Analysis of the Brewing Industry of the UK - Essay Example

? Analysis of the brewing industry of UK BS3100 Strategic Management: Assignment 11 INTRODUCTION The world’s economy has been hit by, and suffering from, recession. The ever increasing population, the resultant boost in demands, the decrease of resources, the rise in inflation, as well as, other external and natural factors are causing mayhem in the international markets. Brewing industry has been affected from the effects of recession the most. Regarding purchase of beer as a luxury and wastage of needed money, many people have started reducing its consumption. To add to it, anti-addiction agencies across the world are trying their best to make people believe that alcohol consumption will result in serious damages to their health. Further, governments are levying more and more taxes on this industry to regulate the monetary crisis. UK BEER INDUSTRY Beer is called the national drink of UK. However, the present statistics have reported that beer consumption has decreased in UK by 3.1% in last 12 months (BBPA, 2008, p. 3). This reduction in the consumption of beer is causing UK brewing industries to downsize and even close their breweries. There are a number of key factors that are causing the decrease in the rate of consumption of beer. Major factors causing the shift in consumption patterns can be categorized into change in trends, financial, political and economic issues. FACTORS AFFECTING UK BEER INDUSTRY CHANGE OF TRENDS The rate of beer consumption in UK has been affected hugely by the shift in trends that has resulted into a change of preferences. According to BBPA’s report, “Since 1979, per capita consumption of beer has fallen by 33 per cent.” (BBPA, 2008, p. 3) It further stated that “men fell from 17.2 units a week in 1998 to 14.9 in 2006. By women, it fell from 6.5 units to 6.3, having been at 7.6 in 2002” (BBPA, 2008, p. 8). The reasons behind the drastic fall in the brewing industries include factors such as shifts in the demographic trends, introduction of substitutes such as carbonated soft drinks and colas, increase in awareness about health and bans imposed on the consumption of beer in workplaces. 1. Introduction of Carbonated Soft Drinks The change in people’s taste plays a major contribution in the low sales of beer nowadays. Beer used to be a popular drink a century ago, but today the introduction of sodas, various juices and drinks have lessened its charm and popularity despite being UK’s national drink. 2. Demographic Shift The migration and settlement of the people from all over the world in UK can also be regarded as an important factor in lowering the rate of consumption of beer. The ever increasing population of Muslims in UK has also resulted in the reduction of alcohol consumption as Muslims refrain from drinking beer and other alcoholic products. 3. Ban The ban on alcohol consumption within workplaces is also affecting the sale of beer. A restriction on drinking alcoholic products while travelling has also led to a reduction in the sales of beer as a lesser number of people want to go against the law. Though there are toasts raised and wines served in social gatherings and business parties, the average decrease is quite prominent. 4. Health Consciousness The increase in the health consciousness is also causing people to avoid drinking alcohol. It is further promoted by anti drug agencies and nutritionists who regard alcohol as an additional burden on the wallet, a threat to lives of drinkers and the people around them, and a ticket to one’s journey to prison cells. FINANCIAL ISSUES Along with the changing trends, financial issues are affecting the brewing industry badly. People have found things more important to buy than a pint of beer. Beer is now considered as a luxury since it has become extremely expensive due to the imposition of new government regulations. Major factors contributing to the financial issues causing lesser consumption of beer include the ever increasing prices of beer, lesser affordability due to unemployment and lower purchasing power of consumers due to inflation. 1. Rise in Prices of Beer The most important factor in this regard is the constant rise in the price of beers. Bread and other edibles are cheaper than beer, and that is why people prefer to buy necessities rather than beer. Commenting upon the continuous rise in the prices of beer in UK, Hammond argues, “?6.50 for a loaf of bread, ?7 for a bag of pasta and ?18 for a pint of lager — this is what the future looks like in Britain if we don’t prevent dangerous climate change” (Greenbang, 2009). Now the question arises that why would the brewing companies increase prices when they know that this will decrease their customer base? The answer to it lies within the budget and reports of UK’s treasury that are increasing the taxes and excise duties on beer. 2. Unemployment According to a report, the percentage of unemployment in developed countries is 2.5. Unemployment has resulted due to the recession that is causing organizations to resort to downsizing in order to minimize their costs, and hence, reduce their losses. The sale of beer is thus decreasing with the increasing rate of unemployment as lesser people can now afford to drink beer. 3. Rising Inflation Higher rates of inflation are causing an increase in the prices of normal goods. This is, in turn, causing the rate of consumption of beer to fall as more people now prefer to spend less on luxury goods and more on normal goods. POLITICAL AND ECONOMIC ISSUES The government of UK has tried to minimize the consumption of beer by increasing the taxes and regulations on beer, and thus, increase the prices of beer. (British Beer and Pub Association, 2008) states that a duty increase of about 9% on beer was included in the budget of 2008 while a tax of 2% over inflation rate was also levied by the treasury which further increased the prices and caused many pubs to close. The increases in government regulations and taxation have also led to an increase in the percentage of pubs closing daily. The government has further increased the costs borne by pubs by introducing harsher laws regarding gambling, hygiene, workplace safety