Analysis of Beer Industry - Essay Example

Running Head: Industrial Economics Industrial Economics s Importance of Industry Analysis Industry analysis is a means that smooth the progress of a company's perception of its place comparative to other companies that create analogous and equivalent products or services. Considering the forces at work in on the whole industry is a vital module of effectual and successful strategic planning. Industry analysis facilitates business owners to discover and recognize the threats and opportunities facing their businesses, and to center their resources on developing inimitable and distinctive competencies that could direct to a competitive advantage. Kenneth J. Cook wrote, "Many small business owners and executives consider themselves at worst victims, and at best observers of what goes on in their industry. They sometimes fail to perceive that understanding your industry directly impacts your ability to succeed. Understanding your industry and anticipating its future trends and directions gives you the knowledge you need to react and control your portion of that industry. However, your analysis of this is significant only in a relative sense. Since both you and your competitors are in the same industry, the key is in finding the differing abilities between you and the competition in dealing with the industry forces that impact you. If you can identify abilities you have that are superior to competitors, you can use that ability to establish a competitive advantage." (Cook, 1995) An industry analysis consists of three most key fundamentals: the causal forces at work in the industry; the on the whole magnetism of the industry; and the critical factors that establish a company's success within the industry. In 1980, Michael E. Porter developed a leading model for analyzing the arrangement of industries. A complete industry analysis necessitates a business owner to make an objective examination of the underlying forces, attractiveness, and success factors that establish the composition of the industry. Considering and accepting the company's working environment in this manner can assist the business owner to devise an effectual and successful strategy, pose the company for success, and employ the limited resources of the business in the most efficient way. Collecting and evaluating information on competitors is essential for successful strategy formulation. Porter wrote, "Once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm is in a position to identify its strengths and weaknesses relative to the industry. An effective competitive strategy takes offensive or defensive action in order to create a defendable position against the five competitive forces." (Porter, 1980) The first step in carrying out an industry analysis is to evaluate the impact of Porter's five forces. "The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long term return on invested capital," Porter stated. "The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favor." (Porter, 1980) Beer Industry The beer industry has been seeing a lot of globalization lately, although consumers all around the world continue preferring local brands over the imported ones. Besides, the cost of manufacturing at one place and then shipping to other parts of the world is costlier than brewing it regionally. As the millennium came in, the international brewers began extracting positive cash from their regional acquisitions in the 80s and 90s. The beer industry stands global today. Heinkin and Anheuser Busch, the two giants in the beer industry took drastic and significant steps towards becoming global. These companies either acquire breweries in other countries or contract with them and then brew and market their own global brand there and run it through their distribution network. The motions of new countries which are not involved traditionally in the business of beer are fueling international growth in this industry. The modern way of life style is to trim down the rate of alcohol intake, leaving beer further attractive than spirits and wine principally in budding markets. Therefore, to carry on expansion and development on an international level, Anheuser Busch and Heineken pursue business strategies as mentioned in the pages to come. Anheuser Busch and Heineken "Heineken is steady in branding itself internationally as a premium brand". It aims to be the leader in a particular beer market in practically all fragments with an assortment of well-known brands. In particular markets where such a perspective is not practicable, they seek fragment leadership in which the Heineken brand makes the foremost brewery group in the premium fragment. Heineken's strategy on the whole is to have a typical beer that can be a local beer such as Amstel. http://www.brandchannel.com/features_effect.asppf_id=62 Heineken and Anheuser Busch have a propensity to obtain equity in a local brewer and exploit it as a distribution medium for the global brand. These companies adopt the strategy first to build up a sturdy local operating stage and then leverage it over time to make lucrative development through the exact brands and distribution arrangement to provide a local national market. Secondly, these companies choose to widen the assortment to embrace international brands to leverage global comings to assist in optimizing both the local brands and global brands. Next, these companies ensure an evenhanded range of countries between full-grown and budding markets, whereby the full-grown markets such as North America and Europe supply the finances to put in markets such as Korea and Russia that have inferior GDP and superior prospective for development. Their strategies are also based on the notion that market consolidation will facilitate making safe arrangements and