Whitbread assignment

BibliographyThere are no sources in the current document.

Carol Pickering

Assignment 1 Business strategy

EXECUTIVE SUMMARY

Whitbread PLC founded in 1742 by Samuel Whitbread the first mass production brewing plant in Georgian London. Whitbread had always been known for brewing and running pubs. A complete change in direction in 2001 saw the selling off of both the brewing and the pubs and a new era of hotels restaurants and coffee shops began. 2011 see the core estate of premier inns several restaurant chains and costa coffee. These are not confined to the UK but Whitbread now sees business as global. Their vision is to build the best large scale hospitality brands in the world but still incorporating the values the Sam had in the 18th century.Whitbread have core values that are simple yet strong and three words, Genuine, Confident and Committed. These can be seen as to what the company aspires to and how they wish the business to conduct itself.As a global corporate business Whitbread can be seen to be creating value for money and creating a complete customer experience focusing on areas of the industry that are expanding value for money hotels and family restaurants as well as ever popular coffee shops.In the financial report for 2010/11 there were as can be expected no financial objectives there were however several covering corporate responsibility from green issues such as energy saving to ethical objectivessuch as funding of schools for children in coffee growing

regions. Also improving customer experiences stronger offers and expanding the business around the globeThe vision strategy and core values for Whitbread are to the point focused and easily understood. The mission statement however is a little weak in that it does not contain and the necessary elements of a good mission statement. It focuses on its brand market and its philosophy with no mentions of employees or its corporate responsibility which both hold strong focus in the annual report for 2010/11Financially Whitbread has gone from strength to strength. Expanding the business across the globe opening hotels and coffee shops in foreign shores has led to increase in like for like sales and profits. Turnover in 2010/11 was up 11.5%. Revenue in hotels and restaurants up 10.6%. Growth in costa coffee saw a massive increase of 24.7% and Costa saw an increase of 38.4% in its operating profit for the financial year.Operating profit grew from 3188m in 99/00 to £250m the year after the radical change in direction to £308.8m in 10/11. Taking such a step in redirection was a gamble some would say. Having a solid strategy strong core values and a clear aim has lead Whitbread from strength to strength not nationally as was but globally as is.

CONTENTSIntroduction……………………………………..page 1History of Whitbread………………..……….…page 1Whitbread Strategy…………………………….page2Mission Statement……………………………..page 2Vision……………………………………………page 3Core Values…………………………………….page 4Objectives……………………………………….page 5Financial Analysis……………………………..page 5Conclusion……………………………………..page 6

1.INTRODUCTIONWHITBREAD STRATEGYUsing PESTEL (Political, Economic, Social, Technological Environmental and Legal) an organisation can influence its strategy and alter it as the factors change. Politics covers changes in government; economics are influenced by exchange rates and world growth. Social covers demographics and technological covers innovations such as the internet. Environmental covers green issues and legal covering legislation such as health and safety (Johnson.G, Scholes.K, Whittington.R 2008).Whitbread’s strategy is focused on creating value for money and the customer experience creating a link to a set of objectives and an incentive scheme for managers that depending on the brand can be up to 100% of the basic salary. (www.whitbread.co.uk/benefits).   Rewarding individuals motivates a team, the interest levels increase in those areas of focus and the strategy becomes the employee’s everyday focus and it is understood. The team are motivated to perform to the best of their ability (Kaplan.R,Norton.D, 2004).   Whitbread Strategy Appendix iMISSON STATEMENTWhitbread mission statement Appendix ii“A mission statements aim is to provide stakeholders with clarity about the overall purpose and raison d’etre of the organisation.” (Johnson, Scholes, Whittington 2008). 3.By early 21st century mission statement were widely used by organisations, Barkus regarded them as weak and varying

( Barkus.B, Glassman.M, McAfee.B, 2000). However Rarrek Vitton and Bart Baetz found a positive influence on returns for those organisations with an effective mission statement. (Bart,C., Baetz,M. 1998) found a positive influence on returns for those organisations with an effective mission statement. Mission statements should contain some or all or nine components (Appendix iii) The Whitbread statement does not contain all nine of these components. It touches on its brand “hospitality brand” Market “the world”. Its philosophy could be interpreted as “outstanding value”. There is however no mention of the employees or public image both of which hold focus in the last annual report with regard to employee qualifications and corporate responsibility (www.whitbread/annualreport.co.uk )VISIONWhitbread vision statement (appendix iv)A vision statement gives an insight into direction the organisation wants to take. It gives direction to the stakeholders and why and how to support the organisation (Kaplan.R, Norton,D.   2004).   Profitalone will not motivate employees an organisation they see profit as money the management use and pay-out to shareholders (Quigley.J, 1994). A combination of a vision for employees to work towards and the generation of profit are needed for the success of an organisation.Whitbread in their vision statement give a clear and concise direction for the company using phrases “best large scale hospitality brands in the world” and “most 4.customer focused organisation there is”. The stakeholders know the direction the organisation is going and how it will achieve this.CORE VALUESTo instil a set of core values within an organisation and will define the way in which the organisation is run. These values will tend towards values in which the organisation wishes to reach or aspire rather than what it is. These values are usually linked to corporate responsibility and are variable and

misleading (Johnson.G, Scholes.K, and Wittington.R 2008). Arguably these core values are the basis on which an organisation work and conduct themselves. Whereas strategies will change according to outside influences the core values will not change (www.nps.gov )Whitbread has three core values  1. Genuine – really caring about customers  2. Confident – striving to be the best at what we do  3. Committed – working hard for each otherThese values would not need to change even if the business did. PESTEL influences do not affectthe 3 values for Whitbread. These can remain the focus for the company in challenging times.

5.OBJECTIVESWhitbread objectives (appendix v)“Clear and explicit and the basis upon which options are evaluated” (Johnson.G, Scholes.K, Whittington.R, 2008 p31)Objectives are formulated in relation to sales profits and aimed at both unit and corporate level. There are market based objectives that are linked to service repeat business and market share these are more commonly called targets. Both objectives and targets need to be measured (Ansoff.I, 1968). These measured and times objectives can focus on areas within a business that are in need of attention (Johnson.G, Scholes.K, and Wittington.R 2008). While within the Whitbread report there were no clear financial objectives those that were laid out are environmental (Appendix v) and called targets rather than objectives. When using the SMART criteria for creating objectives, Specific Measurable Attainable Realistic and Times all the targets meet this criteria. (Kerry 2002).FINANCIAL ANALYSISWhitbread turnover 2010/11 was £1599.6m up from £1435m 2009/10 a growth of 11.5%. gross profit 2010/11 was £1362.5m against £1221.5m 2009/10 an increase of 0.75%. Whitbread is

split into 2 divisions hotels/restaurants and Costa Coffee. Revenue from the hotel/restaurants 20010/11 was £698.6m an increase of 10.6%. like for like sales were up 8.2% against a negative of 4.3% 2009/10.Restaurants had positive LFL sales of 3.3% and the operating profit was up 14.7% to £283.4m. Costa 6.Coffee revenue 20010/11 was £425m an increase of 24.7% like for like sales of 7.8% and an operating profit of £50.1m an increase of 38.4% (www.whitbread.co.uk)CONCLUSIONWhitbread has a clear defined strategy vision and strong core values. Each is easy for stakeholders to understand and form a strong base for the brand across the globe. The mission statement is however missing several of the key components including employee and corporate responsibility. This has not however hampered the continuing success of the company with sales and profits up again at the end of the last financial year.

Strategic Hospitality Management

Whitbread PLC

Module Resit Assignment

DECLARATION OF OWN WORK  * I composed this work myself.  * This work has not been accepted in any previous application for a degree or diploma, by myself or by anyone else.  * The work, of which this is a record, has been done wholly by me.  * All verbatim extracts have been distinguished by quotation marks and the sources of our information have been specifically acknowledged.

Whitbread PLCIntroductionThis is a strategic management report for Whitbread PLC. This report includes a strategic analysis of the company which will result in a new strategy for the company to fulfil their vision.Whitbread is a multiple business hospitality firm established by Samuel Whitbread in 1742. The company started as a brewery and became a well-known brand in the brewery industry. In the year 2001, Whitbread went in another direction by selling its breweries. the new focus was on the hospitality business by operating hotels and restaurants. Whitbread PLC is currently operating in the hotel sector with Premier Inn, a budget hotel brand with over 600 hotels. With 4

brands, the company is part of the restaurant sector in the UK. These brands are Beefeater, Table Table, Taybarns and Brewers Fayre. The last brand which is part of Whitbread PLC isCosta Coffee, the fastest growing coffee shop chain in the UK.

The Whitbread Way ForwardThe mission of Whitbread is to build the best large-scale hospitality brands in the world by becoming the most customer-focused organisation there is. To achieve this Whitbread wants to provideoutstanding value to their guests to make them feel special resulting in high customer retention.

 “The Whitbread Way Forward”

Whitbread’s core values are genuine; which stand for their commitment with their guests, confident; they want to be the best in their work, and committed; Whitbread people have to stand for the company and work hard together to achieve the highest results.Internal analysisStrengths & WeaknessesStrenghtsHealth & SafetyThe company finds health and safety of highest importance for their guests as well as for their employees. The company sets high standards and these are well monitored.Distribution Whitbread has a excellent distribution of their products in the UK. In every town of the UK a Whitbread brand is located. Next to that is 84% of the UK habitants living within 5 miles of one or more of the Whitbread brands.EmployeeWhitbread has strong affection with their employees. Whitbread people have excellent training programmes. Whitbread finds it very important that their employees feel well and are happy.

They will emit this and guests can notice this. When employees are happy, guests feel happy, is one of the thoughts of Whitbread.

WeaknessesDistribution in market segmentsThe hotel and restaurant brands of Whitbread are mainly focussing on the budget market. There is not a spread over different segment as the mid and luxury segment. This means that they possibly miss chances.

Whitbread’s ResourcesTangible resourcesExpansion of locationsWhitbread has a wide range of locations for their hotels, restaurants and coffee shops. 2200 outletsacross the UK and other international locations.Intangible resourcesBrand nameDuring the years, Whitbread has created a strong brand reputation with its different brands in different hospitality sectors.

Human resourcesWhitbread has high managerial capabilities. The management team exists out of people who have experience in different sectors and at different brands. This creates a great cohesion of knowledge.Whitbread strives to have high team engagement. Personnel is involved in operations and decisions of the company. Next to that, Whitbread has a great trainings programme for their employees. Showing that you care about your employees will create employee loyalty.

Core competences of WhitbreadAcquisitionDuring the years, Whitbread has gained great experience in the

acquisitions of hospitality companies. Whitbreads’ future plans are to expand more in the UK as well as globally. This already existing knowledge is of great use.Balance between quality and valueMost difficult for an hospitality company is to find good balance between quality and value of products and services. Whitbread strives to have a continuous quality against a reasonable price. These goals have shown their success because on the YouGov’s Brandindex, Premier Inn was at the top position of good quality – value balance.Effective promotionResearch from YouGov shows the results of effective promotion. The question was:  "If you've heard anything about the brand in the last two weeks, through advertising, news or word of mouth, was it positive or negative?". Premier Inn came out as a winner with the most positivepromotion.

Resources | Treshold Resources   * Well educated employees   * Diversity in management team | Unique resources   * Brand reputation   * Expansion of brands   * Awards |Competences | Threshold Competences   * Providing good quality   * Effective promotion   * Providing good customer service | Core Competences   * Employee loyalty   * Experience in acquisitions |

Competitive advantageOut of the previous information it can be concluded that Whitbread has a competitive advantage on different subjects. With their strong brands they stand for a good balance between quality and value. This is achieved by a high level of knowledge and experiences.

