The German Alcohol Market - Term Paper Example

Table of Contents Introduction 2 The German alcohol market 3 Legal considerations 4 Cultural considerations 6 Competitive environment 7 Financial considerations 8 Target market 8 Market analysis 9 Market segmentation 9 Demographic segmentation 10 Psychological segmentation 11 Geographical segmentation 11 Behavioural segmentation 11 Marketing mix 12 Product 12 Price 13 Promotion 13 Place 14 Positioning 14 Advantages of the product 15 Disadvantages of the product 16 Market entry strategies 16 Conclusion 20 Works Cited 20 Introduction Beer products have been brewed for many centuries. Early modes of brewing have been modified into modern industries whereby large brewery industries export their beer products internationally. This has been made possible by technological advancements in the industry such as the yeast separator which made increased production of beer probable. This signifies increased competition in the beer market as many local industries have gone international in the aim of meeting their set objectives. According to studies, based on per capita, Germans consume the most beer per person every year. In the United States, beer drinkers rank fourteenth worldwide, with American breweries generating about 156,900 million barrels of beer yearly. Currently, the American beer market is led by various large companies including the Anheuser Busch and Miller, although microbreweries which produce their own brands have turned out to be increasingly popular (Blocker et al., 2006, pp. 21-34). This report seeks to establish a new market to expand a company’s products which have now saturated in the domestic market. In this case, the chosen market is Germany, with which we would market the product internationally. The beer market consists of the sale of ales, stouts and bitters, low/no alcohol beers, specialty beers, premium lager and standard lager. The business report will cover the objectives, target market, country and market analysis, important factors including legal, cultural, competitive and financial considerations; assessment and selection of entry strategies and recommendation to the management. With this report, the senior manager will be able to assess which entry strategy is most appropriate for the company. Enough knowledge of the market environment, the target market and the competitors will enable the senior manager to choose efficient strategies which will assist the company to emerge successful in the eyes of its competitors. In the previous years, most of the largest alcohol producers have been performing well in the global markets. However, some companies are now experiencing stagnation in sales due to the consequent fall in the volume of consumption. This has therefore left the beer producing and marketing companies with the challenge of coming up with marketing strategies that will fit in the target market to ensure higher sales are attained. Furthermore, innovation has to be central to the company’s activities in order to ensure the products go in line with changing consumer tastes and preferences. According to the report presented by the Business Insights, the three main drivers growth for the beer producing companies are the increasing global young adult population, the surfacing and increase of the middle class generation with some disposable income, and the rapidly increasing consumer’s desire to purchase more premium products. The company deals in beer products such as stouts and bitters, premium lager, ales, low and no alcohol beer, specialty beers and standard lager. However, these products have been trading on the domestic market and have been considered to have saturated the domestic market. This is therefore the reason why there is need to expand to the internal markets. In this case the company needs to enter into the German market. These products will basically target both the high and low income earners considering the fact that the price charged for the products will be affordable. The German alcohol market Germany is famous for its rich beer market that trades in over 5,000 different brands. It is speculated that there are almost 1200 breweries in Germany alone. However, there was a rise in the abuse of alcoholic drinks in Germany in the nineteenth century, especially with regard to the distilled drinks, a fact that led to much criticism with regard to the prevailing alcohol condition in the country. This led to the establishment of temperance associations that greatly altered people’s attitudes towards alcoholism since alcoholism was then regarded as an illness and not as a moral problem. The total alcohol consumption rose between the 1960s and 1985. It is documented that the overall consumption per capita in 1960 was 7.3 litres for the whole of Germany (Van, 1992, pp 22-23). These figures have slightly reduced considering the fact the total per capita consumption in 2000 was 10.5 litres. A national survey carried out by the European Comparative Alcohol Study on 1000 respondents of ages between 64 to 18 years found out that the rate of abstainers among males was 12 per cent while the rate of abstainers among females was 18 per cent. However, these findings are based on the most often consumed and preferred beverage among the respondents. The proportion of the 15 year old respondents reported to have been drinking for more than two times was approximately 44.3 per cent for the male