generate shareholder value. Consumers in beer industry prefer local brands mainly because they are much more readily obtainable. In about each country, the large national brewers hold or control the wholesale distribution network, and novel competitors must acquire licenses from local authorities and put together profound reserves before preparing to compete. As a consequence in South Africa, for example, such key group of actors as Heineken and Guinness have elected to license their local production, distribution, and marketing to South African Breweries, the governing local actor, rather than try to do business on their own. Conventionally, brewers wanted to control national markets by realizing cost advantages all the way through physical scale. In the United States, for instance, Anheuser-Busch guided the way in constructing enormous economical facilities, thus driving out minor brewers and consolidating the market. However this is no more a successful strategy to pursue. As the payback of physical scale grows fainter that of intangible scale grow up. The most excellent brewers leverage such intangible resources as brands and market acquaintance to add competitive advantage around the world. Heineken portrays on the lessons it has cultured from advertising and marketing in developed countries to support and build up its position in emergent ones. In order to become winning brands will perhaps have to make inventive cross-category shifts, as Heineken did when it tied local Coke bottlers in Brazil to produce a brewer 'Kaiser' that faced up to Brahma and Antarctica in that country's market. Heineken offered brewing proficiency, the Coke bottlers a distribution arrangement. Jointly, they succeeded to gain a 15 percent market share in just a small number of years. Heineken at the moment has the sole most excellent outlook of standing in the midst of the global giants of the future. It has a global brand name; a prevalent presence, both in its own right and through alliances; and well-built expertise in such areas as marketing and production. As the company gets bigger, this expertise will aid it build value - for instance, by improving the operations it acquires. Anheuser-Busch too is in good shape. (Richard et al, 1999) Out-and-out acquirement may not be the most excellent approach. Anheuser-Busch obtained a marginal stake in the Mexican brewer Modelo in 1993 and increased that stake to 51 percent in July 1997. It has also gone into a transaction with Antarctica (Brazil's second-largest brewer) that locks up an alternative for future enhancement in equity, without consuming too much quantity of cash straight. Anheuser-Busch continues globalizing itself by making acquisitions. It has completed its purchase of approximately 29 percent of Harbin Brewery Group Ltd., a leading brewer in China, through the purchase of Global Conduit Holdings Ltd., an investment holding company. "Harbin fits our strategy of investing in leading companies in growth markets like China with good volume and profit growth potential," said Patrick Stokes, president and chief executive officer of Anheuser-Busch Cos., Inc. "We look forward to working closely with Harbin management and believe this cooperation will allow us to better participate in the long-term growth of the industry in China." (http://www.ap-foodtechnology.com/news/ng.aspid=51834-anheuser-invests-in) "This is Anheuser-Busch's second investment in a leading brewer in China. Since 1993, Anheuser-Busch has been a minority investor in Tsingtao Brewery Co., Ltd. In 2002, the two companies announced a strategic alliance and initiated a best practices exchange program and other management initiatives. Anheuser-Busch currently owns 9.9 percent of Tsingtao, and has an agreement to increase the ownership to 27 percent over the next several years". (http://www.corporate-ir.net/ireye/ir_site.zhtmlticker=BUD&script=417&layout=-6&item_id=522073) "In addition to Tsingtao, Anheuser-Busch equity investments include a 50 percent share in Grupo Modelo, Mexico's leading brewer. In a survey of 10,000 business leaders and securities analysts, Anheuser-Busch ranked first among beverage companies in quality of products and services researched in FORTUNE magazine's 2004 "Global Most Admired Companies" listing. The company also is one of the largest theme park operators in the United States, is a major manufacturer of aluminum cans and is the world's largest recycler of aluminum beverage containers." http://www.corporate-ir.net/ireye/ir_site.zhtmlticker=BUD&script=417&layout=-6&item_id=522073 Following are the key financial figures of Heineken International directly taken from its website (http://www.heinekeninternational.com/pages/article/s2/keyfigures.aspx): Key Financial Figures Heineken International Turnover and profit in millions of euros IFRS IFRS* 2004 2003 2002 2001 2005 2004 Revenue 10,796 10,062 10,005 9,255 8,482 7,637 Operating profit 1,249 1,348 1,248 1,222 1,282 1,125 Operating profit BEIA 1,301 1,386 1,329 1,327 1,282 1,125 as % of net turnover 12.1 13.8 13.3 14.3 15.1 14.7 as % of the total assets 11.0 12.9 12.8 12.2 16.4 15.6 Interest cover ratio 14.3 12.2 11.2 13.3 16.6 22.5 Net profit 761 642 537 798 795 767 Net profit BEIA 840 802 791 806 795 715 as % of shareholders' equity 21.2 24.7 23.4 25.4 30.1 25.9 Dividend 196 173 173 157 157 157 as % of net profit 25.8 26.9 32.2 19.7 19.7 20.5 Bonus shares in millions of euros Increase in share capital - - - - - 73 Distribution from reserves - - - - - 73 Percentage increase - 25 25 - - 10 Per share of 1.60 in euros Cash flow from operating activities 3.82 3.29 3.10 3.34 2.42 2.38 Net profit BEIA 1.71 1.64 1.61 1.64 1.62 1.46 Dividend (proposed) 0.40 0.40 0.40 0.32 0.32 0.32 Shareholders' equity 8.10 6.65 6.90 6.46 5.38 5.63 Bonus shares (par value) - - - - - 0.23 Cash flow statement in millions of euros Cash flow from operating activities 1,872 1,611 1,520 1,638 1,184 1,165 Dividend -271 -243 -243 -241 -187 -168 Investing 1,194 -1,795 -1,671 -2,081 -1,973 -783 Financing -321 -123 -125 1,233 427 -39 Net cash flow 87 -550 -519 549 -549 175 * European Union regulation requires all publicly listed companies based in the EU to report their financial statements under International Financial Reporting Standards (IFRS) as of January 12005. Since Heineken is not listed in the USA Heineken is not required to publish accounts under US GAAP. 1. Before amortisation, extraordinary income and goodwill. 