External analysisOpportunities & threatsOpportunitiesForecasted increase of occupancy

For the UK there is an increase in occupancy forecasted for the coming years. In combination with a higher RevPar this will result in higher revenues. UK guestsDue to the decrease in consumer confidence as a result of the high unemployment rate, it is expected that UK citizens will choose for spending their holidays in the UK itself. Because of the great brand reputation of Whitbread this will result in potential higher revenues.Forecasted GDP growthThe coming years UK expects a growth in the GDP. This means that consumers will be able to spend more. This not necessary means that their spending will be in the tourism industry.ThreatsDecrease in consumer confidenceThere is a decrease in consumer confidence, due to the high unemployment rate and the high VAT. This means that good quality needs to be achieved to keep the good brand reputation.HighcompetitivenessThere is high competitiveness in the hospitality industry due to the impact of technogical trends. Internet and social media give customers a increased opportunities for searching for the best deal.

PESTELPoliticalThe UK has increased the VAT. The hospitality industry is influenced by this factor. This high VAT   has impact on the consumers. The high rate of VAT makes the UK uncompetitive in other European countries, because it is a cause of the high prices of products and services.EconomicThe UK has a high unemployment rate. This has impacted the consumer confidence. People have become more selective in buying goods and services. Sociocultural

The UK has the longest working hours of the European countries. People have a busier live and are fast moving. A trend in the fast-food sector is that people, instead of unhealthy products, choose for healthy products of good quality.Guests in the hospitality companies are searching for a “feel at home” environment. They want to feel comfortable in a non-threatening environment. They have high expectations of service.Consumers are looking for products of good quality. This means that they want to know exactly what there are buying and eating. Within this trend, sustainability and environmental friendly has become more and more popular.

TechnologicalThe hospitality industry has undergone a real technological boost. The use of internet and social media has become of greatest importance for companies. Consumers “shop” on the internet to look for the company that fits bests to their wishes. This leads to a extremely increasingcompetitive environment. Consumers compare prices and are looking for the best deals. Nowadays 77% of hotel bookings are now made through automated channels. Online bookings also count for restaurants.EnvironmentalCompanies and consumers are involved with the environmental changes. “Going green” is an upcoming trend. Companies try to work on waste-reduction, water consumption and carbon reduction to show that they have affection with the environment. For consumers this is the same. They often prefer companies which show their corporate responsibility than those who don’t.LegalThe hospitality industry has to cope with high health and safety standards.

SWOTInternal | Strengths   * Distribution of business   * Employee loyalty   * Health and safety | Weaknesses   * Distribution in

different market segments |External | Opportunities   * Increase GDP and occupancy   * UK guests | Threats   * High competitive market   * Decrease consumer confidence   * High VAT |

Financial AnalysisFor the financial analysis, the balance sheet and income statements from past three years are used. To analyse the financial situation, an horizontal and vertical analysis have been made and a ratio analysis.

Income statement |in millions £ || | | | | | | | | | | | | || | 1 March 2012 | | 1 March 2011 | | 1 March 2010 | | | Difference 2011 to 2010 | Difference 2012 to 2011 | Difference 2012 to 2010 || | | | | | | | | | | | | |Revenue | | 1778 | 100% | 1599,6 | 100% | 1435 | 100% | | 11% | | 11% | | 24% |Cost of sales | | -288,4 | -16% | -237,1 | -15% |-213,5 | -15% | | 11% | | 22% | | 35% |Gross Profit | | 1489,6 | 84% | 1362,5 | 85% | 1221,5 | 85% | | 12% | | 9% | | 22% |Distribution Costs | | -969,2 | -55% | -886,6 | -55% | -830,3 | -58% | | 7% | | 9% | | 17% |Administrative expenses | | -174,7 | -10% | -166 | -10% | -138 | -10% | | 20% | | 5% | | 27% |Operating profit | | 345,7 | 19% | 309,9 | 19% | 253,2 | 18% | | 22% | | 12% | | 37% |Share of loss from joint venture | | -0,7 | 0% | -2,8 | 0% | -3,1 | 0% | | -10% | | -75% | | -77% |Share of profit from associate | | 0,9 | 0% | 0,8 | 0% | 0,7 | 0% | | 14% | | 13% | | 29% |Finance costs | | -43,4 | -2% | -38,1 | -2% | -43,9 | -3% | | -13% | | 14% | | -1% |Finance revenue | | 3,3 | 0% | 1,4 | 0% | 1,1 | 0% | | 27% | | 136% |

| 200% |Profit before taxation | | 305,8 | 17% | 271,2 | 17% | 208 | 14% | | 30% | | 13% | | 47% |Underlying tax expense | | -84,4 | -5% | -83,7 | -5% | -71,1 | -5% | | 18% | | 1% | | 19% |Exceptional tax and tax on non-GAAP adjustments | | 44,6 | 3% | 34,6 | 2% | 23,1 | 2% | | 50% | | 29% | | 93% |Net profit from continuing operations | | 266 | 15% | 222,1 | 14% | 160 | 11% | | 39% | | 20% | | 66% || | | | | | | | | | | | | |Discontinued operations | | | | | | | | | | | | | |net profit on disposal of discontinued business | | 0 | | 0 | | 0 | | | | | | | |profit for the year from this continued operations | | 0 | | 0 | | 0 | | | | | | | |Profit for the year   | | 266 | | 222,1 | | 160 | | | | | | | |

Whitbread PLC |Balance sheet |in millions £ |Year ended | | 1 March 2012 | | 1 March 2011 | | 1 March 2010 || | | | | | |Intangible assets | | 206,6 | | 204,3 | | 150 |property, plant & equipment | | 2580,5 | | 2415,9 | | 2310,7 |investments in joint ventures | | 18,7 | | 17,4 | | 18,1 |investments in association | | 1,6 | | 1,4 | | 1,2 |trade and other receivables | | 3,6 | | 2,9 | | 0 |other financial assets | | 0 | | 0,9 | | 0,9 |derivative financial instruments | | 0 | | 0 | | 0 |non currents assets | | 2811 | | 2642,8 | | 2480,9 || | | | | | |inventories | | 23,1 | | 18,4 | | 17 |trade and other receivables | | 85 | | 84,3 | | 93,9 |income tax prepayment or receivable | | 0 | | 0 | | 6,5 |cash and cash equivalents | | 40,3 | | 38,2 | | 47 |currents assets | | 148,4 | | 140,9 | | 164,4 || | | | | | |

assets classified as held for sale | | 0,6 | | 4 | | 2,3 || | | | | | |totals assets | | 2960 | | 2787,7 | | 2647,6 || | | | | | |financial liabilities | | -14,2 | | -4,2 | | -31,4 |provisions | | -10,7 | | -15,4 | | -21,4 |derivative financial instruments | | -6,6 | | -16,3 | | -18,9 |income tax liabilities | | -15,4 | | -15,4 | | 0 |trade and other payables | | -321,3 | | -280,2 | | 286,3 |current liabilities | | -368,2 | | -331,5 | | -358 || | | | | | |financial liabilities | | -530,4 | | -521,9 | | 529 |provisions | | -37,1 | | -29,8 | | 32,4 |derivative financial instruments | | -20,1 | | -16,6 | | 17,2 |deferred income tax liabilities | | -105,9 | | -142,7 | | 160,8 |pension liability | | -598,7 | | -488 | | 434 |trade and other payables | | -16,4 | | -15,2 | | -8,2 |non-current liabilities | | -1308,6 | | -1214,2 | | -1181,6 || | | | | | |total liabilities | | -1676,8 | | -1545,7 | | -1539,6 || | | | | | |net assets | | 1283,2 | | 1242 | | 1108 || | | | | | |share capital | | 147,5 | | 147 | | 146,4 |share premium | | 53,7 | | 50,8 | | 49,1 |capital redemption reserve | | 12,3 | | 12,3 | | 12,3 |retained earnings | | 3163 | | 3128,8 | | 3006,8 |currency translation reserve | | 3,7 | | 4,3 | | 5,1 |other reserves | | -2103,4 | | -2103 | | -2112,7 |minority interest | | 6,4 | | 1,8 | | 1 |total equity | | 1283,2 | | 1242 | | 1108 |

Ratios | | | | Results || | | | |Liquidity | | | | |Current Ratio | | 2012 | | 0,40 || | 2011 | | 0,43 |

| | 2010 | | 0,46 || | | | |Working Capital | | 2012 | | -219,8 || | 2011 | | -190,6 || | 2010 | | -193,6 || | | | |Accounts receivable turnover | | 2012 | | 823 || | 2011 | | 741 || | 2010 | | 664 |Solvency | | | | |Solvency ratio | | 2012 | | 0,16 || | 2011 | | 0,14 || | 2010 | | 0,10 || | | | |Debt-equity ratio | | 2012 | | 1,31 || | 2011 | | 1,24 || | 2010 | | 1,39 |Activity | | | | |Asset turnover | | 2012 | | 0,64 || | 2011 | | 0,57 || | 2010 | | 0,51 |Profitability | | | | |Profit margin | |2012 | | 15% || | 2011 | | 14% || | 2010 | | 11% || | | | |Return on assets | | 2012 | | 10% || | 2011 | | 8% || | 2010 | | 6% || | | | |Return on owners' equity | | 2012 | | 22% || | 2011 | | 18% || | 2010 | | 13% |AnalysisThe current ratio of Whitbread is below average. A low current ratio is preferable for stockholders, because they have more

benefit from a profitable organisation. The accounts receivable turnover for the company is very high. This is preferable for the owners, because it means that accounts receivable are managed well. It could also be possible that this ratio is too high. This is the cause when the credit policy is too strict and aggressive what can lead to lower sales.The working capital of the organisation is not the most preferable. Owners prefer this ratio to be high to cover unexpected problems. Looking at the profit margin, it can be concluded that the company is profitable.

Strategic directionMarket DevelopmentFor the new strategic option for Whitbread PLC, the focus will be on the hotel brand of the company. The current market is saturated. The brand is operating in the budget hotel sector, mainly in the UK. Possible options to broaden their portfolio for the hotel sector is to choose for geographical spread or entering new market segments.

Strategic OptionAfter analysing the companies’ internal and external factors and providing the new strategic direction for the company,   two strategic options have been chosen.Expand the company’s portfolio by entering new market segments in the hotel sectorof the UK.To achieve this the focus will be on the following options:  * Acquisition of hotels  * Using existing Premier Inn hotelsAcquisition of hotelsThe acquisition of hotels means that Whitbread will take over existing hotels from different companies. An advantage of the acquisition of existing hotels is that there is the possibility to keep the current employees who have already knowledge and experience in the segment.

The hotels have already the resources to be a hotel in a higher segment or rating and the need of adjustments is minimal.Acquisition of hotels needs high investments, that’s why it is important to make a deliberate choice in which town and which hotel is most suitable for acquisition. Rebranding existing Premier Inn HotelsRebranding of existing Premier Inn hotels means that for selected hotels a new brand will be introduced. Next to that the hotel has to adjust its standards. The new brand has to compete with certain standard to achieve a classification as a higher segment hotel.A risk of this option is to lose the regular guests. Guests who are regularly visiting this hotel are used to certain standard and of most importance: certain prices.The investment of rebranding existing is of lower weight than of the acquisition of new hotels. Hotels are already part of Whitbread. Necessary investments are those to obtain a higher classification and training of your staffmembers.

Strategy Implementation Considering the two options for Whitbreads’ new strategy the best option has been chosen.The new strategy is formulated as followed:“Creating a broader hotel brandportfolio by entering new market segments through the acquisition of existing hotels.”