respondents and 34.4 per cent for their female counterparts (Van, 1992, pp 222-23). However, there was a general conclusion that the main reason for earlier alcohol consumption could be closely linked to the earlier formation of a drinking habit at a tender age. Young people therefore develop abusive drinking styles at tender ages which lead to increased numbers of severe alcoholics at a later stage. Legal considerations The Germen government addresses its alcoholic policies under three social subsystems. These include the legal system, comprising of the police, the regulating authorities and the legislative system, the social and health system comprised of the social workers, counsellors, healing professionals and the general practitioners and the educational system that takes an intermediary position between the helping and regulating authorities. The government does not require any license for the manufacture or distribution of the alcoholic beverages in the country exclusively, but there are other laws that are related to the consumption and sale of alcoholic beverages that regulate these activities. In addition, the law stipulates that all products containing 1.2 alcoholic volumes have to be labelled with regard to the provisions of the food labelling authority (Van, 1992, pp 22-23). However, the laws regulating the use and sale of alcohol in Germany are considered to be some of the less restrictive ones globally. They basically aim at protecting the youth from excessive drinking. However, in contrast, the legislation of other countries, such as the United States is not directed at controlling the youth drinking habits, but rather focuses on providing appropriate approaches of alcohol consumption. The German legislation recognizes three drinking ages; at the age of fourteen years, the minors are permitted to possess and consume fermented or un-distilled alcoholic beverages like wine and beer under the company of their guardians or parents, at the age of sixteen, they can consume un-distilled alcoholic beverages without the company of their parents, and at the age of eighteen years, since this population is now considered as adults, they law permits such individuals to consume distilled alcoholic beverages (Hughes and Dodder, 1992, p52). It is also important to note that in Germany, just like in any other states such as Europe, the consumption of alcohol among the adults is considered a tradition and is therefore generally acceptable. However, this does not applicable in the United States.  Infringement of the identified restraints will result in a law suit for the company selling the products and the bystanders who do not control the drinking habits of their children. These laws are however well spread and known to all the people in the country. The law does not hold any offense to the minors. It is also important to note that legislation requires that a standard rate of 1,500 Euro be charged for the illegal sale of a bottle, and it is speculated that country gets an approximate of 2 million Euros annually as returns from the illegal sale of alcoholic beverages in the country. The closing hours for the shops dealing in alcoholic drinks is determined by the towns and cities. Alcoholic drinks can also be purchased at supermarkets as well as petrol stations. Concerning the advertisement of the alcoholic products, a law has not yet been enacted, though the general guidelines drawn from the Advertising Federation limit consumers from excessive consumption of alcohol. Cultural considerations Germany is indeed considered as one of the heaviest alcohol drinking nations in the entire Europe. It is postulated that approximately five percent of the entire German population is considered to be non-drinkers. Considering the country’s lax laws governing the beer industry, drinking beer in public places is allowed and considered by the law as legal. Despite the ongoing controversies surrounding the young drinking age, Germans are comfortable and familiar with alcohol consumption by the time they enter college. This is because they have already drunk in suitable environments and have established their own consumption limits. It is important to note that alcohol consumption in Germany is considered as a tradition and therefore Germans have a general liking of their own beer. It is therefore important that the company identifies the tastes and preferences of the target market in order to manufacture products that suit the target market. The country’s legislation allows the consumers to access and purchase alcoholic products from anywhere, for instance, gas stations, grocery stores and even the newspaper stands. In addition, alcohol can be consumed in restaurants, snack bars, cafes, parks and even on the streets, a trend that is totally unacceptable in other countries. Considering the prices charged for these products, it is postulated that the alcohol price compared to the overall costs of living is very low. The general low prices charged for the alcoholic products and the ease of accessibility considering the fact that the country’s legislation is not strict concerning the drinking habits has cultivated a harmful drinking culture within the population. The World Health Organization postulates that alcoholism is one of the biggest social problems in Germany. Competitive environment Germany is globally known as an alcohol consumption country. It is postulated that there are