Magoosh GRE

Identify and Assess the Key Factors in The Macro Environment that have, or Might, Affect the UK Beer Industry.

| March 7, 2015

Introduction

In today’s volatile and highly dynamic business environment, organisations are faced with onerous risks and various threats which are not only fuelled by the growing and burgeoning forces of globalisation, uncertainty and constant change – but driven by the regulatory environment including social pressures of the immediate environment in which they operate. The UK beer industry is a critical example of such industry which is at the mercy of burgeoning macro environmental pressure and now at the brink of an imminent collapse.

Using the British Beer and Pub Association report (BBPA, 2008), ‘A Wake-up for Westminster’. This report assesses the UK beer industry with particular reference to its macro environment. A number of reports have shown that the UK beer industry is under immense pressure from the policies and legislations of the labour government introduced in 2008. As a result, the pub and the brewing sectors are operating under the most severe conditions on record since the depression of the 1930s (BBPA, 2008). The telegraph (March 11, 2011) reports that since the past 5 years that government legislations on duty and taxes were introduced, there have been serious declines in the number of beer sales owing to falling consumption patterns.

As a consequence, there have been significant closures in the number of pubs and brewing companies in the UK. More so, thousands of jobs have been lost while a serious decline have been recorded in the share prices or listed brewing companies. The key factors which can be held responsible for these negative declines are listed and analysed below.

  1. Regulation
  • Labour tax act on binge drinking
  • Drink driving legislation
  • License reforms
  • Age Restriction
  • No smoking legislation

 

In a bid to tackle excessive behaviours and health related issues which arises as a result of binge drinking, the labour government in 2008 had increased the duty on alcohol by 6% while year on year the duty was set to increase by 2% above inflation rates (HM Treasury, 2010). One of such key policies was the Alcohol Harm Reduction Strategy for England in 2004 which focused on enforcing restrictions on young people who are under 18 in addition to the drink and drive policy which already existed. While these policies were aimed at cutting the escalating rates of antisocial behaviours amongst young adults and cut the increased level of accident and health risks reported from binge drinking, it has equally spawned an array of major negative effects on the UK beer industry.

 

The BBPA report (2008) shows that over 44,000 jobs will be lost between 2008 and 2013 as a consequence of the duty placed on tax policies which has bad impact on beer business. Given the beer industry challenges, the various regulations and pressures wielded on the industry can be said to be lopsided because they have been overly concentrated on particular areas – for example – health risks and accidents.

 

Arguably, focusing on the strengthening and mitigation of such health risks are good decisions – but one placed at the erroneous expense of the sustainability of the beer industry.

 

The BBPA’s call for a rethink on the policy is therefore justified because the declining consumption of beer volumes combined with rising costs of utilities and increased closure of pubs as well as breweries are seriously affecting the future of the industry. The Economist (July 24, 2010) reports that “not only will the strings of government policies fail in addressing the problems associated with binge drinking,  it will infact seriously work against the main stakeholders such as the pub operators,  brewers, suppliers, licensees  and  millions of consumers,  thus harming an industry which is already at the brink of impending collapse”. Indeed, the impact of the just concluded financial crisis which enveloped the UK economy has further exacerbated the situation and worsened the plights of stakeholders in the beer industry. It is therefore important that the government reconsiders some of its key policies on the beer industry in order to save it from further collapse. Finally, the problem with the policies of government in the beer industry stems from the fact that such policies have not been constantly reappraised and monitored to ensure that it fits with changing economic circumstances. This is very important so as to ensure that the plights of the concerned are well managed and constantly suited to changing events and economic circumstances.

 

 2. Economic Volatility

Some major challenges faced by the UK beer industry are triggered by various macro environmental events such as unstable inflation, fuel price hike, changing interest rates, exchange rate risks and growing competition as well as the global financial crisis. Before the financial crisis which further exacerbated the precarious situation, a number of challenges had confronted the UK beer industry. Part of it was an unstable inflationary trend and high interest rates. This caused banks and financial institutions to give less financial support to operators of the beer industry. Consequently, the operators could not embark on project expansion to further cope with pressures from both the internal and external environments. On the other hand, unstable inflation was reported by the BBPA report (2008) as causing pressure on family budgets and thus forcing them to reduce their visit to pubs.

