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UK Beer Industry Analysis

Porter`s Five Forces

Seminar Paper 2007 19 Pages

Business economics - General

Excerpt

Table of Contents

A) Introduction

B) Porter`s Five Forces Analysis
1. Intensity of rivalry
2. Bargaining power of buyers
3. Bargaining power of suppliers
4. Threat of entry
5. Threat of substitutes

C) Critique of Porter`s Five Forces

D) Conclusion

E) Appendix

F) References

G) Bibliography

A) Introduction

Compared with the rest of the world the UK beer consumption was on rank 51 in 2001 what shows its significance. Within the overall market value of 15,473.8 million pounds (2004), premium lager was the leading segment with a value share of 39.2 %. All in all 5,454.7 million litres of beer have been sold in 2004.2

Below you will find a Porter`s five forces analysis of the UK beer industry which deduces the attractiveness of the industry from its structure. The structure itself influences the corporate strategy which is responsible for corporate success finally. Attractiveness in Porter`s view depends on five forces which influence an industry. Porter says that “the collective strength of these forces determines the ultimate profit potential of an industry.” (Porter 1980, p. 21)3 In order to detect the importance of a single force Porter provides some indicators which will be highlighted.

I have chosen this external analysis tool because it covers a wide range of important influences affecting the UK beer industry. To anticipate the later shown results it will become obvious that some of the forces provided by Porter have a massive effect on the industry especially intensity of rivalry and bargaining power of buyers. Companies acting in the industry have to have good knowledge of the industry structure and its threats to defend or favourably influence it to stay competitive and earn profits. The stronger the forces are the more the industry becomes unattractive.

B) Porter`s Five Forces Analysis

1. Intensity of rivalry

The UK beer industry is ruled by four companies which shared about 76 % of the market volume in 2004, the rest was shared by many other middle-sized and micro-breweries with little market share. (see figure 1) For example, The Society of Independent Brewers (SIBA) on its own has over 500 registered micro- and local breweries just to show the diffusion.4

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Figure 1: Market share 2004 – self created (data by euromonitor 2006) 5

The market is in the maturity phase and will be relatively static in the next few years. An evidence for that is the compound annual growth rate (CAGR) which was -2.8 % from 2000 - 2004 and the forecast that predicts a CACR amounting to -0.1 %.6 (see figure 2)

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Figure 2: source datamonitor 2005 7

To get more or at least to keep their market share under these conditions the companies are forced to skim customers from their competitors. This implicates high rivalry amongst the industry. The main players fight for the mass market and compete against each other heavily whilst the small- and micro-breweries try to find their market niche and compete on that level.

An important point in this context is the possibility of differentiation. The flavour of beer is different and the companies use this way to differentiate. All breweries develop new kinds of beers and add for example lemonade to their standard product to try to differentiate or to diversify in times of market maturity. In 2005 there have taken place “over twice as many beer launches in the UK compared to the year before.” (McCrorie, 2006)8 The opponents will always watch you and react with counteractive measures, if a certain kind of new beer works well the opponents can copy it relatively easy. The standard products like premium lager taste different but the range of beer flavours among the main brands of the major brewers is not so wide because these beers are produced for the mass market which requires a “moderate” flavour what makes differentiation on this level much more difficult. Smaller breweries try to differentiate by for example special tastes which fit the needs of a special region. These beers have become very successful on their level because customers search for new experiences concerning flavour.9

Another way of differentiation in this context is brand marketing. The breweries try to give an own personality to their brands to achieve consumer loyalty and most breweries especially the big ones have a range of different brands - for example Stella Artois, Castlemaine XXXX and Tennent`s belong to Interbrew. (see figure 6 appendix) These brands have often been adopted by acquirement of smaller brewers.10 Brewers use different brands to skim more market share through different flavours and different marketing strategies of the single brands. They have to pay attention that their own brands do not cannibalise each other but cannibalisation amongst their own brands is better than loosing market share to competitors. Differentiation on this level to suggest an image and to get customer loyalty is very expensive especially in mass markets with TV advertising and sport sponsoring on a high level. (e.g. Carlsberg – FC Liverpool)11 Small brewers and microbreweries try to differentiate through marketing activities that focus on long tradition and positive associations coming along with them from the past. Connectivity to a certain region becomes important.12

Recapitulating, rivalry presents a strong force in the beer industry.

