Global Forces and the European Brewing Industry

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Table of Contents

Executive Summary
Introduction
Industry Analysis
SWOT Analysis
Conclusion
References

Executive Summary

The aim of the study is to analyze the environmental factors that have contributed to the decline of the European beer industry using PESTEL and Porter’s five forces analysis.

The results were used to perform a SWOT analysis for Heineken. The findings reveal that the decline of European beer industry has been caused by high competition and government campaigns against alcohol consumption. Additionally, the industry has a low growth rate since it has reached its maturity stage.

Brewery companies are responding to these trends through mergers, acquisitions and alliances. Heineken’s main strength is its strong brand image. Over reliance on few brands and the European market is the main weakness of Heineken.

The opportunities available for Heineken include introducing new products and joining overseas markets. Overall, the environmental trends are likely to have a negative effect on Heineken’s future competitiveness.

Introduction

Purpose

The purpose of this report is to analyze the environmental factors that have contributed to the decline of Europe’s beer industry. In particular, PESTEL and Porter’s five forces analyses will be used to analyze the European beer industry.

The results will be used to conduct a SWOT analysis in order to determine the effects of the industry trends on Heineken’s competitiveness.

Scope

The study focuses on the trends in the external and competitive environment of the European beer industry. Additionally, Heineken’s internal environment will be analyzed.

Background

The study focuses on the European beer industry. It investigates the effect of the competitive global environment on the European beer industry.

Assumptions and Limitations

Lack of current or updated information about the trends in European beer industry is the main limitation of the study. Thus, the statistics and data used in the report are assumed to be accurate.

Methodology

The data used in the study was collected through secondary literature review. The main sources of data included journals and strategic management textbooks.

Industry Analysis

PESTEL Analysis

PESTEL analysis is a tool used by managers to assess the effects of the trends in the external environment on their businesses. PESTEL analysis considers the influence of political, economic, social, technological, environmental and legal trends on businesses.

Political Trends

Europe has a relatively stable political environment which promotes investment and trade between member countries. The formation of European Union led to the removal of tariff and non-tariff barriers to trade in Europe (Rojas and Tianji, 2011, pp. 10-12).

This enabled beer producers to join European countries of their choice through exports and foreign direct investments. Trade liberalization in the region has led to an increase in cross-boarder mergers and acquisitions, thereby increasing competition.

Economic Trends

In 2010, the economy of Europe, as a region, grew by 1.8%. The region also recorded an inflation rate of 3.1% in 2010. About 17% of Europe’s population leaves below the poverty line. In general, the production costs for beer have increased by approximately 24% since 2006.

Additionally, nearly half of the European countries have significantly increased taxes on beer, thereby increasing the prices of beer. The slow economic growth and high prices have led to low demand for beer.

Social Trends

Concerns over the health risks associated with drinking beer have increased in the last two decades. Government and non-governmental organizations are actively campaigning against excessive drinking (Zygadlo and Slondski, 2010, pp. 59-74).

The significant reduction in sales for beer is mainly attributed to anti-alcohol campaigns.

Drinking habits have also changed, with more consumers preferring to buy beer through retailers (off-trade) instead of bars and restaurants (on-trade). Pan European beer brands tend to be more popular among Europeans than the imported brands.

Technological Trends

Adoption of modern information and communication technology has enabled beer producers to enhance efficiency in their supply chains.

Through research and development, alternative sources of energy such as bio-fuels have been developed and adopted by producers. The high rate of technological transfer and investment in research and development in Europe has improved access to modern production technologies (Bollman and Theuvsen, 2008, pp. 63-88).

Overall, the use of modern technology has led to economies of scale in production and distribution of beer.

Environmental Trends

Beer production depends on agricultural produce such as barley. Changes in climate due to global warming continue to affect the production of barley negatively. Thus, the production and consumption of beer is likely to decline in future (Woolverton and Parcell, 2008, pp. 420-430).

Legal Trends

The beer industry is highly regulated due to the health risks associated with alcohol. Consumption of beer is controlled through high taxes and restriction on beer adverts. The high regulation discourages production and consumption of beer.

Porter’s Five Forces Analysis

Porter’s five forces analysis enables managers to analyze the factors or forces that influence competition in their industries.

New entrants

Joining the beer industry requires a lot of financial resources which many firms are not able to access. The tight regulation associated with the beer industry also makes it unattractive to new entrants.

In the context of Europe, high competition limits the chances of rapid market penetration by new entrants. Consequently, the threat attributed to new entrants is low. This means that the incumbents can not easily lose their market shares to new firms.

Substitutes

Beer faces competition from its substitutes such as non-alcoholic drinks and other alcoholic drinks such as wine. The consumption of wine is increasingly becoming popular in Europe, thereby reducing the market share for beer.

Soft drinks such as coca-coal cost less then most beer brands. Unlike beer, soft drinks are associated with little health risks. Thus, the threat attributed to substitutes is high in the beer industry. This implies that demand for beer is likely to reduce as consumption shifts to other drinks.

Power of Suppliers

The suppliers in the beer industry include farmers, energy producers and manufacturers of packaging material. There are many farmers supplying the brewers with undifferentiated products such as barley.