Whitbread has a mission to be the greatest hospitality organisation providing excellent consumer service. As the budget segment for hotels is saturated the new focus will be on the higher segments. The new strategy is to create a bigger portfolio. The plan in to create a new brand for Whitbread in the hotel sector. This brand will focus on a more exclusive hotel market. This will be generated by the acquisition of existing hotels of the middle segment in bigger towns of the UK.There will not be a radical cultural change. The company has

knowledge of the UK guests and their habits. The main idea is to take over existing hotels together with their employees because of the corporate responsibility the company stands for.These current staff members of the hotels have experience in companies of this hotel segment. People will get training and support on the Whitbread standards and values.The financial investments will depend on the chosen location and hotel to take over. Financial investments will include: acquisition of hotels, introducing a new brand name, training and support of employees and marketing activities.

ConclusionBy introducing a new brand for Whitbread, the company will attract a greater range of guests. The company will be in better position to act on the different demand of guests. Looking at the trends in hospitality that guests are looking for good quality and excellent experiences, Whitbread can create this in other segments considering their knowledge experience and reputation for good quality.

ibliographyThere are no sources in the current document.

Carol Pickering

Assignment 1 Business strategy

EXECUTIVE SUMMARY

Whitbread PLC founded in 1742 by Samuel Whitbread the first mass production brewing plant in Georgian London. Whitbread had always been known for brewing and running pubs. A complete change in direction in 2001 saw the selling off of both the brewing and the pubs and a new era of hotels restaurants and coffee shops began. 2011 see the core estate of premier inns several restaurant chains and costa coffee. These are not confined to the UK but Whitbread now sees business as global. Their vision is to build the best large scale hospitality brands in the world but still incorporating the values the Sam had in the 18th century.Whitbread have core values that are simple yet strong and three words, Genuine, Confident and Committed. These can be seen as to what the company aspires to and how they wish the business to conduct itself.As a global corporate business Whitbread can be seen to be creating value for money and creating a complete customer experience focusing on areas of the industry that are expanding value for money hotels and family restaurants as well as ever popular coffee shops.In the financial report for 2010/11 there were as can be expected no financial objectives there were however several covering

corporate responsibility from green issues such as energy saving to ethical objectivessuch as funding of schools for children in coffee growing regions. Also improving customer experiences stronger offers and expanding the business around the globeThe vision strategy and core values for Whitbread are to the point focused and easily understood. The mission statement however is a little weak in that it does not contain and the necessary elements of a good mission statement. It focuses on its brand market and its philosophy with no mentions of employees or its corporate responsibility which both hold strong focus in the annual report for 2010/11Financially Whitbread has gone from strength to strength. Expanding the business across the globe opening hotels and coffee shops in foreign shores has led to increase in like for like sales and profits. Turnover in 2010/11 was up 11.5%. Revenue in hotels and restaurants up 10.6%. Growth in costa coffee saw a massive increase of 24.7% and Costa saw an increase of 38.4% in its operating profit for the financial year.Operating profit grew from 3188m in 99/00 to £250m the year after the radical change in direction to £308.8m in 10/11. Taking such a step in redirection was a gamble some would say. Having a solid strategy strong core values and a clear aim has lead Whitbread from strength to strength not nationally as was but globally as is.

CONTENTSIntroduction……………………………………..page 1History of Whitbread………………..……….…page 1Whitbread Strategy…………………………….page2Mission Statement……………………………..page 2Vision……………………………………………page 3Core Values…………………………………….page 4Objectives……………………………………….page 5Financial Analysis……………………………..page 5Conclusion……………………………………..page 6

1.INTRODUCTIONWhitbread PLC is a major player within the hospitality and leisure sector in the U.K. As a company in 2001 the company took a different direction altogether. The aim was then to concentrate on the growing markets in hotels and restaurants. This report aims to look at the business strategy of Whitbread through the annual report 20010/2011 looking key trends and ratios as well as the company’s mission statements visions and objectives.

HISTORY OF WHITBREADSamuel Whitbread was born in 1720 his brewing apprenticeship was 1736 and he opened his first brewery in 1742. In 1750 he constructed the first purpose built mass production brewery in the UK this was Chiswell Street in Georgian London.Modern Whitbread in its current form started in 2001 when the brewing division was sold off and the company left the traditional bar and pub sector for good. Reincarnating itself into a hotel and restaurant company it still holds the values the Sam Whitbread in the founding days. That is to genuinely focus on the customer and to strive to be the best and to recognise that progress comes from innovative thinking. In the annual report from 2000/01 which was the last thatcovered the original estate the consisted of 5915 units outside the brewing division ranging from pubs managed and leased to hotels and off-licences with a turnover of £2951.4mil and a GP

of £759.4mil. In the last annual report 2010/11 the portfolio contains 44295 rooms 379 restaurants and 1217 UK coffee shops and 654 internationally. The 2.turnover for this period was £1599.6mil however the GP was 1362.5mil. (www.whitbread.co.uk) WHITBREAD STRATEGYUsing PESTEL (Political, Economic, Social, Technological Environmental and Legal) an organisation can influence its strategy and alter it as the factors change. Politics covers changes in government; economics are influenced by exchange rates and world growth. Social covers demographics and technological covers innovations such as the internet. Environmental covers green issues and legal covering legislation such as health and safety (Johnson.G, Scholes.K, Whittington.R 2008).Whitbread’s strategy is focused on creating value for money and the customer experience creating a link to a set of objectives and an incentive scheme for managers that depending on the brand can be up to 100% of the basic salary. (www.whitbread.co.uk/benefits).   Rewarding individuals motivates a team, the interest levels increase in those areas of focus and the strategy becomes the employee’s everyday focus and it is understood. The team are motivated to perform to the best of their ability (Kaplan.R,Norton.D, 2004).   Whitbread Strategy Appendix iMISSON STATEMENTWhitbread mission statement Appendix ii“A mission statements aim is to provide stakeholders with clarity about the overall purpose and raison d’etre of the organisation.” (Johnson, Scholes, Whittington 2008). 3.By early 21st century mission statement were widely used by organisations, Barkus regarded them as weak and varying ( Barkus.B, Glassman.M, McAfee.B, 2000). However Rarrek Vitton and Bart Baetz found a positive influence on returns for those organisations with an effective mission statement.

(Bart,C., Baetz,M. 1998) found a positive influence on returns for those organisations with an effective mission statement. Mission statements should contain some or all or nine components (Appendix iii) The Whitbread statement does not contain all nine of these components. It touches on its brand “hospitality brand” Market “the world”. Its philosophy could be interpreted as “outstanding value”. There is however no mention of the employees or public image both of which hold focus in the last annual report with regard to employee qualifications and corporate responsibility (www.whitbread/annualreport.co.uk )VISIONWhitbread vision statement (appendix iv)A vision statement gives an insight into direction the organisation wants to take. It gives direction to the stakeholders and why and how to support the organisation (Kaplan.R, Norton,D.   2004).   Profitalone will not motivate employees an organisation they see profit as money the management use and pay-out to shareholders (Quigley.J, 1994). A combination of a vision for employees to work towards and the generation of profit are needed for the success of an organisation.Whitbread in their vision statement give a clear and concise direction for the company using phrases “best large scale hospitality brands in the world” and “most 4.customer focused organisation there is”. The stakeholders know the direction the organisation is going and how it will achieve this.CORE VALUESTo instil a set of core values within an organisation and will define the way in which the organisation is run. These values will tend towards values in which the organisation wishes to reach or aspire rather than what it is. These values are usually linked to corporate responsibility and are variable and misleading (Johnson.G, Scholes.K, and Wittington.R 2008). Arguably these core values are the basis on which an organisation work and conduct themselves. Whereas strategies

will change according to outside influences the core values will not change (www.nps.gov )Whitbread has three core values  1. Genuine – really caring about customers  2. Confident – striving to be the best at what we do  3. Committed – working hard for each otherThese values would not need to change even if the business did. PESTEL influences do not affectthe 3 values for Whitbread. These can remain the focus for the company in challenging times.

5.OBJECTIVESWhitbread objectives (appendix v)“Clear and explicit and the basis upon which options are evaluated” (Johnson.G, Scholes.K, Whittington.R, 2008 p31)Objectives are formulated in relation to sales profits and aimed at both unit and corporate level. There are market based objectives that are linked to service repeat business and market share these are more commonly called targets. Both objectives and targets need to be measured (Ansoff.I, 1968). These measured and times objectives can focus on areas within a business that are in need of attention (Johnson.G, Scholes.K, and Wittington.R 2008). While within the Whitbread report there were no clear financial objectives those that were laid out are environmental (Appendix v) and called targets rather than objectives. When using the SMART criteria for creating objectives, Specific Measurable Attainable Realistic and Times all the targets meet this criteria. (Kerry 2002).FINANCIAL ANALYSISWhitbread turnover 2010/11 was £1599.6m up from £1435m 2009/10 a growth of 11.5%. gross profit 2010/11 was £1362.5m against £1221.5m 2009/10 an increase of 0.75%. Whitbread is split into 2 divisions hotels/restaurants and Costa Coffee. Revenue from the hotel/restaurants 20010/11 was £698.6m an increase of 10.6%. like for like sales were up 8.2% against a

negative of 4.3% 2009/10.Restaurants had positive LFL sales of 3.3% and the operating profit was up 14.7% to £283.4m. Costa 6.Coffee revenue 20010/11 was £425m an increase of 24.7% like for like sales of 7.8% and an operating profit of £50.1m an increase of 38.4% (www.whitbread.co.uk)CONCLUSIONWhitbread has a clear defined strategy vision and strong core values. Each is easy for stakeholders to understand and form a strong base for the brand across the globe. The mission statement is however missing several of the key components including employee and corporate responsibility. This has not however hampered the continuing success of the company with sales and profits up again at the end of the last financial year.

BIBLIOGRAPHY

Ansoff,C. Baetz,M. (1998) The Relationship between Mission Statements and Firm Performance: an explority study. Journal of management studies. 35.Bartlaus,B. Glassman,M. McAfee,B. (2000) Mission Statements: are they smoke and Mirrors. Business horizons.23.David,F. (2010). Strategic Management. Prentice Hall.USA

Kaplan,R. Norton,D. (2004) The Strategy- focused Organisation. Harvard business School Press. Boston Mass. USAKerry,T. (2002) Effective Learning Objectives task setting and differentiation. Nelson Thomas. UK.Quigley,J. (1994). Vision: how leaders develop it share it and sustain it:39WEB SITESwww.whitbread.co.ukwww.nps.gov

APPENDICESWhitbreadStrategy“Our strategy is to create value for our shareholders by focusing our investment and growth in the expanding areas of the hospitality industry with particular focus on value for money hotels and costa coffee shops. This is how we manage to deliver outstanding performance across all of our business”www.whitbread.co.uk-------------------------------------------------Appendix i

Whitbread Mission statement“Our aim is to build the best large scale hospitality brands in the world by becoming the most customer focused organisation there is. Anywhere. We’ll do this by providing outstanding value and making every day experiences feel special so that our customers come back time and time again”www.whitbread.co.uk-------------------------------------------------Appendix ii

Components for a mission statement  1. Customers- who are the firm’s customers?  2. Products or services- what are the major products or services?  3. Markets- geographically where does the firm compete?  4. Technology- is the firm technically current?  5. Concern for survival growth and profitability-is the company committed to growth and financial soundness?  6. Philosophy- what are the basic beliefs values aspirations and ethical priorities of the firm?  7. Self-concept- what is the firm’s distinctive competence or major competitive advantage?  8. Concern for publicimage- is the firm responsive to social community and environmental concerns?  9. Concern for employees- are employees a valuable asset of the firm?-------------------------------------------------Chapter 2 the business vision and mission-------------------------------------------------Appendix iiiVISION STATEMENT“Our ambitious vision is to build the best large scale hospitality brands in the world by becoming the most customer focused organisation there is, anywhere”www.whitbread.co.uk-------------------------------------------------Appendix ivOBJECTIVES  * Improving our insight to deliver a better customer experience  * Stronger value led offers  * Innovating across our brand propositions making our brands more accessible through increased distribution channels  * Reduce our relative operational carbon emissions by 26% v a 2009/10 baseline by 2020  * Achieve 80% of waste diverted from landfill from Whitbread hotels and restaurant sites by Feb. 2012

