Case: European Brewing Industry - Essay Example

European Brewing Industry Introduction Recently there has been a dramatic change in the competition of breweries in the global market. The change is as a result of the market domination by breweries with high power. That is the same case in Europe. The change in the European market has prompted several companies to use several strategies to remain relevant in the market.PEST Analysis The PEST analysis performed on the European Breweries proved and portrayed a positive image of the industry in terms of independence (Warburg 2000).

Internal and external factors were considered when analyzing the industry as a whole. It focuses on the macro environment, and how these changes affect the industries (Dumbliauskaite, et al., 2010).Political: Beer consumption could be at the decreasing edge in Europe due to the unending campaigns against driving when one is drunk. In as much as the campaigns are geared towards ensuring that people are safe, it has tremendously reduced beer consumption rate (L. Richmond 2000). This is because most people do not want to be caught on the wrong side of the law.

Economic: Beer consumption in Europe is known to be constantly high, but decreasing demands for beer are on progress while in other countries, the demand is rising (Dinkhoff, 2010). The increase in the demand for beer has been attributed to the increase in people’s economic status. Several people’s income is on the rise, and this puts them in a position to afford comfortably a bottle or two.Social: The health risks and hazards associated with alcohol are risk; thus, beer consumption is becoming a concerning issue among the consumers (Spicer, et al., 2009). Several campaigns have been mounted by non-governmental organizations and social institutions.

They strive to create awareness of the risks posed by excessive consumption of beer. In this case, some consumers have desisted from taking beer resulting to loss of some potential market.Technological: Advancement in technology in the processes of beer production has made it easy and accurate. This is because sophisticated machines are used to produce large volumes of beer at a shorter period (C. H. Tremblay & V. Tremblay 2004).Opportunities and Threats            Beer consumption has proved to be a serious threat for the European governments.

The increasing health researchers are all pointing towards beer as a potential cause of health problems to human health (L. M. Richmond & Turton 2004). The reports that are being given on accidents and violence concerning alcohol influence have led to negative campaigns against the European brewing industry (Sakamoto, 2012).The opportunities are among the increasing demand of beer and alcohol related drinks and helps in a steady development of the economic crisis in the European countries (Kinsella, et al., 2008).  Analysis of the five forcesCompetition among the present firms is extremely high and unavoidable; thus, firms are forced to create ways in which they can curb the various competition challenges in the market (Witcher & Chau, 2010).

Threats of low penetration since some private companies are gaining access to the market control. Therefore, new breweries are predated and thus do not survive competition in the market (McKern 2003). Substitute and attractive products are also a challenge in the market, in that production of beverages that may replace the beer is swiftly penetrating into the market. The demand is also growing at a magnificent rate (Haberberg & Rieple, 2008). Suppliers’ bargaining Power: The purchasing costs entailed in European brewing include the raw materials and the peripheral packaging materials.

The companies that solute for the brewers are few in the region; thus, the existing ones dominate the market. This makes them raise their prices (Adams, 2006).Consumers’ bargaining power: The consumers can bargain a lot in order for the brewers to make price changes. However, this can only work when the suppliers also co-operate since the beer prices depend on the price of the raw materials (Lewis & Young 2002). Chances are that the brewers may fall for their bargains. These are the strategies that are used to retain customers and attract more consumers.

 The European policy allows vertical integration in the production and distribution of alcohol. Through the means of contracts with beer points and pubs, vertical integration is incorporated. These kinds of agreements help to obstruct the entrance of new breweries in the market (Dumbliauskaite, et al., 2010). The market behavior and structure help to investigate the integration of the vertical agreements in the beer industry in Europe. The market structure is the kind of market that the brewery firms operate (Witcher & Chau, 2010).

Within the brewery industry, an observance of the market behavior is a vertical arrangement where firms may decide to come together through technological processes, distribute, market, and combine for the economic processes. Breweries in Europe are using the strategy of vertical arrangements with bars and pubs. The authority to set the prices is determined by a common ground (Dinkhoff, 2010). In the European brewery industry, there are two types of contracts. They include; loans agreements and lease agreements.

Both forms of agreements have a sense of purchase contracts in them that ensure that the bars serve beer under their supervisions and to their benefit (Schmitt 2011).In vertical integration, the factors considered include; the competitors and in what manner they conduct their business. This enables competing companies to focus on the target areas. In this cases; the merchants purchase the brew directly from the brewers as retailers and create a channel of distribution and hardly do the consumers get it directly from the brewers.

Bars can purchase directly from their brewers or beer merchants (Welford, 2012). In as much as beer consumption in within homes and from the supermarkets has increased, the consumption through the caterers is still fifty percent of the total consumption of the brews (Hechavaria, 2005).The diagram below shows the chain of vertical arrangements in European breweriesBarley FarmerGrain MerchantMalting plant and other inputsBreweryRetailBeer MerchantCateringConsumerTheories of Vertical IntegrationChicago school theories of vertical integrationThis was developed and implemented in the Chicago schools, and it evaluated the effects of vertical arrangements on competition.

Traditionally, the vertical integration has been based on two models named; monopoly leverage model and the successive monopoly model or model of double marginalization. These models helped the Chicago school model to enhance their model on vertical integration. For instance, the monopoly leverage model argues that an organization with a monopolistic market would not have the urge to try and create another monopolistic market (Spulber, 2011).The successive monopoly model lies on the effect of integration between a downstream monopolist and one that is upstream.

It shows that the vertical arrangement is successful and causes improvement to the welfare. In these cases, vertical integration causes both consumers and the firm to have notable improvements (Hill & Jones, 2012). Opportunities of Vertical arrangements include:It provides a way of economic access by smaller forms of brewers. This is then delivered to consumers and enables swift competition with the national brewers (Wilson 2005).It enables brewers to practice and implement proper managerial tactics together with those at the retail level.

It provides an effective way of providing facilities of tenancy to the retailers.It enables the brewers to control the draught beer that is in for distribution.They work towards increasing harmonization and standardization in the economies of scale (ARC Advisory Group, 2004).Challenges of vertical arrangementVertical agreements result in the exclusion of some parties.It also comes in as a barrier in the penetration of new people into the market of pub running.It decreases competition in the market since the businesses are reduced.

ConclusionThe vertical strategy used by European brewing companies is extremely effective. This is because it enables them to have a share of the market despite its competitive nature (Katsigris & Thomas 2006). However, in order to stay in the market for long and remain relevant, European brewing companies should seek ways to improve the successive monopolistic market style. ReferencesAdams, W. J., 2006. Beer in Germany and the United States. Journal of economic Perspectives, 20(1), pp. 189-205.

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