The farmer’s products are very important since they are the main ingredients in beer production. The packaging and energy industries are highly concentrated. Thus, we can conclude that the suppliers have a moderate bargaining power.

Power of the Buyers

The producers of beer have low switching costs, and can easily shift from one supplier to the other. There are also a variety of substitutes for inputs such as barley, packaging material and energy.

The threat of backward integration is high since some beer producers invest in the production of inputs such as packaging material and barley. In the context of consumers, changes in drinking habits make it difficult to ensure customer loyalty. Increasing brand identity also makes it difficult to shift consumption from one brand to the other.

Additionally, the shift towards off-trade consumption of beer has enhanced the bargaining power of retailers. We can conclude that buyers have a fairly high power in the industry.

Competitive Rivalry

The threat attributed to competition in the beer industry is very high due to the following reasons. First, there are very many producers and importers of beer in the industry. Second, nearly all firms have embarked on product differentiation in order to attract more customers.

Third, heavy investment in production plants is an exit barrier to firms that intend to leave the industry. Finally, the industry has a low growth rate since it is at its maturity stage. The threat attributed to competition is likely to lead to low sales and profits among beer producers.

SWOT Analysis

SWOT analysis enables managers to identify the strengths and weaknesses of a business (internal environment). It also helps managers to identify the threats and opportunities that are available in the industry (external environment).

Heineken

Heineken is the leading producer of beer in Europe. It has 11.7% of the European market and operates over 115 breweries.

Strengths

As the largest brewery company in Europe, Heineken boasts of a premium brand that is known for quality and value. The effective advertisement strategy used by Heineken has helped it to enhance its brand equity across Europe.

The visibility of Heineken’s products is also high due to its presence in over 170 countries. By focusing on improving efficiency and reducing costs, the firm has been able to remain competitive in Europe.

Weaknesses

Heineken has the following weaknesses. First, Heineken mainly operates in Europe which accounts for 75% of its sales. Thus, a reduction in demand for beer in Europe is likely to have adverse effects on its profits.

Second, Heineken over relies on its two main brands. Thus, it is likely to lose customers to producers with a variety of brands.

Opportunities

The low threat posed by new entrants in European market, coupled with rapid increase in demand for beer in emerging markets such as Asia is an opportunity for Heineken to increase its market share and profits.

The rising demand for non-alcoholic drinks is also an opportunity of Heineken to develop new products (non-alcoholic and flavored drinks).

Finally, the growth in off-trade market is an opportunity for Heineken to improve the visibility of its products by distributing the products through well established and efficient supermarkets.

Threats

The threats facing Heineken include the following. First, the threat attributed to competition is likely to reduce its sales and profits. Second, the high regulation on drinking and alcohol production is also likely to reduce its sales.

Third, the European market which Heineken depends on has reached its maturity stage. Thus, chances of growth are limited. Finally, the threat posed by substitute products is likely to reduce the market share for Heineken’s products in Europe.

Effect of the Trends on Heineken

Market stagnation is likely to be experienced in Europe. Hence, there will be little scope for growth in the European market. High competition and slow market growth will result into a decline in Heineken’s sales and profits. The current trend in consolidation is likely to continue.

Consequently, more international firms are likely to join the European market, thereby reducing Heineken’s market share. Finally, Heineken’s dependence on only two brands is likely to lead to brand dilution, thereby reducing its competitiveness.

Conclusion

The European beer market has traditionally been the largest in the world. However, the fortunes of the market have since declined due to high competition, high regulation and poor economic performance in Europe.

Heineken owes its success in Europe to a strong brand image, product visibility, and efficiency in production. Heineken’s weaknesses include over reliance on a few brands and the European market.

The opportunities available to Heineken include the rise in demand for beer in emerging markets such as Asia. Overall, the trends in Europe’s beer industry are likely to have negative effects on Heineken’s future competitiveness.

References

Atoyan, R., 2011. Beyong the Crisis: Revisiting Emerging Europe’s Growth Model. European Journal of Operational Research, 97(3), pp.113-116.

Bollman, C., and Theuvsen, L., 2008. Strategic Management in Turbulent Markets: the Case of the German and Croatian Brewery Industry. Journal for East European Management Studies, 13(1), pp.63-88.

Erickson, G., 2009. An Oligopoly Model of Dynamic Advertising Competition. European Journal of Operational Research, 197(1), pp.374-388.

Jain, S., 2011. Global Competitiveness In the Beer Industry. European Journal of Operational Research, 34(7), pp.47-53.

Meger, A., 2008. Apartheid and Business: Competition, Monopoly and the Growth of Malted Beer Industry in South Africa. Business History, 50(3), pp.272-290.

Rojas, C., and Tianji, S., 2011. Tax Incidence when Quality Matters: Evidence from the Beer Market. Journal of Agricultural and Food Industry Organization, 9(1), pp.10-12.

Woolverton, A., and Parcell, J., 2008. Can Niche Agriculturalist Take Notes from the Craft Beer Industry? Journal of Food Distribution Research, 39(2), pp.420-430.

Zygadlo, K., and Slondski, T., 2010. Sustainable Growth Trade in the Strategic Analysis of Brewery Industry. Journal of Agricultural and Food Industry Organization, 2(1), pp.59-74.

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