  * Achieve a relative 20% reduction in water consumption in our hotels and restaurants portfolio against 2009/10 base line by 2020  * Raise £1m for water aid  * Achieve 3000 qualifications from Whitbread hotels and restaurants apprenticeship scheme. 400 costa learners trained by 2011  * To raise funds and build Costa foundation schools sufficient to educate 15,000 children in coffee growing communities by 2012

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Traditionally a vertically integrated brewing company, Whitbread (WB) had to face a new market situation in 1992. Anti-monopoly regulations limited the company’s opportunities to profit from economies of scale and further growth opportunities in the beer industry. As a consequence, WB proactively started to diversify and grow a leisure division that was successfully headed by Dean Thomas, who was appointed CEO in 1997. At that time, it seemed clear to outsiders that the beer business would not be profitable in the long-run. However, Thomas adhered to WB’s legacy and tried to close a huge deal to acquire new pubs. Only after the deal had failed, which triggered a severe company crisis (WB’s stock price crashed, Thomas’ reputation and credibility were harmed due to his failure to clearly communicate and explain his strategy internally and externally), he realized that an overall strategic change was necessary. Consequently, he sold the beer business

in 2000 and focused solely on the leisure business. The key challenge was to transform the operations-focused single business suffering from “institutionalized underperformance” into a high-performance and brand-led multi-business company.

In a first step, Thomas unfreezed the organization and restructured it to a decentralized federalization. He significantly reduced the headquarter staff and eliminated duplicated positions, but he missed to strategically define and clearly communicatethe role and added value of the headquarters as well as the employees’ responsibilities. The new structure increased the autonomy of the divisions and its managers, which created latitude for opportunistic behavior. This was further aggravated by the fact that the divisional heads did not have to team up on strategic issues and individually reported to the CEO and CFO. Thomas, who was known as being collaborative and consensus-oriented, neglected to form a top management team that worked together jointly and whose members identified not only with its division but with the overall group. Furthermore, he did not hold his managers accountable for their actions and avoided conflicts by not enforcing his strategic plans against their wills. He neither intervened nor did he draw any personnel consequences when the managing directors of two divisions refused to cooperate and he also failed to cope with the well-known problems of the restaurant division and didn’t push its manager to take necessary steps for restructuring the unit. Although Thomas succeeded to effectively change WB’s portfolio of business, he did not succeed to develop and communicate a clear strategic vision for the whole group and each divisions operated more or less independently without achieving any synergies. In 2001, Thomas realized that he had underestimated the power of a strong and unifying group vision and initiated the “Strategic Fitness Process”(SFP), which was intended to engage both management and employees in the necessary organizational and cultural change. However, he deviated from the SFP process suggested by

external consultants and eliminated essential steps, which would have forced the management team to collectively discuss the strategic intent of the company and to jointly develop an action plan. This can be interpreted as perceptual barrier of Thomas, because he did not realize that it wasn’t only him who had to drive the change, it was also his managers and employees. Especially the latter were very passionate, but at the same time disappointed by the missing strategic direction and leadership skills. Subsuming, it can be stated that Thomas succeeded to initiate the change process of WB in a brand-led organization and had the courage to start the radical SFP process despite having to face questions concerning his leadership skills. However, he took too much time, did not incorporate for change barriers such as cultural, emotional and environmental blocks so that in 2004, WB still suffered from numerous internal problems: e.g. professional brand positioning and consumer research measures weren’t implemented and the organization had not been rebuild, yet, to complement its inside-out with a market-oriented outside-in perspective. The failure to anchor this brand perspective in the corporate culture and the attitudes and behaviors of the staff cannotonly be ascribed to a missing vision, but also to the lack of skills and performance-based incentive and reward systems.

WB’s change process was triggered by a company crisis and affected the overall company so that the top-management, foremost the CEO, has direct responsibility for its success. Thomas’ successor will be faced with a series of challenges. He should be aware of the various socio-psychological barriers to change and develop strategies to circumvent them in order to transform and freeze WB in a truly brand-led firm. As a start, he should analyze the effectiveness of the change process, needs for changes in HR and organization and determine specific objectives for both the group, divisions and top managers. Unlike Thomas, he should act in a transparent way and communicate his vision and strategic direction very clearly both to employees and to stakeholders such as media and investors.

In a next step, he should critically reflect the existing but still very unspecific “11 Point Plan” and deviate concrete measures - not only for the middle- and long-run, but also for the short-run, in order to achieve short-term wins that motivate the staff and thereby facilitate the transition process. An important social and institutional barrier to change is WB’s “culture of niceness” that fosters the institutionalized underperformance and inhibits people from discussing the unvarnished truth. Circumventing this barrier shouldbe prioritized by actively promoting a feedback culture and by rewarding the best improvements/innovations from individuals and by using best practices of divisions on a corporate level – e.g. the successful balanced score card of Pizza Hut, which rewards behaviors that are aligned with corporate strategy. Changes due to company crisis typically entail top management resistance. Hence, a top priority should be to evaluate and train but also to replace existing managers if they don’t comply with the overall vision and/or do not have enough potential in terms of required key competences. High potentials willing to act as change agents within their divisions need to be motivated and should be teamed up and given resources and responsibility for the change. The prevailing mistrust between the divisions is a political barrier that inhibits collaboration, economies of scale and synergies. Team building measures, periodic team meetings and clear responsibilities can help to create a positive corporate feeling. Combined with financial incentives they can foster synergies. Key to WB’s success is professional brand management, which requires to think from a customer’s perspective and to closely monitor market and competitors’ actions. To overcome individual barriers of missing skills it’s quintessential to extensively and continuously train existing employees that show potential and to additionally hire highly-skilled personnel.

Porter's Generic Strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns.A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:

Porter's Generic Strategies

|Target Scope                           |Advantage                                     ||                                       |Low Cost                               |Product Uniqueness                     ||                                       |Cost Leadership                       |Differentiation                       ||Broad                                   |Strategy                               |Strategy                               ||(Industry Wide)                         |                                       |           |

|                                       |Focus                                 |Focus           ||Narrow                                 |Strategy                               |Strategy                               ||(Market Segment)                       |(low cost)                             |(differentiation)                    |

Cost Leadership StrategyThis generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market.Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership.Firms that succeed in cost leadership often have the following internal strengths:    • Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.    • Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.    • High level of expertise in manufacturing process

engineering.    • Efficient distribution channels.Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms followinga focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share.

Differentiation StrategyA differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily.Firms that succeed in a differentiation strategy often have the following internal strengths:    • Access to leading scientific research.    • Highly skilled and creative product development team.    • Strong sales team with the ability to successfully communicate the perceived strengths of the product.    • Corporate reputation for quality and innovation.The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.

Focus StrategyThe focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.Becauseof their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist.Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well.Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other focusers may be able to carve out sub-segments that they can serve even better.

A Combination of Generic Strategies- Stuck in the Middle?These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.

Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy. By separating the strategies into different units having different policies and even different cultures, a corporation is less likely to become "stuck in the middle."However, thereexists a viewpoint that a single generic strategy is not always best because within the same product customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price. There have been cases in which high quality producers faithfully followed a single strategy and then suffered greatly when another firm entered the market with a lower-quality product that better met the overall needs of the customers.

Generic Strategies and Industry ForcesThese generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces.

Generic Strategies and Industry Forces

|Industry         |Generic Strategies                                                   ||Force             |                                                                                 ||                 |Cost Leadership             |Differentiation                     |Focus                                       ||Entry             |Ability to cut price in     |Customer loyalty can discourage       |Focusing develops core competencies that can||Barriers         |retaliation deters         |potential entrants.               |act as an entry barrier.                     ||                 |potential entrants.         |                                       |       |

|Buyer             |Ability to offer lower     |Large buyers have less power to       |Large buyers have less power to negotiate   ||Power             |price to powerful buyers.   |negotiate because of few close         |because of few alternatives.                 ||                 |                          |alternatives.                         |                                           ||Supplier         |Better insulated from       |Better able to pass on supplier price |Suppliers have power because of low volumes,||Power             |powerful suppliers.         |increases to customers. |but a differentiation-focused firm is better||                 |                           |                                       |able to pass on supplier price increases.   ||Threat of         |Can use low price to defend|Customer's become attached to         |Specialized products & core competency       ||Substitutes       |against substitutes.       |differentiating attributes, reducing   |protect against substitutes.                 ||                 |                           |threat of substitutes.                 |       ||Rivalry           |Better able to compete on   |Brand loyalty to keep customers from   |Rivals cannot meet differentiation-focused   ||                 |price.                     |rivals.                               |customer needs.                             |

Recommended ReadingPorter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and CompetitorsCompetitive Strategy is the basis for much of modern business strategy. In this classic work, Michael Porter presents his five forces and generic strategies, then discusses how to recognize and act on market signals and how to forecast the evolution of industry structure. He then discusses competitive strategy for emerging, mature, declining, and fragmented industries. The last part of the book covers strategic decisions related to vertical integration, capacity expansion, and entry into an industry. The

book concludes with an appendix on how to conduct an industry analysis.

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 1Brewing Industry Case StudyModule: Strategic Planning ProcessLecturer: Michael ShovelinDate: 04th September 2010Postassignment: Case exampleGlobal Forces and the European brewing industry-------------------------------------------------This assignment is based on the case example Global forces and the European brewing industry andrelates to two questions raised in chapter 2 at the end of the case example (Johnson et al. 2008, p.91) of the book Exploring Corporate Strategy: Text and Cases by Johnson, Scholes and Whittington.1.) Using the data from the case (and any other sources available), carry out for the Europeanbrewing industry (i) a PESTEL analysis and (ii) a five forces analysis. What do you conclude?(i) PESTEL analysisOne tool to analyze the broad macro-environment is the PESTEL analysis. In the PESTEL analysisenvironmental influences are categorized into political, economical, social, technological,environmental and legal aspects. It helps to identify how future trends might influence anorganization and furthermore, to identify the key drivers of change to create scenarios for thepossible future.Political factorsThere is an overall decline of consumption of Beer in

