The UK Brewing Industry - Paper Example

The case study conducted by Oliver and Whitehouse provides the real accounts of different encounters that flawed the UK brewing industry before its subservient failure. This paper draws its reference to the case study and analyses the UK Brewing Industry in three different sections in regard to the time when the case study was carried out. This paper analyses the UK brewing industry using the PESTEL model and the Porters Five Force Model.

Section 1: Macro-Environmental Analysis

This section analyses the UK brewing industry using the PESTEL model.

Political (-)

Government restrictions affect the brewing industry in the UK. Currently, the government restricts excessive consumption of alcohol as a way of controlling the binge drink culture. The beer duty increased to 9% with an inflation of 2% in the 2008 budget. The governments decision to increase value-added-tax (VAT) on the bear in January 2011 resulted in increased inflation from 2 % to 4 %(Koller, 2015; Hill, 2014). These regulations make the political factor a threat.

Economical (-)

Economic burden experienced in the UK makes it difficult for brewers to grow as expected. According to (Pavey, 2007), rising cost of commodities and the continuous increase in the price of energy, food tax, and increasing rates of unemployment are also having an adverse impact in regard to the input costs. The increase in the salaries of staff as a result of minimum wage increases and the growing need for national insurance increases the labor costs for brewers hence making it difficult to operate as a result of declining net profits (Bridge, 2011). The UK economic burden threatens the survival of brewing firms.

Social (-)

There are increasing social concerns in relation to binge culture in the UK. Excessive consumption of alcohol is also linked to rising levels of crime, increased domestic violence and marital problems, poor school performance as well as a reduction in employee productivity at their respective workplaces. The continuous government restrictions will result in a deterrence of clients from buying alcohol and beer products (Hill, 2014). The changing sociological environment, therefore, poses a threat to the survival of new firms.

Technological (+)

Technology affects the way in which beer is manufactured, advertised and distributed to the final consumers (Bridge, 2011). Technology enables beer brewing firms to manufacture more brands of beer with different flavors and tastes which appeal to the public (Koller, 2015). Technological growth has enabled brewers to increase their efficiency and reduce their cost of production.For instance, Adams decision to use energy renewable technology in its production system allowed the company to save 30% of the total costs spent on energy annually (Swinnen, 2011). Technology has also improved distribution channels as brewing firms are currently using new techniques such as Electronic Funds Transfer (EFT), Global Positioning systems (GPS), and the portable data collection terminals to improve their distribution process (Pavey, 2007). Technological development is a large opportunity for brewers to increase their sales and overall profits.

Legal (-)

The UK has implemented various laws which impact the brewing industry. There is a stronger implementation of underage consumption of beer regulations in the UK. The UK has also set 80 mg as the legal limit of alcohol consumption before driving(Oliver & Whitehouse, 2015). This limit affects the brewing industry by reducing the number of sales in beer brewing places including pubs and clubs. The increased legislation is a great threat to the survival of new firms as well as the existing one.

Environmental (-)

Environmental measures taken to manage consumption of beer such as reducing carbon (iv) oxide emission by twice the normal amount will result in a reduction in beer consumption hence cause diminishing sales (Swinnen, 2011). There are also regulatory demands to protect the environment through reusing, and recycling which affects the amount of beer consumed and sold in the industry. The rise in transportation and delivery costs of goods also affects the industry by reducing the number of profits made, hence remains a critical threat to the functioning of the new firms.

Key Factors that Impacted the Beer Industry at the Time when Oliver and Whitehouse Conducted the Case Study

Strict regulation, economic volatility, and social changes are the three factors that impacted the performance of the brewing industry. First, the UK government introduced the progressive beer duty requiring small-scale brewers to pay significantly less beer duty than brewers that operated on a large scale (Pavey, 2007). This move led to the entry of many new firms in the market resulting in high competition. Currently, there is a growing concern on the need to reconsider these policies to reinstate the UK brewing industry (Bridge, 2011).

Economic volatility occurred as a result of changes in some macro environmental factors including an increase in the price of fuel, unstable inflation, and growing competition as a result of new market entrants (Hillma, 2007). Unstable inflation caused banks to reduce their financial support to the UK brewery operators. Firms responded to the issue through acquisition deals which led to the creation of large market players that accounted for stiff competition with new entrants. For instance, AB InBev acquired Camden Town Brewery in December 2015(Oliver & Whitehouse, 2015).

Social change which was characterized by changes in demographic profile impacted the survival of brewing companies in the UK. A majority of the UK population was aging (Oliver & Whitehouse, 2015). Peoples ability to participate in social activities tend to reduce over time as a result of growing old and may consume less beer due to increased health risks. Similarly, there was a widening choice in terms of market whereby consumers could obtain their products from alternative sources such as supermarkets (Koller, 2015; Hill, 2014).