2. Bargaining power of buyers

At first you have to define who the buyers are. Beer is a consumer good destined for the end consumer. Single end consumers have little bargaining power because single persons or households buy small amounts compared to the whole market. For the breweries it is not worthwhile to deliver small amounts to single end consumers so they need the help of distributors.

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Figure 3: source datamonitor 200513

On-trade selling in pubs, discos and so on was the biggest distribution channel in 2004 and still is. (see figure 3) Currently there is a trend to off-trade consumption and the amount of beer sales in supermarkets increases because beer is cheaper there.14

In consequence, bargaining power of supermarket/hypermarket chains like Tesco (21 % market share in 2003 – food sector value) or Asda (13 %) is very high because they are bulk buyers of the beer industry and their influence grows.15 (see figure 4)

Off-trade sales of beer by distribution format: Volume in % (2000/2005)

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Figure 4: source euromonitor 2006 16

Brewers have to get listed to get the chance to sell their products. On the other hand it is necessary for the retailers to offer special brands to satisfy customer needs, especially brands with a high market share. Hence, the brewers can reduce the bargaining power of retailers by doing a lot of end consumer marketing (pull marketing) to keep or make their brand popular. All in all bargaining power of retailers depends on their purchase volume but has aggravated with big retailer chains and combined convenience store chains.

The second and biggest distribution channel is the on-trade sector. Big pub chains with hundreds of single pubs/clubs (for example JD Wetherspoon with 657 pubs in 2005)17 can put pressure on the breweries as well because they purchase huge amounts. Single independent pubs on their own have no bargaining power but they on their part order from wholesalers which can put pressure on breweries because of purchasing huge amounts as well. Obviously, single participants of the one-trade sector have less bargaining power than the big retailers because of less concentration.

Switching from one brand to the other one is very easy for the end consumer because they just have to go to a supermarket or pub and buy another brand. Hence, it is necessary to get a consumer loyalty for example by the use of marketing instruments. If the end customer does not buy your beer, the retailers and pubs will take your products out of the shelves consequently – their switching costs are relatively low, too.

The relatively importance of a beer brand to the on-trade or off-trade sector depends on end customer needs. In regions where people want special brands to be in the shelves or to be served in bars, the importance of this brand increases and the bargaining power of the distributors to the brewery decreases – the main supermarket chains need the famous beer brands to have a complete assortment for example.

Recapitulating you can say that bargaining power of buyers has increased in recent years because of big distributors putting pressure on the breweries.

3. Bargaining power of suppliers

In short, brewers need the following main resources from their suppliers: The brewing equipment, cans/bottles/vats, packages and the raw materials to brew beer (water, barley, hops, malt, yeast).

Of course, brewers need constructions to brew the beer and the larger the brewery is the more expensive the constructions are. All in all the influence of these suppliers is not very high because the technology required by the brewers is little ambitious and there are a lot of companies which are able to do this kind of mechanical engineering.

Cans, bottles, vats and packages are needed for transport and marketing. Although, there are only three main can producers in the UK for example, big breweries are bulk buyers for these suppliers and have big bargaining power on their side consequently.18 Smaller brewers have less bargaining power and micro breweries have to accept the price that is given. For brewers it is relatively easy to switch from one producer to the other because these products are standardised in the majority of cases consequently switching costs are relatively low. A new can supplier for example only has to change the brand logo on the can.

Finally, brewers need agrarian raw materials (barley, hops, malt, yeast) to brew beer by itself. About 90 %19 of beer sold in the UK is brewed in the UK, consequently UK-brewers buy a lot of these products. Prices in agriculture decreased considerably in the last ten years because of oversupply. (see figure 5) In the case of oversupply and comparable products like in agriculture the suppliers have virtually no bargaining power but in times of insufficient supply after a crop disease for example things can change.

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Details

Pages
19
Year
2007
ISBN (eBook)
9783638043908
ISBN (Book)
9783640868490
File size
567 KB
Language
English
Catalog Number
v89692
Institution / College
University of Lincoln – School of Business and Law
Grade
1,3
Tags
Beer Industry Analysis Strategic Management Porter`s Five Forces Five Forces Porter

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Title: UK Beer Industry Analysis