Europe as many traditional key markets havebeen made increasingly aware of the social problems associated with alcohol consumption. Factorscould be the active campaign of European governments against drunken driving, binge-drinking andconsequently the long term health and fitness problems.EconomicfactorsIn the case study there is the talk of the overall decline of European beer consumption, while therewas an increase in emerging markets (e.g. China, Brazil) around the world. This could be because of the government campaigns which caused a shift in sales from the on-trade (beer consumed in pubsor restaurants) to the off-trade (retail/supermarkets). Moreover, the success of Germansupermarkets like Aldi and Lidl with their own private label beers rather than the brewery-brandedbeers has an influence on the European brewing industry. Supermarkets are offering cut price offers.Also the rise of the main purchasing costs like packaging, raw material and energy will have influenceon the beer price e.g. Heineken). Also, the increase of fuel prices which will affect the distributionnetwork, thus transportation costs will increase. Besides, due to the economic crises the breachbetween rich and poor is steadily growing and thus many people cannot afford any more to go outfor dinner or having a beer. Through legal restrictions the demand for alcohol in public places coulddeclines. Furthermore, acquisitions, licensing and strategic alliances have occurred because theleading brewers battle to control the market. The global pressures for consolidation due toovercapacity within the industry are another point that influences this industry. There is a growingtrend towards cross-border mergers and acquisitions. Introduction of higher-priced premiumproducts let sales values raise. If thereare natural disasters like previously the fires in Russia this hasan impact on the prices of the raw material.Social/cultural factorsWines have become increasingly popular in the Northern European markets. People may rethinktheir lifestyle and prefer drinking a good wine instead of beer and binge drinking. This could bebecause wine is associated with the upper class

and people with a higher income. Moreover, people 2are getting more and more health conscious and therefore, will drink in moderation. Furthermore,there is a rising demand for premium and fruit-flavored beers and also an increasing demand forprivate-label beers. There will also be an increasing acceptance of pan European brands. Besides,the importance of supermarkets in distribution and the growth of own-label products will rise.Technological factorsResearch and development is important in the brewing industry due to the changes in consumertastes. People demand alcohol in different flavors, with low calorie, with low alcohol, seasonal beerand so on. Through technology it is possible to produce more although raw material stays the same,furthermore the quality is getting better, the alcohol has a longer durability and is produced moreefficiently and quickly. New harvesting and production technologies help to increase processefficiency.Environmental factorsPeople are getting more and more aware of the environment and it is necessary that companies doeverything to prevent environmental pollution. It is importantthat the environmental load throughthe brewing process is as low as possible. Reusability and recycling is important. The brewingindustry for example treats their effluents so that they can use it again for irrigation. Through thisthey save energy and minimize sludge disposal costs. (1)Legal factorsBesides, when comparing Europe with the United States one can see that in America it is forbiddento drink in public places in contrast to Europe where you can drink alcohol wherever you want. Thiscould lead to new laws that forbid drinking alcohol in the public. This is a threat that might comereally quickly when comparing the new law about the restrictions in smoking in public places likepubs and restaurants. Moreover, a few years ago it was allowed to have a blood alcohol level of 0.8parts per thousand. This was changed to 0.5 parts per thousand. So it is not unlikely that thegovernment changes this law again to further price down this limit or completely forbid to drink anddrive. As you could read in the case study in the United

Kingdom there is a growing hostility towardsexcessive alcohol consumption in pubs and clubs and this could also happen everywhere in Europe.Furthermore, there is the threat that politics could put up the age of teenagers from 16 to 18 toallow to drink alcohol. If drunken people are involved in an accident or in a crime they are fined witha higher penalty.(ii) A five forces analysisThe five forces analysis helps to determine the impact of the threat ofnew entrants, substitutes,buyers and rivals on profitability in an industry or sector. (Johnson et al. 2008, p. 59)Threat of entryThe threat of entry depends on the height of barriers to entry. I think that the threat of entry inEuropean Brewing industry is very low due to the mergers and acquisitions of the past years.Through consolidations breweries stabilize their competitive position. As there are only a few reallybig brewing companies with a lot of power the financial effort for new entrants would be too high toenter this market. Moreover, because of the strong brand and the loyalty of existing consumers inEurope it would not be easy for new entrants to challenge well established leaders.Threat of substitutesThere are a lot of products that can be seen as a substitute of beer like wine, fruit-flavored andexotic beers as well as soft- and energy drinks. In the case example wines becoming increasinglypopular in the Northern European markets. Table 1 in the case example shows that there was asignificant decrease in beer consumption in Denmark and Norway which confirms the increase of wines in those countries.Power of buyers 3 Due to Government campaigning against drunken driving and binge drinking there was a shift fromon-trade to off-trade. Through this, large supermarket chains (industry concentration increases)like Tesco or Carrefour gain the power of buyers and thus have a high bargaining power. This meansthat large supermarket chains for instance pretend the pricethey are willing to pay. Through thepower of buyers and their

ability of changing easily the brand (supplier) the brewing industry comesunder pressure.Power of suppliersIn the case example they write that the Brewers main purchasing costs are packaging, raw materialsand energy. The power of suppliers of packaging I believe is very high. There are only a few suppliersof glass- and PET- (polyethylene terephthalate) bottles available and therefore, they have a highpower. To change the supplier could lead to high switching costs as they have to buy a new machineor adapt the existing machine. The main raw materials for brewing are water, malt, hops, yeast andbarley. The power of suppliers of these materials I think is low because there are a great number of suppliers available. The power of supplier of energy is very high as there is a concentration of suppliers.Competitive rivalryCompetitive rivalry means that there are organizations with similar products and services aimed atthe same customer group. In my opinion competitive rivalry in this industry is very high because* product differentiation is very low* acquisitions, licensing and strategic alliances (gain market share)* consolidations due to overcapacity within the industryTable3shows the worlds top 10 brewery companies by volume in 2005 which accounted for aroundhalf of world beer volumes. InBev, Anheuser-Busch, SABMiller and Heineken reached about33%of the volume of beer drunken around the world. Approximately 15%wasreached by Morelo,Carlsberg, Coors, TsingTao, Baltic Brewery Holdings and Asahi. The European brewing industry Ibelieve is saturated and started to decline and thus competitive rivalry will still exist on a high level.Barriers to entry within EU are reducing leading to cross-border mergers.My conclusion is that either you can be one of the big players or one of the many small specialist andregional breweries like Grolsch, Cobra Beer

For the four breweries outlined above (or breweries of your own choice) explain:(a) how these trends will impact differently on these different companies; and(b) the relative strengths and weaknesses of each company(a) HeinekenHeineken is the biggest of the European brewery businesses. As Europe is a saturated marketHeineken focuses also on going overseas. They use locally acquired companies to introduce theirbeer they have a good strategy to further expand their market share. The same strategy they couldapply in Europe. As the European market is saturated they could acquire small specialist and regionalbreweries like Grolsch and thus grow.(b) Strengths:* Leader in the European brewery business* 5%of sales in Asia-Pacific* 17%of sales in Americas* Strong brands: Heineken, Amstel* Family controlled stability and independence* Introduce brand to new markets overseas by using locally acquired companies* Strengthens local companies by transferring expertise and technology* Economies of scale for Heineken and the local beers.

Business Enviorment of the Brewing IndustryBy x67jagx, Sep 2009 | 10 Pages (2,355 Words) | 1320 Views|

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To discuss the environment of a particular industry or business, firstly one should attempt to define what a business environment is or entails. Simply stated in the Merriam-Webster dictionary, Business Environment is defined as circumstances, objects or conditions surrounding a commercial or mercantile activity engaged in as a means of livelihood. This is a very broad definition, as it should be, considering the variety of elements that can affect a business thus determining its environment. There are literally hundreds of factors that can dictate, shape, and or mold the environment of a business. Those factors differ slightly depending specifically which business is being discussed now. In this paper, I will delve in to the most significant factors that shape my business environment.      Salient points to be discussed at length include inflation rates and interest rates which have been a topic of hot discussion in the midst of this credit crisis. The issue of employment or lack thereof is also a point of merits not to be ignored. Wholly influencing the business environment is the arena of politics,

especially in these times, is a consuming topic of discussion. Newly important areas concerning environment and ecology single handedly have changed the face and processes of manufacturing.      To discuss the business environment of the Brewing Industry in the U.K there are several factor to consider. To comprehensively examine the brewing industry one must alsoconsider the factors of the economy, social ramifications of your product, the political climate, and the arena of technological advances within the business environment of the brewing industry. This breakdown of individualized environment is an analysis known as PEST. The acronym is formulated using the aforementioned components.      Looking at the political environment illustrates how big alcohol consumption and thus the brewing industry impacts the legal and political systems. The World Health Organization (WHO) has found that the potential hazards of an unchecked brewing industry warrants legislative action. The WHO is a sector of the United Nation that specialized with dealings in international public health. The WHO regulates a number of elements involved in the brewing industry spanning from deeming the percentage of alcohol content that specifies the classification of types of alcohol to minimum pricing of alcohol.      “Alcoholic beverages are commercial products and, as such, subject to the same economic principles as other consumer products. Retail prices of alcoholic beverages are composed of the wholesale price plus profit and other costs. In addition, taxes specific to alcoholic beverages are often added. One of the factors explaining price differences is the rate of alcohol taxes. Production costs per litre of pure alcohol are higher for making wine and beer than distilled spirits. That is one of the reasons for the usually higher tax on spirits.Another reason is that, in some countries, the official policy of the pricing system is to steer people towards a particular type of low-alcohol or non-alcoholic beverage, in order to substantially reduce risky or high blood alcohol levels, i.e. discourage spirits drinking and encourage beverages with lower alcohol content

(Holder et al., 1998)”. (WHO pg 49 2004)Such action could seem intrusive and outside the scope of governmental power and/or concern. But when doing a PEST analysis of an industry often it is seen that the environmental elements overlap with each other. The broad use of legislation also has a social responsibility aspect accompaniment. One would not be as hard pressed to say there are huge ramifications regarding the brewing industry at the political level. Although, it seems that the political action is taken not because the leaders of the brewing industry have paved the way for action, but it seems they are the cause for the action. Of course the legislation is geared to keep retail giants in check as well. But the brewing companies create such a large volume of product it only behoves retailers to take the steps necessary to attract their customers through the door.The necessary legislative interjection is largely fuelled by the social contract citizens tend to believe they have with their respective governments. The contract of paying taxes and generally being good human beings in return for protection from themselves is a notionheld, perhaps subconsciously. Particularly in Great Britain, there is a deeply embedded cultural dynamic of social drinking. As an American citizen, I can relate to the deep roots the brewing industry had in the West. America has had initial economic markets built sturdily on the brewing industry. However, there still is a bit of reluctance to imbibe the large amounts as frequently as those in the U.K. This statement has come from primary personal observational research.Though the brewing industry is an integral part of European culture that would also lend one to believe that the brewing industry would feel a constantly renewed sense of responsibility to it consumers. Feeling that sense of responsibility and manifesting the sense of responsibility are two different things, are the brewing companies performing the latter? The question is only raised because literally every day there are new studies that come out saying that now women in the U.K are more likely to die from alcohol related problems than men are in

different parts of the world or more children are abusing alcohol than in any other country in Europe. Only recently in the Metro pg 34, there was a piece that claimed that women who drink two drinks or more everyday increase their chances of contracting oesophageal cancer to seven in ten thousand. It is unrealistic to expect brewing industries to cut production or take any action which would incur a decrease in sales, or product availability. Butperhaps ad campaigns that encourages drinking in moderation or even massive support for companies like GlaskoSmithKlein that take on the daunting task of cancer research. These genuine sincere gestures would display a modicum of social awareness and responsibility.Also, the issue of underage drinking has been a subject of great concern in modern history. The reasons for this concern are sound. Young people are still developing physically, emotionally, and mentally. The very nature of alcohol is to affect/disrupt the processes of the body. The effect alcohol can have on young people can be permanently damaging hence the reason for a minimum age for drinking. Drinking whilst underage, including heavy and frequent use of alcohol, carries a variety of detrimental consequences in tow. Everlasting and instantaneous consequences of singular incidences resulting from impulsive alcohol fuelled actions up to including, injury and accidental death are frequently occurring. Youth, coupled with chronic binge drinking also often comes persistent absenteeism, abuse and addiction to alcohol, and anti social behaviour.      “Acute consequences of underage drinking include unintentional death and injury associated with driving or engaging in other risky tasks after drinking, homicide and violence, suicide attempts, sexual assault, risky sexual behaviour, and vandalism and property damage. In addition, these consequences appear to be more severe for those who start drinking ata young age. Hingson and Kenkel (in press), report on a series of studies that controlled for history of alcohol dependency,

