Analysis and Evaluation of Scotch Whisky Industry - Coursework Example

? Analysis and Evaluation of Scotch whisky Industry   By of the of the Introduction Scotch whisky is the leading product exported. The major export markets for the Scotch whisky are United States, Spain, Singapore and South Korea. Emerging economies like China and India are increasing becoming important export markets for whisky. The highest selling brand of Scotch is Johnnie Walker. Scotch accounts for about a quarter of the value of all food and beverage exports from the UK and more than 80 percent of exports in Scotland. Production of scotch whiskey has adversely been affected by declining revenues and slow growth for the past 5 years. This is attributable to declining per capita consumption of spirits, health and societal concerns about the misuse of alcohol and tough competition from its close substitutes. One of the major drivers of growth was the exports before the onset of the financial crisis, which slowed down the markets in US and Europe. Effects of global restructuring and cost-cutting measures on the Scotch whisky industry Diageo, as part of its restructuring plan reported that it would close down its Port Dundas grain whisky distillery and the Kilmarnock bottling plant. The latter is where the world’s most popular Scotch whisky, Johnnie Walker, had been bottled. This would cost about 710 jobs. Diageo also intend to expand its Leven plant and create about 400 jobs. A protest ensued from the stakeholders but the decision was ultimately undertaken by Diageo. Another whisky producer Whyte & Mackay cut 85 jobs in Scotland. These signal decisions by producers to shift bottling overseas due to increased costs and the emerging economies, which have become important markets. Shifting production processes offshore will have an impact on production of other spirits in Scotland, which rely on the economies of scale by large-scale whisky distilling and bottling to remain operational. Analysis of Scotch whisky in terms of market segmentation . In 2008, Scotch whisky was overtaken by vodka as the highest selling spirit in the UK. However it is easily the most popular UK spirit exports with revenues of ?3.0 billion in 2009. Under the UK law, Scotch whisky must be produced in Scotland. It divided into 3 major types: single grain, single malt or blended. When blended, Scotch comprises 60 percent to 85 percent grain whisky. Its alcohol content ranges from 40 percent to 95 percent by volume. The Scotch whisky industry directly employs about 10,000 people at over 100 distilleries in Scotland. Famous Grouse and Bell’s are the top brands of blended Scotch whisky in the UK. Imported whiskies account for only 4.0 per cent of spirits sales. Included in this category are Irish whiskey, US and Canadian whiskey and Indian whisky. US-produced corn whiskey (bourbon) has demonstrated solid growth in the United Kingdom, particularly among younger drinkers. Markets for Scotch whisky industry Scotch whisky accounts for majority of the exports, followed by vodka and gin. By the year 2011-12, it is expected that exports will account for 88 percent of industry revenue. Scotch whisky’s major export markets are the US, France, Spain, Singapore and South Korea. India and China are becoming increasing important too. Business and production locations for Scotch whiskey There are four major producing regions in Scotland: the Highlands, the Lowlands, Islay and Campbeltown, Speyside is home to more than half of the distilleries in the UK. Scotland also accounts for most of the production of spirits other than whisky, including vodka, gin, rum and ready-to-drink beverages. Combining existing production facilities, bottling capacity and distribution channels with production of other spirits provides tremendous economies of scale for spirits producers. In the past two years, more than ?500 million has been spent on new infrastructure in the region. Key Success Factors of the Scotch whisky industry The most important Key Success Factors (KSFs) for this industry are: Effective product promotion: Marketing, especially brand positioning, is essential to success in local and international markets. The intense competition among brands necessitates large expenditures on advertising and promotion. Economies of scale: Mass production reduces average and marginal costs, thereby improving profitability. Economies of scale provided by Scotch whisky distilling also allow spirits producers to make other spirits in the UK. Economies of scope: A diverse array of products can reduce the risks of shocks to specific segments. Distilleries that make multiple types of spirits, or even other beverages such as wine and beer, are less susceptible to losses from changing preferences. Guaranteed supply of beverage crops and water: Success is highly dependent on the ability to ensure adequate quantities of raw materials. The price of key inputs such as grains and sugars can be extremely volatile. Firm viability is dependent on limiting the exposure to these shifts. Establishment of export markets: Exports make up over 85 per cent of industry revenue and are expected to grow further as domestic demand gradually declines. Cost Structure Benchmarks Average operating profit for this industry is about 20 per cent of total revenue. This figure has fallen over the past five years as declining sales and competition forced producers to cut prices and costs gradually increased. Margins vary depending on the size of the distiller, with larger distillers generally having lower costs due to economies of scale, superior distribution networks and more favourable supply contracts. Smaller distilleries do not enjoy the same level of profit. Purchases are the greatest cost to this industry. This has increased over the past five years because of growing demand for higher quality products, which necessitate purchases of finer inputs. Items purchased include bottles, concentrated spirits, sugar, grains and water. Grain is the primary raw material used to produce whisky. Despite this, purchases are anticipated to continue to remain a high portion of revenue as demand for superior quality spirits grows. Marketing accounts for an estimated 9.5 per cent of industry revenue. Marketing costs declined following the financial crisis as companies moved to balance their books, but are projected to increase over the next five years as competition intensifies and demand for premium products grows. With the increasing trend towards premium offerings, successful branding and advertising will become even more critical for success over the next five years. Wages are relatively lower than other beverage manufacturing industries at 11 per cent of industry revenue, and are decreasing proportionately as revenue increases. This is because most of the production process is contained within the ageing process, which is not especially labour