2. Restated for the 5:4 share splitof 2004. 3. Includes the cash for the payment of the second tranche of BBAG, due in January 2004 All previous years have been restated using the current number of shares outstanding of 489,974,594. Geographical Split* 2005 01/01/2004 - 31/12/2004 IFRS Dutch GAAP** (old) Dutch GAAP (new) IFRS Revenue Western Europe 5,385 6,348 5,740 5,349 Central & Eastern Europe 2,796 1,894 2,502 2,526 Americas 1,733 1,514 1,514 1,516 Africa & Middle East 1,052 890 890 889 Asia Pacific 502 470 470 471 Eliminations 672 n.a. n.a. 689 Heineken Total Consolidated Revenue 10,796 10,005 10,005 10,062 Operating profit Western Europe 465 623 554 562 Central & Eastern Europe 290 129 198 254 Americas 242 269 269 284 Africa & Middle East 196 168 168 185 Asia Pacific 65 59 59 63 Heineken Consolidated Operating Profit 1,249 1,248 1,248 1,348 Assets Western Europe 3,813 4,392 3,786 3,924 Central & Eastern Europe 4,971 3,412 4,036 4,292 Americas 1,241 986 986 1,014 Africa & Middle East 1,106 856 856 825 Asia Pacific 450 378 378 363 11,829 10,024 10,024 10,418 Unallocated Assets 248 394 394 359 Heineken Total Consolidated Assets 11,829 10,418 10,418 10,777 BeerVolume (1000 hl) Western Europe 41,316 52,295 41,311 41,488 Central & Eastern Europe 45,588 31,585 42,598 42,726 Americas 15,123 14,555 14,555 14,549 Africa & Middle East 15,036 13,511 13,511 13,509 Asia Pacific 10,802 9,526 9,526 9,526 Eliminations 9,255 n.a. n.a. 9,170 Heineken TotalConsolidatedVolume 118,610 112,628 112,628 112,628 "UK beer consumption peaked in 1979 at 69.5 million hectoliters. Since then consumption has declined gradually to its current level, below 60 million hl. Excess brewing capacity is another threat to what remains of Britain's regional breweries. Beer production has followed consumption, though there has been a slow but steady increase in the market share of imported beer. Now that large parts of Britain's brewing industry are in the hands of multinational industrial brewers, it's easy to see why more beer could be shipped in from Europe in the coming years. UK beer exports have underachieved as long as anyone can remember. Exports in 1860 and were a little more than they were in 1980, around the 800,000 hl level. But in the last 15 years exports have risen to well over 3 million hl a year." http://www.europeanbeerguide.net/ukstatsn.htm Gradual decrease in beer consumption due to health and cultural reasons pose a threat to the development and advancement of this industry. This not only affects the profitability of existing companies in the industry but also pose as a barrier to entry for new entrants. According to another report, "The amount of beer bought to drink at home has scarcely changed after increasing steadily for decades. Sales of beer as a whole have fallen gradually from a peak in the late Seventies. But the volume of lager has edged up as it has taken market share from ales and stouts. Lager accounted for less than one pint in five sold 30 years ago. Now its share of the UK beer market is about 70 percent. The severity of the beer market downturn means that even lager sales have fallen. The amount of lager that was drunk in the three months to April was nearly one percent lower than a year earlier." http://www.probrewer.com/news/news-002602.php Consolidation and globalization are fashions happening across nearly all industries including brewing. Simultaneously, brewers could do with a clear-headed approach to sustaining consumer faithfulness with their local brands while constructing new trustworthiness with the global consumer through a further aligned approach of branding. Nothing satisfies such a challenge better than a potent portfolio. References Anheuser-Busch Companies, Inc. Investor Relations http://www.corporate-ir.net/ireye/ir_site.zhtmlticker=BUD&script=417&layout=-6&item_id=522073 Accessed December 1, 2006 Anheuser-Busch Companies http://www.anheuser-busch.com/misc/search.html Accessed December 1, 2006 Anheuser invests in Harbin http://www.ap-foodtechnology.com/news/ng.aspid=51834-anheuser-invests-in Accessed December 1, 2006 brandchannel.com | Interbrew Heineken | Brand Strategy| brands | brand | branding news http://www.brandchannel.com/features_effect.asppf_id=62 Accessed December 1, 2006 Cook, Kenneth J. "The AMA Complete Guide to Strategic Planning for Small Business" Chicago: American Marketing Association, 1995 M.E. Porter, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" New York: Free Press, 1980 ---"Changing Patterns of International Competition", California Management Review, Vol. 28, No. 2 (1986) pp. 9-40. ---"Competitive Advantage: Creating and Sustaining Superior Performance", New York: Free Press, 1985. Harry Schumacher; "The global beer industry 2001 review: Toto, we're not in Kansas anymore" March 25, 2002; http://www.findarticles.com/p/articles/mi_m3469/is_12_53/ai_84678710 Accessed December 1, 2006 Heineken International http://www.heinekeninternational.com/pages/content/S2/homepage.aspx Accessed December 1, 2006 Richard Benson-Armer, Joshua Leibowitz, Deepak Ramachandran; "Global Beer: What's on Tap" The McKinsey Quarterly. Issue: 1. Publication Year: 1999. Page Number: 3. Read More