frequency of heavy drinking, years of drinking, age, gender, race or ethnicity, history of cigarette smoking and illicit drug use. These studies reveal that youth who started drinking before age 15, compared to those who waited until they were 21, were 12 times more likely to be unintentionally injured while under the influence of alcohol, 7 times more likely to be in a motor vehicle crash after drinking and 10 times more likely to have been in a physical fight after drinking." (Bonnie 2003)      The economic climate of the brewing industry’s business environment is a pertinent subject to discuss in the credit crisis much of the world seems to be enduring now. Of the many economic factors that will affect the brewing industry one could argue that the decrease in interest rates will become the most hazardous component in the grand scheme of things. However, though the initial lowering of increase rates will prove beneficial for some, that sets the country down a very slippery slope and lost footing could prove to be very detrimental indeed. John Higginson, the Chief Political Correspondent for the Metro, illustrated my point exactly.          “The latest half percent rate cut is intended to make money so cheap that they [banks] will start offering loans again. Lloyds TSB, Nationwide, Halifax, and Skipton Building Society are all passingon the cut in fill to customers on standard variable rates – but not all lenders are certain to follow suit to keep up their profit margins. The cut should be passed on those on tracker mortgages but will hurt those who live off their savings." (Higginson pg1)The initial boost on the economy because banks are lending money again quickly deteriorates to an ugly situation. The government now will have to begin printing more paper money that will soon be needed because of the plummeting interest rates. Of course throughout history there is a direct correlation with the availability of printed money and/or available credit with exploding inflation. Inflation, one of the salient points that have to be heavily considered when factoring in the cost of doing business, as expected is going to drive up the cost of raw

materials.      In turn the amount of disposable income is decreasing every so rapidly causing the once affordable luxuries enjoyed by the upper echelon of personnel on the corporate triangle to become not so affordable. Hence, there is there now come the choices of choosing to deny corporate fat cats luxuries previously beholden to them or beginning to trim the number the number of employees of which the brewing industry has on retainer. So often what is seen during this credit crisis fiasco, after a hurried perfunctory debate, redundancies are made. Unemployment has been on the rise will continue for an undetermined amount of time. The civil unrestthat has spread like wildfire across the U.K. only to be fanned by the horrifying situation taking place in the banking industry is constantly bubbling under the surface.      The permeability of recent technological changes means that members of the public and privates sectors of the organization of all sizes have been influenced by the fluctuations of the technological environment. Simple technological advances are not the sole driver of change. It is the method by which new and improved culture is integrated into the business environment that creates the change. The modernity of the culture today has almost made improvement in technology the moving force behind change. But a driving force behind needing constant consistent technological change is due to the ever changing way we view the environment.      As I stated earlier, the elements which shape the business environment of the Brewing industry do overlap within on another. The issues of the Environment and Technology and Technology development, in the new millennium, go hand in hand. The globalization of our industries are due to improvements in transport and communication which in turn causes humans to view the world in a much more holistic manner. Gone are the days where there were “four corners” of the earth shadowed in mystery and trepidation. As our industries become larger our world becomes incredibly smaller. This does enable human to perhaps view less developed areas of the world

yet be damagedby the constant battering of modern technology. Hence, allowing us to see what was once untouched and unspoiled. In seeing such things in the 1990's and in the new millennium, the sentiment of " the world is oyster” has take a much more figurative meaning. A sense of awareness has come about conveying that it may be wrong to dump toxic waste materials into rivers and streams and the like.      With this new way of thinking sweeping the developed nations, big industries have need to take giant steps to ensure their brand name stayed positive in the eyes of the consumer. Ad campaigns featuring new and improved methods of brewing or encouraging the use of recycling programs all this done because the consumer called for it to be done. The technology had to change in order to keep up with the times. Scrubber put in manufacturing plants to reduce carbon admissions were the initial phase of improvements. In addition to methods used to create product, the issue of waste became an important issue for the consumer and the brewing industry. The consumer caring about the environmental aspects and manufactures wanting to incur the least amount of waste possible but for an economic reason are reason for development of technological resources.

      Works Cited

Chaloupka, F., et al. 2002. The Effects of Price on Alcohol Consumption and Alcohol-Related Problems. The National Institute on Alcohol abuse and Alcoholism, [Online] V26 (1), p. 22-34. [Accessed 01 January2009]

http://pubs.niaaa.nih.gov/publications/arh26-1/22-34.htm

World Health Organization. 2004 Global Status Report: Alcohol Policy.

Bonnie, R. (2003) Reducing Underage Drinking: A Collective

Responsibility. Washington, DC: National Academies Press.Accessed 29 January 2009http://site.ebrary.com/lib/roehampton/Doc?id=10046854&ppg=76

Higginson, J. 2009. £150 bn: The Last Throw of the Dice. Metro. 6 March, pg1.

Hingson, R. And Kenkle, D. 2003. Committee on Developing a Strategy to Reduce and Prevent Underage Drinking, In Bonnie, P 2003. Reducing Underage Drinking: A Collective Responsibility. Washington, D.C.: National Academies Press.Accessed 29 January 2009http://site.ebrary.com/lib/roehampton/Doc?id=10046854&ppg=76

Holder, H. Et al 1998. European Integration and Nordic Alcohol Policies. In World Health Organization, 2002. Global Status Report: Alcohol Policy.Geneva, Switzerland: World Health Organization, p 41.[Accessed 1 March 2009]http://site.ebrary.com/lib/roehampton/Doc?id=10067174&ppg=49

Jordan, A. Environmental Policy in the European Union : Actors, Institutions and Processes .London, , UK: Earthscan Publications, Limited.[Accessed 3 February 2009]http://site.ebrary.com/lib/roehampton/Doc?id=10128842&ppg=199

World Health Organization. 2004 Global Status Report: Alcohol Policy.Geneva, Switzerland: World Health Organization, p 41.[Accessed 1 March 2009]http://site.ebrary.com/lib/roehampton/Doc?id=10067174&ppg=49

Global Forces and the European Brewing IndustryBy elahimehboob, Aug 2010 | 7 Pages (1,582 Words) | 7704 Views|

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Global forces and the European   Brewing industry –Case 1

Table of ContentsIntroduction……………………………………………………………2PESTEL……………………………………………………………….2Porter’s Five Forces…………………………………………………..4Strengths & weakness of Companies………………………………..5Impact of Trends on the Companies………………………………..7Bibliography……………………………………………………………8.

IntroductionThis case shows how global forces have impact on European brewing industry and how these companies are trying to overcome the obstacles. In spite of restrictions and awareness campaigning runed by the government, these companies are

trying to grow through acquisitions, alliances and closures within the industry. Companies are concentrating on expanding their existence into other markets. Some other companies are concentrating on innovation, branding. Moreover they are fighting on cost cutting such costs include packaging costs which will reduce the cost of overall manufacturing.PESTELPolitical factors:  * Government organising public events in order to make public aware about the effects of alcohol consumption on the health.  * Government is imposing restrictions on consumption of beer and alcohol products.  * If anyone is influenced by alcohol in doing crime they are fined with high penalty.                                                                    (The European Brewing Industry, 1999)Economic factors:  * The government restrictions have lead to increase in sales of alcohol in supermarket.  * Government campaigning and restriction on drinking resulted in decrease in the sale of alcohol productconsumption in clubs and pubs.  * Companies are trying to achieve economic of scale through cost reduction.  * Brewing companies are engaged in various marketing strategy to grow their market through acquisition, mergers and introducing premium products.  * Super markets are offering cut price offers.  * Heineken is facing problem in packaging cost (The European Brewing Industry, 1999).Socio culture factors:  * Consumers are becoming more health conscious.  * Growing unfriendly or aggressive behaviour towards binge drinkers.  * People have started drinking wines in North European market.  * Drinking in the pubs and clubs has been reduced.

(Demographics of Europe)Technological factors:  * Companies are transferring expertise and technology to achieve economic of scale, efficiency and cost reduction.  * Centralization of production is done to increase efficiency and volume.  * Trial breweries are established to enhance innovation.  * Support from media and IT are taken. (European Brewing Industry, 1999).Environmental factor:  * European brewers market in Germany and United Kingdom is decreasing and growing around the world with 7% annual growth in China.  * German retailer’s sales are increasing from local private brands rather than brewery-branded.  * Merger and acquisition are carried on by the companies to overcome competition and to have better control over growth.  * Shift in sales from on-trade to off-trade. (Europa, 2010).Legal Factors:  * In the European countries, the advertisements which are related toAlcohol consumption in large volume are forced to apply certain laws by Government.  * The laws in European countries are strictly against Drinking and Driving, under age drinking and Domestic violence consuming alcohol has compelled many customers to reduce the consumption of drinking. (Institute of Alcohol Studies, 2009).

Porter’s Five Force AnalysisAfter doing the environment (Europe) analysis of brewing industry using PESTEL, now we study the entire brewing industry internally, using porters five force analysis.FORCE1: Threat from Substitute ProductThree important components of brewage industry are Distillers, Wineries and Beer Manufacturers. Due to socio-cultural changes, the European consumers turned health conscious and were looking for substitutes like wine, fruit flavored exotic beers

which resulted in unstable market of traditional beer in European brewing industry.FORCE2: Bargaining power of SuppliersThe important supplier for the brewing industry is packing industry for raw material procurement like barely and bottling. The European packaging industry is concentrated by international players like CROWN (for tins) and OWENS-ILLIENOIS (for bottling). Since being   highly dependent on concentrated suppliers, the bargaining of these suppliers will be very high in the future. To reduce this high bargaining power of these suppliers, the brewing companies should achieve central coordination with their suppliers using information Technology and Media. FORCE3: Bargaining power of Customers or BuyersThe availability of substitutes, health consciousnessand off-trade supply of beer, the bargaining power of customer became very high. One fifth of the sales of beer were through off-trade, more options were available for the customers in the form of exotic flavored beer, wines. The government promotion against drinking alcohol also badly affected the brewing industry which resulted in heavy competition between the brewers benefiting the customers. Therefore due to these reasons, the bargaining power of the customers is very high.

FORCE 4: Threat of the entry of new CompetitorsThe threat of new entry into European Brewery industry is very less. Because it is almost a saturated market which is in mature stage of industry life cycle. If a new company will enter into the industry its investment should be highly capital intensive and it is a specific product where innovation is very hard. The level of competition is very high therefore it will not sustain for a long time in market. Therefore it is very hard for a new entry to come in to European brewing industry.                     FORCE 5: Intensity of competitive rivalryThe European market is highly competitive because of low product differentiation, lack of product innovation, high entry and exit barriers resulting in acquisition and strategic alliances

of the existing players to attain the market share. The industry is in growth stage of industry life cycle which means the market is saturated therefore there is a high intensive competition in the market. HEINEKEN:Strengths:  * It has the biggest market share in European brewery business with a sale of €11.8bn.  * The company has more stability and independence to grow steadily as it is family controlled business.  * Enters new market through acquiring locally established companies.  * Use experts and new technologies.Weakness:  * Lacking experts in top level as whole business is controlled by family members who may not have in-depth knowledge.GROLSCH  Strengths:  * It has huge export business, where half of its sale comes from overseas.  * Innovation and branding are core strategy.  * Centralization of production helps to improve efficiency and volume.  * Manufacturer of flavoured beers.Weakness:  * Lack of proper marketing strategy in local market.  * Sales of company are much lesser than other competitors like Heineken.INBEV:Strengths:  * Largest brewer in the world.  * It is second largest brewer in China, which have 7% annual growth in beer consumption.  * They follow the principal of central coordination purchase which help to achieve more efficiency.   * Got well known international like Beck’s and Stella Artois which helps in marketing.