about 1200 alcoholic manufacturing companies in Germany alone. This therefore means that the German market is saturated with different brands of alcoholic beverages. This therefore means that the company has to devise persuasive strategies that will make the company’s product marketable and suit the target market preferences. This is also backed by the fact that the German market is dominated by the locally produced brands in the market. Some of the common competitors in the market include Mengi Marketing that deals in the manufacture and distribution of neutral alcohol. The other competitor is the Western Done Industry Limited that deals in the manufacture as well as distribution of alcoholic products. Weinkellerei Weinkoeinig GmbH is another alcohol producing company in the German market. Considering the fact that the market is fully loaded with a variety of brands from different companies, the rate of competition is as well stiff. However, considering the fact that the laws regulating the alcohol industry are less strict and the overall drinking culture that is dominant within the country, there is a room that the country will have a market for its products depending on the market entry strategies the company will employ. This therefore means that the company has to devise effective strategies that the company will employ in reaching its target market. Financial considerations It is important that the company allocates some funds to the expansion programme. These funds will be channelled into different uses such as, distribution and delivery of the products, and for the purchase of the additional raw materials considering the fact that the company will have to increase the volume of its production in order to be able to supply the products to the new market. For instance, the company needs to allocate aside about 10 million US dollars for promotions and the marketing of these products in the new market. In addition the company will also require some funds to pay for the labour that will be required to undertake this operation. However, the company needs to be very keen with how these funds will be used as it may run in to deficits if the funds are used inappropriately. There is therefore need to employ a competent financial controller to manage the funds that will be set aside for the expansion exercise. The table below displays the various fund allocations the company will have to factor in its expansion exercise. Funds allocation Amount in US dollars Promotion 10 million Purchase of additional raw materials 8 million Distribution and delivery of the product 14 million Labour 7 million Target market Basically, target marketing involves dividing the prospective customers into various groups which makes it easy for the company to reach such groups. In addition, it is a very effective method of marketing the beer products to the targeted and the correct groups of individuals. There are various ways of dividing the customers and this is based on market segmentation. For instance, in this case, the potential customers will be grouped on the basis of demographic and psychological segmentation. Demographic segmentation involves grouping the customers in terms of income, age, gender, social standing, and needs (Kotler and Kevin, 2006, pp.76-84). The company’s beer products will target the working and corporate class who earn a substantial amount of income and furthermore appreciates good quality beer. These working classes who include both men and women will range from the administrative personnel to the managerial class who are aware of their reputation and image. However, the company will also target blue collar workers with low income. In terms of age, the company will target individuals who are above eighteen years as recommended by the law. The company’s marketing strategy mostly will be based upon making the correct products available to the correct group of individuals. The company will make certain that the beer products prices will consider individuals budgets, and that they attain information regarding the existent of the products and where to get them. The marketing will express a sense of quality and segment strategy in every promotion, every picture and every publication. The company will choose to compete in markets with low competition, and channel areas which match its strengths. The company’s strategy necessitates good relationships with the distributors, suppliers and retailers in order to support the business. The company should also make regular visits to the chosen areas in order to make certain that we are meeting the expectations of the target groups. Market analysis Market segmentation Market segmentation is a technique of subdividing the homogenous market into addressable and targeted needs bucket. These buckets are in turn analyzed in terms of psychological, demographic, behavioural and geographical constraints (Kotler and Kevin, 2006, pp. 76-84). Through the application of market segmentation strategy, a company can drive complete and unified product measures that are deemed harmonious with customer outreach, messaging and channel strategies for marketing and supporting clients. In order to compete with other major producers of the beer products, the company will avoid mass marketing strategies and use target marketing. The following segmentation methods will be applied. Demographic segmentation Demographic segmentation involves grouping the