrictions on imports.
A reason for the inability to establish the brand in the global market could be its lack of marketing
strategy. f branded properly the company can make use of the growth potential in Western
markets, such as USA, South America, Eastern and Western Europe.


References:
Anheuser-Busch-nBev, 2011. (pdf) Available at: http://www.ab-
inbev.com/pdf/AB_CSR10_Environment.pdf [Accessed 19 ctober 2011]