Weakness:  * Lack of innovation.  * Lack of product differentiation. They don’t have anything different from other brewers being the market leader.Scottish and Newcastle:Strength:  * It is market leader in UK, France and Russia.  * Forth largest brewer in Europe in terms of volume.  * They take risk by investing in new places like Ukraine and Baltic countries.   * Emphasises on development of innovative and premium beers.Weakness:  * They are closingtheir inefficient breweries instead of finding solution to the problem, so they lack proper coordination.  * Loosing market share by closing the breweries.

Impact of Trends on the CompaniesHeineken (Netherlands):  * Due to the restriction on the alcoholic products in Europe, so it is obvious that there would be negative impact on Heineken Company as it is a Europe based company.  * This company always transferring their effective expertise and latest technology to their targeting countries to promote their domestic players.  * It is shown in the case that there is decreasement in beer consumption across Europe, so they are looking for the new places and searching for opportunities. Grolsch (Netherlands)This company is having the authority from the government to sell the appreciated Americas miller brand in this country.As it is shown in the case that more than half of the sale came overseas, so there was no greater impact of restrictions and awareness on this company.The production of this company is like as a enhancing competence in trend.

 InBev (Belgium/Brazil)  * There was no great effect on this company of restrictions, because it is a leading company global wise.  * It is not a European company, so it is another reason for little impact.  * They are keeping their strategy by acquisitions.Scottish and Newcastle (UK)  * This company is a largest company in UK.  * Masses of United Kingdom showed great resistance to binge drinking which is not good for the company.  * This company is keeping busy itself by throughout the world.  * This company is focusing to invent the new products and always eliminate the uneconomical ones.

BibliographyAgeing Population and Lifestyle Changes Drive Demand for Orthopaedic Biomaterials in Europe. (n.d.). Retrieved March 9, 2010, from http://www.prnewswire.co.uk/cgi/news/release?id=174134Demographics of Europe. (n.d.). Retrieved March 9, 2010, from Absolute Astronomy: http://www.absoluteastronomy.com/topics/Demographics_of_EuropeEuropa. (2010, February 17). Retrieved March 10, 2010, from European Union website: http://europa.eu/pol/env/index_en.htmEUROPA. (2010, february 17). Retrieved march 10, 2010, from European union website: http://europa.eu/pol/rights/index_en.htmEUROPA. (2010, february 17). Retrieved march 10, 2010, from European Union website: http://europa.eu/pol/health/index_en.htmEUROPA. (2010, february 17). Retrieved march 10, 2010, from European Union website: http://europa.eu/legislation_summaries/employment_and_social_policy/index_en.htmEuropean Brewing Industry. (1999). Retrieved March 9, 2010, from

www.The20European20Brewing20Industry,20Theses_26_Dissertations,20College%20Term20Papers.comInstitute of Alcohol Studies. (2009). Alcohol in Europe A Public Health Perspective. Retrieved March 10, 2010, from Institute of Alcohol Studies: http://www.ias.org.uk/resources/publications/theglobe/globe200602/gl200602_p3.html#Anchor-Evaluating-3800The European Brewing Industry. (1999). Retrieved from College Term Papers Web Site:

AN ANALYSIS OF THE EUROPEAN BREWING INDUSTRY

IntroductionThe purpose of this paper is to analyse the underlying factors that led to a decrease in beer consumption in certain European countries from the start of the 21st century.   The case study we have been presented with examines how the increased competitive pressure of operating within global markets caused consolidation within the brewing industry in the form of acquisitions, alliances and the closures of breweries.   The

framework I will be using to outline these factors is the PESTEL analysis which categorises environmental influences into six main types; political, economic, socio-cultural, technological, environmental and legal.   This provides a comprehensive list of influences on the possible success or failure of particular strategies.PESTEL AnalysisPolitical FactorsEuropean brewing companies’ main concern when it comes to the political factors is Governments strongly campaigning against drunken driving and other alcohol related threats to innocent members of society. These campaigns have the potential to push for law changes surrounding what alcohol can be purchased in restaurants, pubs, bars and retail outlets in terms of both quantity and alcohol volume (%).   Economic FactorsMovements against drunken driving and binge drinking have resulted in a huge shift in sales from on-trade (pubs etc) to off-trade (retail e.g. supermarkets).   Unfortunately this caused an estimated 50 pubs a week to close during the recession in2009, a huge loss for the breweries in terms of customers.   More than one fifth of beer volume is now sold through supermarkets, which put an extremely low mark up on beer to lure people into their stores.   Because the breweries have lost customers there have been a number of extremely significant mergers, acquisitions and closures within the industry as breweries either vie for a large enough market share to keep business alive or accept defeat and sell out.

Socio-Cultural FactorsThe case study refers to the growing hostility towards so-called ‘binge drinking’, the increasingly common trend which is seeing young adults consume alcohol excessively in a short space of time at pubs and clubs.   This ‘binge drinking’ can result in accidents, violence and criminal behaviour, all of which carry negative connotations in the eyes of the public.   In addition, issues relating to ‘binge drinking’ are often blown up in the

media and tough questions regarding the health and safety of the young adults are quickly turned back onto liquor licensing committees and brewery representatives to answer.Technological FactorsWith breweries now releasing higher priced premium beers such as low-carbohydrate beers, non-alcoholic beers, extra cold lagers on tap and even fruit flavoured beers, it would seem logical for brewers to invest more into R&D.   Especially as these new ‘hybrid’ beers are contributing to sales values rising even though on-trade beer volumes are falling.Environmental FactorsThecase study did not touch on environmental factors in much depth.   However, it was stated that packaging (glass bottles and cans) was a major purchasing cost with the industry being dominated by large international companies who have the power to set prices. Therefore it would be wise for breweries to look at recycling and waste disposal as key areas to increase efficiency for business success.Legal FactorsIncreasing awareness of the effects of alcohol on health and fitness have the potential to cause the laws surrounding liquor licensing to be reviewed. Possible changes could include, lowering the alcohol volume (%) in drinks, lowering blood alcohol levels for drunk driving and even raising the drinking age.   All of these factors could be detrimental to the profit margin of the breweries in one way or another.

PESTEL ConclusionWhile all the factors of the PESTEL analysis require attention if the businesses operating in the industry want to maximise efficiency and success, some are more important to focus on than others.   The political, socio-cultural and legal factors influencing the brewing industry are huge obstacles for the breweries to overcome, and they all interrelate. Socio-cultural factors such as ‘binge drinking’, drunken driving and health issues are often in the light of the media, and the media

regularly blames brewing companies for these issues.   Politicians want to be seen to be doing the right thing, so they start campaigns to stomp out these socio-cultural issues.   Ifthese campaigns receive enough support from the public, laws surrounding alcohol can change.   Brewing companies must be seen to be actively doing their part in helping out the communities that support them if they want to keep brewing their beers with no regulation.Strengths & Weaknesses of the Breweries Presented in the Case StudyAnheuser-Busch InBev (Belgium)StrengthsIn 2004 the merger of Interbrew and AmBev made InBev the second largest brewer in the world.   In 2008 InBev acquired leading American brewer Anheuser-Busch, turning them into the unrivalled world leader.   A-B InBev control almost 300 brands, lead by globally consumed beers such as Stella Artois, Becks and Budweiser.   This helps the company enjoy nearly a 50% market share of the US market and a 19.5% share of the global market, which they can only look to keep increasing in the near future.   Perhaps A-B InBev’s most impressive feat is in 2008 the company owned four out of the top ten best selling beers in the world, which has lead to them holding the number one or number two positions in twenty national markets.WeaknessesA-B InBev has been reducing its stakes in the Chinese market and it also sold its Central and Eastern beer operations in 2009 to pay for its acquisition of Anheuser-Busch ($52bn).Greene King (United Kingdom)StrengthsGreene King is the largest of all domestic British brewers. The company owns IPA, the UK’s top cask ale, with over 20% of the on trade market.   Whereas Old Speckled Hen, UK’stop premium ale, accounts for more than one eighth of beer sold via retail in the UK.   Greene King also own and operate almost 2000 pubs in the UK, an unusual but profitable strategy as they raised $310m in 2009 for further acquisitions.

WeaknessesGreene King’s business is effectively confined to the UK, a notable weakness as the case study illustrates that beer consumption has been falling in the UK since the start of the 21st century.Tsingtao (China)StrengthsTsingtao’s main strength is their strong export orientation, with the companies exports accounting for more than 50% of China’s beer exports.   This strong focus on exports has seen them become the Chinese brand leader in the US Market and has lead to their beer now being sold in 62 countries.WeaknessesTsingtao only maintains a 13% market share in China, a figure that needs to see significant improvement.   Asahi breweries also hold 19.9% of shares in Tsingtao and a private investor holds 7%.   Tsingtao needs to hold on to shares or else face the prospect of acquisition or a merger.ConclusionIn conclusion, there is definitely a growing reliance upon super-brands in the brewing industry, like Anheuser-Busch InBev who dominates 19.5% of the global beer market.   This reliance upon mega-brewers has come about through acquisitions, mergers and closures within the industry, as smaller brewing companies can’t handle the pressure of operating within a global market and have to sell their shares to the large international companies.

This assignment is based on the case example ‘Global forces and the European brewing industry’ and relates to two questions raised in chapter 2 at the end of the case example (Johnson et al. 2008, p. 91) of the book ‘Exploring Corporate Strategy: Text

and Cases’ by Johnson, Scholes and Whittington.

  1.) Using the data from the case (and any other sources available), carry out for the European brewing industry (i) a PESTEL analysis and (ii) a five forces analysis. What do you conclude?  (i) PESTEL analysisOne tool to analyze the broad macro-environment is the PESTEL analysis. In the PESTEL analysis environmental influences are categorized into political, economical, social, technological, environmental and legal aspects. It helps to identify how future trends might influence an organization and furthermore, to identify the key drivers of change to create scenarios for the possible future.

Political factorsThere is an overall decline of consumption of Beer in Europe as many traditional key markets have been made increasingly aware of the social problems associated with alcohol consumption. Factors could be the active campaign of European governments against drunken driving, binge-drinking and consequently the long term health and fitness problems.

Economic factorsIn the case study there is the talk of the overall declineof European beer consumption, while there was an increase in emerging markets (e.g. China, Brazil) around the world. This could be because of the government campaigns which caused a shift in sales from the ‘on-trade’ (beer consumed in pubs or restaurants) to the off-trade (retail/supermarkets). Moreover, the success of German supermarkets like Aldi and Lidl with their own ‘private label’ beers rather than the brewery-branded beers has an influence on the European brewing industry. Supermarkets are offering cut price offers. Also the rise of the main purchasing costs like packaging, raw material and energy will have influence on the beer price e.g. Heineken). Also, the increase of fuel prices which will affect the distribution network,

thus transportation costs will increase. Besides, due to the economic crises the breach between rich and poor is steadily growing and thus many people cannot afford any more to go out for dinner or having a beer. Through legal restrictions the demand for alcohol in public places could declines. Furthermore, acquisitions, licensing and strategic alliances have occurred because the leading brewers battle to control the market. The global pressures for consolidation due to overcapacity within the industry are another point that influences this industry. There is a growing trend towards cross-border mergers and acquisitions. Introduction of higher-priced premium products let sales values raise. If there are natural disasters like previously the fires in Russia this has an impact on the prices of the raw material.

Social/cultural factorsWines have become increasingly popular in theNorthern European markets. People may rethink their lifestyle and prefer drinking a good wine instead of beer and ‘binge drinking’. This could be because wine is associated with the upper class and people with a higher income. Moreover, people are getting more and more health conscious and therefore, will drink in moderation. Furthermore, there is a rising demand for premium and fruit-flavored beers and also an increasing demand for ‘private-label’ beers. There will also be an increasing acceptance of pan European brands. Besides, the importance of supermarkets in distribution and the growth of own-label products will rise.Technological factorsResearch and development is important in the brewing industry due to the changes in consumer tastes. People demand alcohol in different flavors, with low calorie, with low alcohol, seasonal beer and so on. Through technology it is possible to produce more although raw material stays the same, furthermore the quality is getting better, the alcohol has a longer durability and is produced more efficiently and quickly. New harvesting and production technologies help to increase process efficiency.