 

The graph below shows the increasing rate of inflation since 2009 till 2011. The Office for National Statistics (2011) reports that increasing inflation rates have been recently been triggered by VAT rise which took effect in January 2011.

Source: office for National Statistics (2011).

 

In addition to inflation, the extreme volatility in the prices of commodities such as oil, barley and other key inputs for the production of beer have contributed to the spiralling costs of beer production. The Business week (July 3, 2008) had reported that supplies of Barley have been seriously hit by serious droughts in Australia, too much rain in Germany, and the rush to plant corn for ethanol, pushing the price for the grain up 100% over the past 12 months. The implications of this have been felt mostly by the food and the beer industry (GAX research, 2007). The society for independent brewers (2010) concludes that “this price rises mean small brewers “face the dilemma of whether to put up their prices and lose trade or absorb the higher costs and take the risk of their businesses becoming economically unsound”.

The graph below for example shows how the costs of commodities have increased year upon year.

 

  1. Social Change

Over the years, the UK has recorded a changing demographic profile where most of its population have been aging. Naturally when people age, they tend to participate less in social activities (Office of National Statistics, 2010) and consume less alcohol because of the high tendency of health risks; this has contributed to the declining level of beer consumption. In addition, a wider market choice for consumers means that they don’t have to go to the pub or drink beer for recreation. Cheap alcohol imports from Russia and other European countries which are available in supermarkets have made it convenient for consumers to buy any beer brand or alcohol from the shop thus having no need to visit the pub.

 

Present a Five Forces analysis of the competitive environment of the UK beer industry and discuss the changing nature and effect of these forces

 

Thereat of New Entrants

The BBPA report (2008) suggests that lager accounts for nearly 70 percent of the entire UK beer market – majority of which is produced by just four large breweries. Namely: Carlsberg of Denmark, Stella Artois by Inbev – a company from Belgium, Scottish and Newcastle which produces Foster‘s and Kronenbourg and Coors which is produced by a US manufacturers. On the other hand, traditional lagers are produced by local brewers who often blend local and distinctive flavours into their beers. Given these background, Hillman (2007) in his analysis of the beer industry suggests that the beer production market in the UK can be divided into two layers. The first is made of the big 4 competitors while the second is made of small and local brewers which comprises up to 700 competitors.

 

In the first group, there is low threat of new entrants because of the huge entry costs as well as high level of marketing required to achieve market strength. The four big existing brands enjoy huge consumer brand awareness and strong global brands which are also found in other countries. On the other hand, there is huge threat of new entrants into the small brewer’s category since there is little cost involved in producing beers. Pavey (2009) also explains that there is huge threat of new entrants into this category simply because beers can be produced with very minimal cost and distributed locally without much barrier.

 

Bargaining Power of Suppliers

Given the existence of many outlets where beers are sold – large suppliers particularly have more power of bargaining power because they can supply to many buyers including the supermarkets, pubs and small retail shops. They also have the power of supplying in huge volumes to supermarkets like Tesco and ASDA through their distribution chain therefore; can reduce the costs of distribution and reach out to more consumers. The small suppliers on the other hand (who produce traditional lagers) only enjoy a forward integration advantage as they also control many of the local pubs where they supply most of their beers. The problem however is that small suppliers are facing huge pressures since sales has been on a continuous decline in pubs which are their main source of sale. Another challenge is that the rates of pub closures have spiralled therefore, a huge challenge to their survival and sustainability.

 

The Threat of Substitutes

As noted by The Economist (October 29, 2009) one of the causes of decline of beer consumption in the UK stems from the fact that a lot of people have found interest in other beverages such as ciders, spirits and wines. The report shows that in today’s EU regime, there have been a huge export of cheap spirits and ciders into the UK from Russia and these has often made people have fewer penchants for beer consumption. Similarly, the Office for National Statistics (2008) suggests that cheap sales of beer substitutes such as spirits and wines in supermarkets have further contributed to the decline in demands for beer.