and employment. Similarly, the ban imposed on smoking in public places has also reduced the popularity of pubs as people now visit them less often for only a glass or two of beer. The graph below shows the overall consumption patterns of beer during 2004 and 2007. Source: British Beer And Pub Association, 2008 CONCLUSION To summarize, UK’s beer industry has been hit hard by the increases in costs, prices and regulations which have resulted in its downfall over the years. The rise in the ratio of unemployment, price of beer and other necessities of life, greater awareness about health and the ban on alcohol consumption under various conditions is causing brewing industries to shut down in great numbers. FIVE FORCES ANALYSIS Porter’s Five Forces analysis is carried out to determine whether a certain market/industry holds potential for a company that is deciding to enter it. It is, therefore, carried out to determine the structural attractiveness of an industry and also to determine whether it allows a company to fit in the industry or not. The structural attractiveness of an industry is verified by a set of five forces that are, as mentioned by Porter, the barriers in an industry that exist to prevent new entrants into the market, the bargaining power that buyers exercise over suppliers, intensity rivalry between existing competitors, pressures that suppliers put on buyers in terms of bargaining powers and the threats posed by substitutes of the products in a specific industry. A comprehensive analysis of the competitive environment of UK’s beer industry is presented below using Porter’s Five Forces analysis. 1. Bargaining Power of Buyers The beer industry of UK is experiencing a higher bargaining power of buyers as more and more people have switched from beer, and thus, very few consumers are left in the market. This has also happened because the industry is facing low switching costs and buyers find it easy now to switch from beer to other substitutes. An increase in the bargaining power can also be attributed to the standardization of the product as beer is not, and cannot be, differentiated much from its substitutes. 2. Bargaining Power of Suppliers It would not be wrong to suggest that the suppliers of beer have also faced a decrease in the power to bargain. Despite many players of the industry exiting the arena, the existing suppliers cannot maintain a strong hand over the consumers. The main reason behind the inability to increase prices to increase profitability is the overall increase in prices resulting from government taxes. This has already caused many consumers to switch to substitutes and any further increase in price would do nothing but to cause a greater decline in the number of consumers, and thus, further deteriorate profitability levels. Beer itself is not much of a differentiated product; therefore, suppliers are unable to charge consumers exceptionally high for it. A resulting decrease in the switching costs of beer has worsened the conditions of the industry and has minimized the bargaining power of buyers. 3. Existing Rivalry The beer industry of UK is facing a high intensity of rivalry among competitors as breweries are now fighting to gain a larger share of the ever shrinking profitability pool. The beer industry is now in the declining stage of the life cycle and is, therefore, suffering from lower profits. The existing players in the market will do every possible thing to stub any company entering into the industry, and thus, prevent sharing of profits. The main players of the industry are almost equal in terms of strength and period of existence in the market and will, therefore, pose serious threats to new entrants. The existing rivals face cut-throat competition from each other as they all fight to gain a greater share of the market. 4. Barriers to Entry UK’s beer industry presents high barriers to entry for any company that wishes to enter the market of UK. The restrictions are majorly imposed by the government as it has levied higher taxes and regulatory costs on beer that make it more costly for suppliers, and thus, lead to an overall high price of beer. The barriers are high also because existing breweries enjoy significant economies of scale as they are well-established and have been brewing beer over a considerable period, allowing them to minimize their costs, that is, they enjoy cost advantages that are independent of scale of production. Customers and businesses that buy beer from these breweries have developed loyalty to their brands and are thus not willing to purchase beer manufactured by a new brewery. The brewing industry of UK has also faced significant drops in the profit margins as the government’s taxes and regulations have reduced the profit margin considerably. The fall in profits also acts as a barrier to entry as breweries would prefer not to enter a market that promises very little profit. Lower profitability has also resulted due to a considerable fall in the consumption of alcoholic drinks by both males and females. A hike in the prices of materials required for brewing is also having a negative effect on breweries considering UK as their new market. 5. Availability of Substitutes Substitutes are classified into three categories namely close substitutes, distant substitutes and non-usage of the product. a) Close Substitutes Close substitutes of beer comprise of non-alcoholic beers, spirit categories such as vodka, gin and rum (BBC, 2007), cider and wine. An overall increase in the number of people shifting to these substitutes over the past few years has resulted in deterioration and thus the decrease in profits for beer industry. This renders the industry unattractive for breweries as it now suffers from an ever-shrinking profitability pie. b) Distant Substitutes Soft drinks, as well as, fruit juices are going to become close substitutes for beer in the future as the ever increasing efforts of alcohol rehabilitation centres is resulting in the rise of awareness and health concern among beer consumers. c) Non-usage of Product It is apparent from the overall trends of beer consumption that the industry is going to face a huge decline in the demand for beer in near future. This, as