intensive. This process does contribute to capital costs by requiring temperature control and storage mechanisms. Wages costs are likely to fall over the five years through 2016-17 if bottling capacity moves offshore. Depreciation represents 7.0 per cent of industry revenue. Spirits production involves a relatively high level of capital intensity, as distillation, storage and bottling infrastructure are quite expensive. Depreciation is expected to remain constant over the 10 years to 2016. Other costs include distribution and general administration, which are significant for the industry as a whole but more so for the major players. These firms must invest more in operations in order to manage the wider range of products, markets and suppliers. Other costs are decreasing proportionately, to 4.6 per cent of revenue in 2011-12. Strategic options for the Balvenie brand in the UK Balvenie is a single malt Scotch whiskey produced by William Grant & Sons Ltd. It’s produced at the Balvenie distillery, one of the few remaining independent distilleries in Scotland. In view of the strategic options, the following options can be expored: Revitalise the Balvenie brand with new campaign to improve competitiveness Premiumise the market (given revitalised image) and encourage consumers to up-trade to higher value products. This would make price competition irrelevant. Seek opportunities for instance in rural areas and invest strategically in less competitive markets Exploration of new channels, for instance as in-home consumption to attract consumers who leave the bar/disco channel Innovate on how to improve on delivery mechanisms to create a competitive advantage Improvements in outlet selection. Analysis and evaluation of opportunities for William Grant & Sons to expand internationally into the Indian market India is fast emerging as an importer of Scotch whisky despite an import tax regime currently under dispute. While some markets are shrinking, emerging markets like india and China have continued to register positive trends. According to the Scotch Whisky Association (SWA), exportation of Scotch whisky earned UK, 90 every second. The report also states that the value of shipments increased by 14 percent to attain a record of 2.8 billion. To penetrate the Indian market, strategies and analysis need are conducted as follows. Marketing Strategy Market strategy in any industry can be considered as a source of customer satisfaction and an enhancement of brand loyalty. William Grant & Sons needs to undertake a strategy analysis tool using SWOT to understand the workings of macro environment and the competitive market. To create a successful marketing strategy, William Grant & Sons need to know their strengths and weaknesses so as to be in a position to explore opportunities and threats that are likely to confront them in the new market. The SWOT study offers helpful information in matching the company’s assets and capabilities to the competitive setting in which it operates. Perceptibly, Grant & Sons will have a better possibility of developing a competitive advantage by identifying a fit between the firm’s strengths and future opportunities. Competitor Analysis Management of Grants & Sons need to estimate the probability that its competitors in India will change their strategies in response to dissatisfaction with its entry, changes in the environment or moves made by other competitors. A competitor analysis would enable Grant & Sons to understand its own capabilities, as well as its competitors’ vulnerability, which prove to be huge sources of opportunities later. Cultural dynamics in international marketing Culture is “everything that people have, think and do as members of their society”. (Ferraro, 1994, p.17). It goes without saying that culture has a significant impact on consumption behavior (Schaninger, C.M et al, 1985). Culture is an important factor in all marketing activities- promotion, pricing, distribution channels, product, packaging and styling. The level success of Grant & Sons will be determined by its interaction with the Indian culture. Opportunities and risks Over the life cycle of a market, market leader, followers and late entrants occupy the market. Rapidly growing markets present attractive opportunities (Aaker and Day 1986). Grant & Sons will make better decisions about the Indian market, with a good knowledge of the limitation of assumptions about the growth market of Scotch whisky industry. Product and brand decisions This will fall under the marketing mix that Grant & Sons wishes to undertake. It involves marketing decisions the company makes to implement its positioning strategies and achieve its objectives. Among all the elements of a market mix, product standardization is the most important (Keegan & Green, 2001). Another approach to international marketing is country of origin. Scotch whisky is a world-famous noble spirit and must be produced in Scotland. Therefore standardisation is helpful for Scotch to keep its fame and attract consumers in the case of India market. Product differentiation might not be a very good strategy. Introduction of the Balvenie brand into the Indian market One of the entries of the Balvenie brand could be an effort to take over the market of alcoholic drinks companies in India. Acquisition of companies with a majority shareholding in alcoholic beverages would give Grant’s a good position to introduce and market Balvenie. Another way would be to enter into a marketing pact with an Indian company, for instance Jagatjit Industries, to have it market some of its whisky brands including Balvenie. Both of these moves would establish the presence of Balvenie into the Indian market. The choice of joint venture as a mode of entry into India would be ideal because of the policy restriction of foreign ownership in the beverages industry. It second choice of partnering would however, have its obvious strategic elements. For instance it could be motivated by the effectively fragmented market or the complexity of the local regulatory environment. Another consideration to make, as stated by Estrin and Meyer (2004), is that managerial and technical resources are contributed exclusively by the foreign partner. Therefore of the two market entry strategies, joint venture and partnering, the latter is more ideal in the case of India, for a successful introduction of the Balvenie into the Indian market. References Estin,S. & Klaus,M 2004. Investment Strategies in Emerging Markets. Massachusetts: Edward Elgar Publications Ferraro, G 1994. The culture dimension of international business. 2nded. New Jersey: Prentice Hall. Aaker, A. & Day, G 1986. ‘The Perils of High-Growth Markets’, Strategic Management Journal Vol. 7, pp. 409-421 Schaninger, C. M., Bourgeois, J. C. & Buss, C 1985.French-English Canadian Subcultural Consumption Differences, Journal of Marketing: pp. 82-92. Read More