 

The Buyer’s Power

Buyers are becoming more powerful in bargaining because of an increasing backward integration of pubs and increasing product differentiation amongst brands as well as price sensitivity. Among beer categories, buyers have more tendencies to patronise one brand over another because of the satisfaction derived from each brand. This gives them the power to choose between brands and bargain as much as is required across suppliers. Furthermore, as noted by the BBPA report (2008) the prices of beer have increased owing to government’s imposed duties therefore, buyers are forced to patronise cheaper substitutes where they derive equal satisfaction. All this increases the bargaining power of consumers who are the buyers.

Rivalry

The competitive rivalry in the UK beer industry is between the four large producers who dominate 70% of the market and the small traditional suppliers who are over 700 in numbers and control 30% of the industry. Both categories compete against each other in different forms to increase market share and win more customers to patronise their brands. As noted by the Financial Times (January 26, 2008), the big suppliers are expanding their horizons and increasing their market scopes by producing localised and traditional flavours which is usually produced by small producers. Equally, small producers are finding their ways to the supermarkets and retail shop shelves to compete with the big brands since their traditional source of sale which is the pub are rapidly closing down. There is also rivalry in the industry amongst brands and competitors. For example, many Russian brands are investing in forward integration by buying up pubs to supply their own brands. Through these means, the degrees of competition and rivalry with local producers have increased.

 

Against the background of a declining industry, the brewer and pub operator Adnams seem to be bucking the trends. Assess the strategic directions chosen by Adnams that have aided their progress.

 

In the seminal work of Gary Hamel (1998), he gave insights into how contemporary organisations can achieve growth in the face of extreme uncertainty. He suggests that “organisations must actively promote change and not simply be carried along with it. They must seek continuous innovation and quest for value. Be subversive by ignoring industry conventions and aim to be unique. He further averred that contemporary organisations must take risks because no one can predict the future with any certainty”.

The strategic business direction undertaken by Adnams Plc., appears to be in line with the strategic lessons of Gary Hamel given the company’s success in the face of tumultuous circumstances. The aim of this section is to assess the strategic decisions of Adnams and how such decisions had contributed to its success.

 

The Executive Chairman of Adnams – Jonathan Adnams in the 2009 Annual report of the company submits that:

“It is gratifying to be able to report a 2009 result substantially ahead of what we achieved in 2008. Operating profits more than doubled to £3.2m, from £1.5m a year ago. Turnover too increased markedly, showing a 9% rise to £51.3m”.

 

Recording such a high rate of success amidst tough operating climate must be driven by no less than the business strategy and the strategic direction taken by the company. As shown in its 2007-2009 Annual reports. Adnams’ investments and operations indeed demonstrate that profits were made as a result of the strategies which the company employed across its business operations. More importantly, its notable successes were achieved through its serious business diversification processes, innovation and market positioning. According to McArdle (2008) such proactive steps are needed to survive in the face of turbulence and uncertain business climate of today.

 

Through the diversification of its product range and the expansion of its market scopes – Adnams was able to balance its growth by focusing on different segments of the beverage market in addition to its traditional business of brewing and selling of beers through pubs. The company has further expanded its distribution channels and started selling directly to independent free-trade pubs. This was flanked by its novel methods of selling through cans and small packages marketed in supermarkets and retail stores. These strategic decisions are responsible for helping the company to reach new markets and increase sales.

 

As was noted by the BBPA report (2008), sales through pubs have been on a continuous decline over the years. Therefore, creating other sales channels as considered by Adnams apart from the pub is a smart strategic decision which is seldom considered by other immediate competitors. As was further noted by McArdle (2008), acquiring new customers and businesses in the face of recession might just be a very smart decision. Truly, Adnams acquisition of three pubs in the 2008 financial year during the financial crisis contributed to its year on year success. Through the pub acquisition, the company was able to sell more pints of beers while using its existing leverage to increase production capacity without incurring more costs.

 

Furthermore, through the creation of more flavour range as noted by the Chief Executive in the 2009 Annual report, the company was able to attract new customers and retain existing ones.

 

We have remained very innovative in our development of beers and our Head Brewer, Fergus Fitzgerald, achieved considerable success using the flexibility created by our recent investments in the brewery to brew a new range of beers based on beer styles from around the world.