Section 2: Structural Analysis Of The UK Brewing Industry From The Perspective Of A Brewer At The Time Of Writing Of The Case

The Threat of Entry High

Economies of scale & Experience Low economies of scale as a result of high concentration of firms Progressive beer duty reduced large players economies of scale

Access to supply and distribution channels More suppliers with concentrated distribution channels including local retailers, pubs and restaurants and pubs.

Expected Retaliation

Development of strategic alliances to control the threat of new entrants. For instance, AB InBev acquired Camden Town Brewery

Government restrictions (e.g. licensing) The government was a major player in the UK beer industry.

Introduction of (PBD) led to concentration of firms

PBD increased from 2% to8% in 2008

Increased VAT raised inflation from 2% to 4%

Incumbency Advantages Incumbents had a wide access to the market

Consumers had different preferences which made incumbents sell a wide variety of products.

Conclusion:

High threat of new entrants due to numerous favorable conditions

Threat of Substitutes Very High Risk

The price/performance ratio of the substitute Prices were determined by the forces of supply and demand.

Substitutes included; Alco-pops, Wine which accounted for a very high risk

Extra Industry Effects Firms started competing on critical factors such as product standardization, pricing, and packaging.

Conclusion: More substitutes increased the overall threat

Porters Five Forces Model is the most effective tool to use when analyzing the UK brewery industry and developing the best business strategy. This model can help determine the competitive nature of a given industry and the market attractiveness as shown in the figure below:

The bargaining power of buyers High Risk

Buyers are concentrated High concentration of buyers

Buyers have low switching costs Low switching threats enabled buyers to buy beers from different suppliers.

Buyer Competition Threat

Changing economic conditions caused buyer competition threats as many individuals could not cater for the growing costs of commodities and their rising demands.

Low Buyer Profits & Impact on quality Low profits as a result of low sales

Conclusion:

High bargaining power of buyers was a high risk due to sing economic burden

The bargaining power of suppliers High Risk

The suppliers are concentrated Suppliers were highly concentrated including Brewer Bredog from Scotland, Watherspoon, Laurel, Spirit, and M&B.

Switching costs are high (it is disruptive or expensive to change suppliers). High switching costs from one supplier due to governments strict regulations

Suppliers can integrate forwards Government allowed only vertical integration

Differentiated products Firms had to invent new survival strategies such as differentiation of products and acquisitions for survival.

Some firms went for substitutes

Conclusion:

The bargaining power of suppliers remained a high risk due to the continuous changes in switching costs and customer demands

Rivalry between competitors High Risk

Competitor Concentration & Balance Firms competed on both local and international basis

The main competitors included AB InBev, Brewer Bredog from Scotland, Watherspoon, Laurel, Spirit, and M&B.

Industry Growth Rate The industry growth rate stagnated with the introduction of the PBD

High fixed costs VAT stood at 4% and PDP 9%

Exit barriers are high

No barriers to exit as firms quitted due to failure to meet their objectives

There is a low level of differentiation Low level of differentiation with firm showing over-reliance on acquisitions and mergers as the main competitive advantages over rivals

Conclusion:

Rivalry between competitors remained high as firms struggled to gain competitive advantages over their rivals

Conclusions Basing on the Five Porters Forces

UK brewing industry provides an opportunity for investors. New entrants need to develop diversified and unique products other than engaging in the brewing of alcohol. In addition, a new firm can use differentiated strategies such as selling through supermarkets and distributing goods to the home of consumers to gain more customers. However, the market may face changes in terms of competitive forces such as suppliers and buyers.Suppliers may hike their prices to make more profits while buyers may change their preferences in terms of places to buy beer and how to spend on social activities. The industry should respond by producing goods that meet customer needs.

Section 3: An Overview of Different environmental Impacts That May Affect the Industry and the Appropriate Responses

According to Swinnen (2011), environmental concerns that may affect the UK brewing industry may entail an increase in craft brewing, increased environmental pollution, and growing health implications, increased competition among industry players. First, the brewing industry will be challenged with the increase in the number of craft brewers as a result of lack of restrictions to entry. Craft brewing which is currently on the rise encourages production of counterfeit beers that not only lack the traditional taste of beer but also pose great health risks. In this case, the brewers should respond by forming unions and developing policies and standards that manage negative practices.

Environmental pollution associated with the brewing industry wastes may also pose a challenge to the brewing industry. In most cases, brewing firms produce large volumes of water as the major wastes which can cause a widespread environmental pollution. Brewers can control environmental pollution by using cleaner technologies for effective production. These technologies should aim to reduce the indus...