customers in terms of income, age, gender, social standing, and needs ((Kotler and Kevin, 2006, pp.76-84). The company’s beer products will target the working and corporate class who earn a substantial amount of income and furthermore appreciates good quality beer. These working classes who include both men and women will range from the administrative personnel to the managerial class who are aware of their reputation and image. However, the company will also target blue collar workers with low income. In terms of age, the company will target individuals who are above eighteen years as recommended by the law. The table below shows projected number of drinkers of both genders in a five year period. Potential customers (both gender) Growth (%) Year 1 Year 2 Year 3 Year 4 Year 5 Blue collar drinkers 4 100,147 104,153 108,319 112,652 117,158 White collar drinkers 2 693,675 709,630 725,951 742,648 759,729 Total 793,822 813,783 834,270 855,300 876,887 Psychological segmentation Psychological grouping considers general habits and lifestyles of the customers. Like all other markets, the company’s product sales will increase during the holidays when the disposable income is high. During this time the company should embark on vigorous advertisements campaigns’ as well as employing more sales individuals in order to cater for the increased product demand. Additionally, during this time, the company should offer discounts to the targeted customers in order to boost sales. Geographical segmentation Geographical segmentation involves dividing the market in terms of metropolitan area, city size, region, and density. The company will divide the targeted customers according to their locations as studies have revealed that the buying power of customers usually vary depending with the location. For example, in this case, the company will target those customers in urban areas as they have a high purchasing power compared to those in rural areas. In addition, these urban people are deemed to have a higher disposable income. Nevertheless, the company will lower the prices of the products sold in the rural areas in order to allow these customers enjoy the company’s product. Behavioural segmentation This kind of segmentation considers the general behaviours of consumers. It is apparent that consumer behaviours change from one place to another. In order to build customer loyalty in the German market, the company should ensure that its products are of high quality compared to those of its competitors. This is due to the fact that, many consumers have a preference for quality products. Marketing mix Marketing mix is defined as the combination of marketing tools which are used to satisfy the customers and meet the company goals. Customers refer to the marketing mix as offering and they are typically controlled by the four P’s; price, product, promotion and place (Hoover, G. and Hoover's Incorporated, 2005, pp. 64-76). A company using these elements is capable of reaching different clients within its chosen target market. Moreover, companies should employ a combination of these elements as it has proved to be efficient than depending merely on one element. Product The company deals in beer products which include sales of ales, stouts and bitters, low/no alcohol beers, premium lager, specialty beers and standard lager. These products have saturated in the domestic market and that’s why, the company needs to enter into the international market in order to increase sale. It is apparent that, the company’s products should be of high quality in order to be able to compete with other beer products in Germany. Furthermore, high quality products will make sure that the company emerges successful in its new market. Price Effective marketing takes into consideration the pricing strategies. Pricing decisions usually take into consideration pricing responses of main competitors and the company’s profit margins. Actually, pricing includes the list price, discounts and financing among others. In order to attract and retain customers, the company should produce high quality products and lower its prices compared to those of its competitors. Studies however have indicated that, customers prefer quality and valuable products irrespective of their prices. This will definitely give the company a competitive advantage over its competitors. Promotion In the contemporary market, promotion strategies are seen as the most significant. Such strategies are developed by the companies to make clients aware of the existence of a certain product. Promotional strategies represent all communications employed by the marketers in the market place. Some of the examples of promotional strategies include advertising, public relations, personal selling and sales promotions (David, 2010, pp. 60-72). In order to emerge successful in its new market, the company should employ a combination of these promotion strategies. Other advertising strategies such as the use of social websites such as Facebook, Twitter, Flickr, and You Tube; print press as well as radios and Televisions can also be employed by the company. Through advertising, customers will be made aware of the existence of the company’s product and where they can obtain it. Moreover, promotion will enable the company products to reach and cover a large geographical area making its products well known to the targeted customers thus boosting its market share, revenues and sales. The