 

In addition, the 2009 financial report shows that over the years, especially during the precarious financial crisis period – serious focus was given to smart operational techniques. The company also held fewer stocks because of the risks involved and increased its brand awareness. By adopting such lean technique and better marketing program – Adnams was able to reduce wastes and achieve more sales through partnership with supermarkets and major UK distributors. The company also made huge sales through exports more than it did in previous years.

 

Generally, sustainability and profitability is achieved in business when management is able implement strategies through which sales can be improved. In the same vein, Sammy et al (2007) opined that the smartest business would seek to improve sales during tough economic times in order to mitigate any negative impact on the business. This is exactly what Adnams did through its export oriented processes and its proactive sales drive which helped to reach new consumers and earn more profits.

 

Furthermore, while other competitors struggled to own a significant market share in the beer brewing and pub market, Adnams’ embarked on diversification by extending its focus into other segments of the market. The company diversified into producing gins and vodka brands while it enhanced its flavours and packaging when others were looking for way out (Bridge, 2011).

 

As the author further reports, Adnam is one of the few British producers to ever manage the entire value chain process from raw material to production in its business process, therefore reducing business risks, improving efficiency and increasing profits. Notably, many players in the beer and beverage industry are not vertically inclined or forwardly integrated like Adnams – therefore are more prone to the vagaries of macro environmental influences.

 

According to the Business Intelligence (May 23, 2006) when an organisation is vertically inclined, such organisation can be more adept and efficient in its response to demands, therefore having the ability to sell more and earn more profits especially in tumultuous times when competitors are not able to achieve such feat.

 

Adnams have also laid great emphasis on production flexibility and quality taste in order to improve the acquisition of new customers and the retention of existing ones. The production distillery was also improved to enhance manufacturing capacity and increase turnaround time. According to the Chief Executive Jonathan Adnams:

 

“With our new distillery and with the whole set-up from the brewing process, we’ve got the flexibility to produce new brands.”

 

Given the various ground-breaking and proactive marketing cum operational activities of Adnams – improved profitability has indeed been a function of its strategic decisions and direction. Operational flexibility, diversification, continuous innovation and market positioning are some of the strategies which has made the company buck the trend. Indeed, for organisations that operate in the face of turbulence, volatility and an unfavourable environment, adopting smart business strategies will likely never fail.

 

References

Adnams Plc Annual Report (2007-2009) An Encouraging Year, our journey continues.

 

British Beer Pub Association (2008) A Wake-Up for Westminster: Economic trends in the beer and pub sector

 

Bridge, S (2011) Adnams gets into spirit with more drinks: Available online at http://www.thisismoney.co.uk/markets/article.html?in_article_id=522798&in_page_id=3 Accessed: 15th March, 2011

 

Campaign for real Ale (2008) CAMRA Briefing on Beer Tax: Statistical Handbook 2008

 

Financial Times (January 26, 2006) Few crying into beers at decline of big six breweries

 

GAX research (2007) Rising food pricing and its implications for the beer market: Economic research series

 

Hamel, G (1998) Strategy in one week; Penguins Books

 

HM Treasury (2010) Review of alcohol taxation: Directive 92/84/EEC

 

Hillman, K (2007). An overview of the beer brewing industry in the United Kingdom: Available at http://www.helium.com/items/550211-an-overview-of-the-beer-brewing-industry-in-the-united-kingdom: Accessed 28th March, 2011

 

McArdle, K (2008) Selling In Uncertain Times Strategies for Building Business in a Tough Economy: Sales and Marketing Excellence

 

Pavey, C (2007) An overview of the beer brewing industry in the United Kingdom: An Industry under distress, Journal of Management 2 (32) pp 56 -89.

 

The Telegraph (March 21, 2011.) The decline in beer drinking: in graphs: Retail and Consumer

 

The Economist (October 29, 2009) Sin-tax error Public health trumps brewing, but not distilling:

 

The Business Week (July 3, 2008) Trouble Brewing for Craft Beer Makers: Microbrewers are dealing with rising commodity prices and a slowing economy by raising prices and consolidating.

 

 

 

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