mentioned earlier, will be greatly due to the hike in prices of beer, decrease in purchasing power of buyers, greater awareness among consumers and the increase in promotional efforts of beer’s close and distant substitutes (Dinkhoff, 2007). The demand for beer is price elastic. The increasing prices of beer have, therefore, resulted in a decline in the demand for beer. This is mostly because consumers deem it more appropriate to spend money on more necessities than to waste it on beer. An increase in awareness about the adverse effects of alcohol consumption has lead to a decrease in the switching cost of beer as consumers now find it easier to turn to substitutes. Lower switching costs have also resulted from an increase in the promotional efforts of companies that produce beer’s substitutes and the change in fashion that depicts drinking non-alcoholic drinks as more fashionable. STRATEGIC DIRECTIONS CHOSEN BY ADNAM INTRODUCTION The present UK brewing industry is facing a great decline due to economical and social factors. The prices of beer along with its costs have raised and the people prefer to cater to necessities instead of indulging in luxuries. As a result, UK brewing industries and pubs are closing on regular basis. According to the report of BBPA, “From 2000 to 2005, pubs were closing at a rate of two per week…This has now accelerated to 35 per week” (2008, p. 6). The resultant closure of pubs is leading to higher unemployment rates, and thus, lowers the purchasing power of consumers. Adnams has, however, managed to stay intact and prosperous by introducing various revolutionary strategies even under these harsh conditions. ADNAMS: COMPANY PROFILE Adnams PLC is a regional brewery company of the Great Britain. George and Ernest Adnams had founded it in 1890 in Southwold, Suffolk, England. The company mostly produces barrel ale and pasteurised bottles of beers. Its production is up to 85,000 barrels a year. The establishment of the Copper House Distillery in 2010 has started the production of vodka, gin and whisky (Wikipedia contributors, 2010). The company is bringing about new changes to make its sale and business more and more progressive each day. ADNAMS: BUSINESS STRATEGIES It is said that the strength of Adnams lies in its revolutionary and unique business strategies that indicate the presence of intelligent minds behind it. The eco-friendliness, pub-promotion and support deals and the relatively cheaper rates are all that make Adnams a name well desired. The fortune making strategies adopted by Adnams include Adnams struggling to maintain a social tag, its efforts to increase online sales and promotions, strict internal financial control and its efforts to minimize its losses. Adnams works on its social image by indulging in CSR activities. It started Adnams Charitable Trust in 1990 to distribute part of its pre-tax profits among the needy (Adnams, 2011). CSR has helped Adnams come in the limelight and has also helped it gain popularity thus increasing its consumer base. The company has differentiated itself on the basis of product offerings and has thus, started offering a wide variety of beer in order to attract a larger number of consumers. The introduction of seasonal and international beers has helped Adnams increase its sales as newer products lead to an increase in consumers with different tastes. By introducing seasonal and limited time offer beer, Adnams has made an effort to tempt consumers of beer to buy Adnams products. An increase in sales from these products is also caused by the increased desire among consumers to ‘try the product at least once’. It has also focused greatly on its brand and promotion by constantly innovating its products and also by improving its logo and packaging to attract customers. Adnams has been organizing various events to increase its popularity. Events such as races help Adnams gain fame among present and would-be consumers in which “All runners receive a free bottle of Adnams beer for taking part.” (Howard, 2010) Adnams has started buying shares in other companies to minimize its financial needs, fight the effects of government taxes and to avoid the detrimental effects of rising prices. It has also started focusing on partnership agreements which has resulted in a close cooperation with pubs. The managerial staff of Adnams holds meetings with pub owners to discuss their business with them and also offer advice and support to the pub owners. CONCLUSION Despite the bans imposed by the government of UK, Adnams has managed to remain in the industry by adopting a number of business strategies. The company’s presence in the beer industry for a long period has enabled it to stay in the market despite the rising costs and diminishing consumer base. Its financial strength has allowed it to bear the losses incurred by the reduction in alcohol consumption and has also enabled it to bring about changes necessary for its survival. Adnams has worked on its social image over the years to present the company as more active and eco-friendly. This allows the company to gain fame among its present and potential consumers and thus secures for it a sound future. Adnams has also started focusing on its online sales and promotion and has started investing on its promotion so as to increase its consumer base. “Being a responsible business is a priority for Adnams and the company firmly believes that a small investment of time and resources into ‘doing things right’ can make a significant impact, resulting in better relationships with the local community, suppliers and employees.” (Green Marketing Conference 2010) “The balance of strategic direction with practical management has established Adnams online as a key contributor to the commercial success of Adnams Retail.” (Andy Wood, Managing Director Adnams PLC) REFERENCES Alexis, Akwagyiram, 2007. Five reasons beer sales have slumped [Press release] 20 Nov 2007, Available at: [Accessed 13 March, 2011] Adnams SouthWold, 2011. Spirits News. [online] Available at: [Accessed 13 March, 20 11] Adnams SouthWold, 2011. Some History. [online] Available at: [Accessed 17 March, 2011] Adnams SouthWold, 2011. 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