table below shows various costs that the company will incur in promotion. Promotional medium Costs incurred (in million US dollars) Print press 1.2 Television 2.8 Radio 1.9 Campaigns and advertising 3.1 Social networks 1.0 Approximate costs 10.0   Place Place or the channel of distribution represents the location in which a product can be obtained. Generally, a place comprises of any physical store and other virtual stores on the internet. The company will distribute its products through wholesalers, retailers and resellers. Besides, the company can resell its products to its customers directly, but this can only be possible if the company establishes a branch in Germany. Furthermore, the company may seek to make direct contacts with the customers as this is believed to be an efficient approach that can be employed to demonstrate the offering of the products to the chosen target market. Positioning In every company, product positioning is a very essential process. With the augmented global competition in businesses, potential customers require a good reason as to why they should purchase a certain product. These reasons emerge from the company’s positioning as they explain what sets their product apart from those of the competitors (Keller, 2009, pp.16-20). This is what keeps loyal customers and makes them buy such a product compared to that of the competitors. Product positioning entails how a particular company differentiates its products and positions itself in the market (Keller, 2009, pp.16-20). The company may position itself both to the high and low income earners. This is based on the fact that the company can lower the prices of the products depending with the location of the potential customers. Lowering prices with an aim of targeting low income customers will increase the company’s sales. The company will position its products based on: Quality which is then accompanied by differences in prices Sales promotions which involves advertising and campaign practices Advantages of the product The company basically deals in beer products, and a major advantage about these products is that they contain low volumes of alcohol. The company can therefore use this as a strategy to market its products considering the fact there is a widespread awareness within the country of the adverse effects that accompany the excessive consumption of alcohol (O’Malley and Wagenaar, 1991, p 490). The other advantage relates with the country’s legislation basing on the fact that the country’s legislation governing the production and distribution of alcoholic beverages within the country are less punitive. In addition, no license is required for the production of alcoholic beverages within this country and therefore this presents a greater opportunity to the company to set up its distribution channels within the prospective market. The other advantage is that the Germans consider the consumption of alcohol as a tradition, and therefore the rate of alcohol consumption is very high. It is therefore upon the company to devise effective market entry strategies that will target the respective market. Disadvantages of the product Research postulates that it is challenging for other countries to market their alcoholic beverages in the German market (Seifert, 2004, p 84). This is based on the fact that the Germans have general preference for their own locally made alcoholic beverages. The company needs to therefore go an extra mile of devising smart strategies that will ensure the products capture the preferences of the target market. The other disadvantage is that the alcoholic beverages are sold at a relatively low price in the German market and therefore the company will as well need to charge low prices for its products irrespective of the costs the company will have to undertake in the production and marketing of its products. The company might therefore end up in incurring losses if care is not taken. In addition, the German market is already saturated with the diverse alcoholic beverages produced by the numerous local companies available within the country. It is claimed that there are over 1200 breweries in Germany and therefore this presents stiff competition to the foreign investors as they have to have effective entry modes that will make their brands sell in the market. Market entry strategies A global market entry strategy is termed as the planning and execution of distributing services or products into a new chosen international target market. It necessitates the establishment and management of contracts in the chosen international market. Most companies operate their businesses successfully in a niche market without considering the possibility of expanding into new international markets. This is usually driven by the localized nature of such businesses. However, many companies endeavour to expand their businesses through increased sales, business stability, and brand awareness by expanding into a new chosen market. Such companies may choose various market entry strategies which include the export based entry mode, relationship based entry mode, manufacturing based entry mode, and the born global entry mode (Lymbersky, 2008, pp.364-366). These market entry frameworks are dependent on the product life cycle and the product type. They have been developed on the basis of Innovation Diffusion Models theories in a competitive game and monopoly theories built upon business economics theories. Export based entry mode Export based entry mode are usually driven by the aspiration to either sell a service, product or technology in the global market with limited commitment of the company’s resources. It is considered as the simplest strategy and it may involve the use of an indirect (counter trade), direct method (agent), establishment of sales office in an overseas market, franchising and licensing. While employing direct exporting, the company will have greater control of the resources, it may necessitate a foreign agent, and the product will be sold to the end user. On the other hand, indirect exporting necessitates a home agent while the products will be sold through cooperatives. This means that the products will not be sold directly to the end users but rather, will pass through middlemen who later sell the products to the target customers. In the recent times, franchising has increased in significance as a method of growing businesses both locally and internationally. Companies which have employed franchising as an entry mode have evidenced great success. Relationship based entry mode This form of entry mode relies mostly on the establishments of relationships and mainly takes place where a substantial level of cooperation is needed in order to attain success. Relationship based entry mode includes strategic alliances, offshoring, contract manufacturing, and countertrade. It is apparent that efficient international strategic alliances necessitate comprehensive planning in order to make sure that all the partners profit (Lymbersky, 2008, pp.364-366). Contract manufacturing involves contracting the production of a product to foreign manufactures, however, retaining control of the product marketing. Countertrade on the other hand encompasses joining an export and import transaction in a manner that is deemed conditional. When companies decide to enter or expand their businesses to new markets, they should put into consideration various issues which are deemed important. These encompass the entry costs, the risks involved and the measures which can be employed to counter such risks. In order to emerge successful in the new market, the company should consider marketing strategies, sourcing and investment and control. This will make certain that the company faces reduced risks during expansion. Manufacturing-based entry The manufacturing-based entry is also known as Foreign Direct Investment, and can take various forms ranging from the full ownership of the international operation to the limited equity ownership. This can be inform of: Joint venture, which is considered as a collaborative market entry strategy where two or more parties combine efforts to access a certain foreign market. Each party is expected to incorporate their expertise in the venture and takes responsibility of the risks as well as the profits the venture will attain. Acquisition whereby a company makes entry to a foreign market by purchasing or acquiring a company in that country. This can as well be a potential competitor. Greenfield operation whereby a company decides to use its own funds to establish a manufacturing process in a foreign country. Recommendations Considering the fact that Germans have a general liking for their locally produced beer products, it is imperative that the company forms a joint venture with another company already in operation in the German market in order to be able to target customers effectively. The company can carry out a market analysis to identify a suitable company it can merge with in order to be able to make an entry into this market. In addition, the company can also consider acquiring other smaller companies already operational in the Germany market. However, setting up another company in this country may be challenging considering the fact that there numerous other local beer producing companies already operating in this country. Conclusion The expansion exercise is an essential undertaking the company needs to give significant consideration. The company has to come up with effective strategies that will ensure the company markets its products efficiently in the prospective market. However, it is postulated that it is challenging for any foreign investor to market its alcoholic products in the German market considering the fact that the German have a general preference for their own locally manufactured alcoholic beverages. This is also backed up by the fact that there are numerous breweries already in operation within the country. The company will also need to consider financial matters as funds will be required for this exercise. Works Cited Anderson, E. and Coughlan, A.T. International Market Entry and Expansion via Independent or Integrated Channels of Distribution. Journal of Marketing, 51 (1987), 71-82. Blocker, J.S., Fahey, D.M. and Tyrrell, I.R. Alcohol and temperance in modern history: an international encyclopedia, Volume 1. ABC-CLIO, 2003. David, R. Strategic management: concepts and cases, Upper Saddle River, Pearson Prentice-Hall, 2010. Hoover, G. and Hoover's Incorporated. Hoover's handbook of world business, 12th Ed. California: University of California, 2005. Hughes, S. P. and R. A. Dodder. Changing the legal minimum drinking age: results of a longitudinal study. Journalof Studies on Alcohol 1992, 53(6). Keller, F. Market Positioning & Framing Market Research. 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