Environmental factorsPeople are getting more and more aware of the environment and it is necessary that companies do everything to prevent environmental pollution. It is important that the environmental load through the brewing process is as low as possible. Reusability and recycling is important. The brewing industry for example treats their effluents so that they can use it again for irrigation. Through this they save energy and minimize sludge disposal costs. (1)Legal factorsBesides,when comparing Europe with the United States one can see that in America it is forbidden to drink in public places in contrast to Europe where you can drink alcohol wherever you want. This could lead to new laws that forbid drinking alcohol in the public. This is a threat that might come really quickly when comparing the new law about the restrictions in smoking in public places like pubs and restaurants. Moreover, a few years ago it was allowed to have a blood alcohol level of 0.8 parts per thousand. This was changed to 0.5 parts per thousand. So it is not unlikely that the government changes this law again to further price down this limit or completely forbid to drink and drive. As you could read in the case study in the United Kingdom there is a growing hostility towards excessive alcohol consumption in pubs and clubs and this could also happen everywhere in Europe. Furthermore, there is the threat that politics could put up the age of teenagers from 16 to 18 to allow to drink alcohol. If drunken people are involved in an accident or in a crime they are fined with a higher penalty.

  (ii) A five forces analysisThe five forces analysis helps to determine the impact of the threat of new entrants,   substitutes, buyers and rivals on profitability in an industry or sector. (Johnson et al. 2008, p. 59)

Threat of entryThe threat of entry depends on the height of barriers to entry. I think that the threat of entry in European Brewing industry is very low due to the mergers and acquisitions of the past years. Through consolidations breweries stabilize their competitive position. As there areonly a few really big brewing companies with a lot of power the financial effort for new entrants would be too high to enter this market. Moreover, because of the strong brand and the loyalty of existing consumers in Europe it would not be easy for new entrants to challenge well established leaders. Threat of substitutesThere are a lot of products that can be seen as a substitute of beer like wine, fruit-flavored and exotic beers as well as soft- and energy drinks. In the case example wines becoming increasingly popular in the Northern European markets. Table 1 in the case example shows that there was a significant decrease in beer consumption in Denmark and Norway which confirms the increase of wines in those countries.Power of buyersDue to Government campaigning against drunken driving and binge drinking there was a shift from ‘on-trade’ to ‘off-trade’. Through this, large supermarket chains (industry concentration increases) like Tesco or Carrefour gain the power of buyers and thus have a high bargaining power. This means that large supermarket chains for instance pretend the price they are willing to pay. Through the power of buyers and their ability of changing easily the brand (supplier) the brewing industry comes under pressure. Power of suppliersIn the case example they write that the Brewers’ main purchasing costs are packaging, raw materials and energy. The power of suppliers of packaging I believe is very high. There are only a few suppliers of glass- and PET- (polyethylene terephthalate) bottles available and therefore, they have a high power. To change the supplier could lead to high switchingcosts as they have to buy a new machine or adapt the existing

machine. The main raw materials for brewing are water, malt, hops, yeast and barley. The power of suppliers of these materials I think is low because there are a great number of suppliers available. The power of supplier of energy is very high as there is a concentration of suppliers. Competitive rivalryCompetitive rivalry means that there are organizations with similar products and services aimed at the same customer group. In my opinion competitive rivalry in this industry is very high because   * product differentiation is very low   * acquisitions, licensing and strategic alliances (gain market share)  * consolidations due to overcapacity within the industry Table 3 shows the world’s top 10 brewery companies by volume in 2005 which accounted for around half of world beer volumes. InBev, Anheuser-Busch, SABMiller and Heineken reached about 33% of the volume of beer drunken around the world. Approximately 15% was reached by Morelo, Carlsberg, Coors, TsingTao, Baltic Brewery Holdings and Asahi. The European brewing industry I believe is saturated and started to decline and thus competitive rivalry will still exist on a high level. Barriers to entry within EU are reducing leading to cross-border mergers.My conclusion is that either you can be one of the big players or one of the many small specialist and regional breweries like Grolsch, Cobra Beer …

For the four breweries outlined above (or breweries of your own choice) explain:  (a) how these trends will impact differently on these different companies; and  (b) the relativestrengths and weaknesses of each company  (a) Heineken

Heineken is the biggest of the European brewery businesses. As Europe is a saturated market Heineken focuses also on going overseas. They use locally acquired companies to introduce their beer they have a good strategy to further expand their market share. The same strategy they could apply in Europe. As the European market is saturated they could acquire small specialist and regional breweries like Grolsch and thus grow.  (b) Strengths:  * Leader in the European brewery business  * 5 % of sales in Asia-Pacific  * 17% of sales in Americas  * Strong brands: Heineken, Amstel  * Family controlled   stability and independence  * Introduce brand to new markets overseas by using locally acquired companies  * Strengthens local companies by transferring expertise and technology  * Economies of scale for Heineken and the local beers.  * Have a vision! Priorities of action:      * Accelerate revenue growth      * Improve cost efficiency and reduction      * Speed up strategy implementation      * Focus on markets where they believe they can win.Weaknesses:  * Price increase of packaging. Heineken complained of an 11 per cent rise in packaging costs.  * Lack of innovation to meet consumers needs (changing tastes - flavoured beer)  * They could stuck in a rut because it is a family-controlled ownership. And they do things as they always have done.Grolsch  (a) how these trends will impact differently on these different companiesGrolsch will invest in innovation and branding to make their brand stronger by strikinggreen bottles and its unique swing-tops. Furthermore, through strong and distinctive beers they want to succeed. As they are a

medium-sized company it would be wise to join strategic alliances to strengthen its position. Otherwise it could easily be that big players that have a vast economies of scale and a high financial power acquire Grolsch. Moreover, it would be good for Grolsch to offer products like the brewery “Mohrenbräu” in Austria. They offer for instance beer noodles, beer mustard, beer jam, beer cosmetic and so on.(4)  (b) Strengths:  * Very experienced - established in 1615!  * Different products (Grolsch premium lager and new flavoured beers) Have the right to sale and distribute the valued US Miller brand.   * Centralized production on a single new Dutch brewery   increase efficiency and volume.  * Trial brewery to support innovationWeakness:  * Medium-size international brewing company  * Less financial power  * € 313m in 2005 in contrast to Heineken € 11,8bn  * Single Dutch brewery - if a problem occurs no beer can be produced.

InBev (Belgium/Brazil)  (a) how these trends will impact differently on these different companiesInBev had a turnover of € 13,3bn in 2006 and was (at that time) the largest brewer in the world. Through further acquisitions of well established (strong brands) and innovative breweries it could strengthen its position. Furthermore, because they have such a strong financial power they could do equity investments to expand their position. Concentrate on building strong brands!

  (b) Strengths:  * Largest brewer in the world (merger of BergianInterBrew and Brazialian AmBev in 2004)  * Second largest brewer in China (7 % annual growth - largest single market by volume)

  * Holding number one and number two positions in 20 different countries  * Strong financial power  * Strong brands like Beck’s and Stella Artois.  * Through the acquisition with Anheuser-Busch in 2008 they now have the King of Beers, Budweiser and Bud Light.(2)  * They have a strategy:      * Transform itself from the biggest brewing company in the world to the best by        * Building global brands.        * Increasing efficiency            * Through more central coordination of purchasing including media and IT.            * From the optimization of its inherited network of breweries.            * From the sharing of best practice across sites internationally  * Emphasize organic growth.

Weakness:  * They bought Anheuser-Busch in 2008 whose sales of the Budweiser and Bud Light brands where declining since 2003. Maybe due to the shift of ownership of the largest U.S. brewer into InBevs’ hands the decrease in sales could get much worse. (2)   * Inherited network of breweries  * Scottish and Newcastle (UK)  (a) how these trends will impact differently on these different companiesScottish and Newcastle is European focused. It was acquired by Heineken in October 2009. (3)

  (b) Their strengths were:  * Strong brands ( John Smiths, Kronenbourg, Kanterbrau, Baltika and Fosters)  * Fourth largest brewer in Europe (volume terms)

  * Market leader in UK, France and Russia  * Investment in Baltic Beverages   fast-growing markets  * 20 per cent stake in CBC (fifth largest brewery)  * In USA second largest importer of foreign beers  * Emphasize development of innovative and premium beers  * Identify their weakness like inefficient breweries and close them down.Their weaknesses were:  * Too less financial powerMohrenbräu (Austria)Strengths:  * Wide product range (Mohren Pfiff, Mohren Special, Mohren Radler, Mohren Kellerbier)  * Complementary products (glasses, beer jugs, ...)  * Additonally products like beer chocolate, beer mustard, beer noodles …  * Strong local brand  * Oldest and latest brewery in Vorarlberg (1834)  * Online shop  * Innovation and high tech machinesWeakness:  * Less financial power  * Regional (but starting to expand - for instance Scandinavia)In conclusion I believe that the mergers and acquisitions during the past years will continue. Big players will buy smaller companies to expand their range of products or to break into new markets (other countries). In the future I think mergers will occur in the emerging markets where beer consumption is raising.

ReferencesJohnson, Gerry, and Kevan Scholes and Richard Whittington. Exploring Corporate Strategy – Text & Cases. 8th ed. Harlow: Pearson Education / Prentice Hall Financial Times, 2008.   (1) http://www.thewatertreatmentplant.com/water-treatment-brewery-industry.html  (2) http://record-eagle.com/business/x75056566/InBev-

inherits-Anheuser-Busch-weaknesses  (3) http://www.guardian.co.uk/business/2009/oct/13/heineken-newcastle-brown-ale-jobs  (4) http://www.mohrenbrauerei.at/index.php?mid=5&smid=&ssmid=

Brewing Industry Case StudyBy bdcorke, Jan 2012 | 6 Pages (1,445 Words) | 262 Views|

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Brewing IndustryBeer is a fermented beverage made of water, hops, malt, and yeast. The alcohol content is usually between 4-7 percent (pg.1). Beer is a popular drink that many consume at their homes, at local pubs, at sporting events, and while having dinner at their favorite restaurant. The brewing process is an eight step process that includes malting, mashing, kettling, hops extracting, protein extracting, fermenting, conditioning, and storing (See Exhibit 6-pg.20). American beer is produced by three types of productions. Large domestic production produces most beer. Microbreweries are a brewery, generally selling fewer than 1million barrels of beer a year and frequently selling its products for off the premises consumption. Brewpubs have less than 1 million barrels in annual sales and the majority of there beer is sold for on-premises consumption (pg. 2-Table A).   There are a few big firms in the brewing industry and many different types of beer. The brewing industry has a very large impact on our economic system, but this industry has also had its challenges over the years.Firms and Market ShareIn 1990, America had 286 brewers in the Brewing Industry. These brewers sold 181.6 million barrels of beer. The retail value of the barrels is $45 billion dollars in the domestic market (pg. 1). There are seven major firms in the industry that hold the top positions in the market. Anheuser-Busch was the leader in the market.The firm’s total share of the market was 45.9%. The second largest firm was Miller with 23.1% of the market. Coors came in behind Miller with 10.2% of the market. Stroh held 8.5% of the

market. Heileman held 6.5% of the market. Schlitz had 5.6% of the market. Pabst came in last holding only 5.1% of the market. The remaining 5.8% of the market was held by the remaining firms in the industry.   Anheuser-Busch holds almost half of the entire market share. Anheuser-Busch was able to achieve this by branching out into the entertainment and food business along with the brewing firm. (pg. 16 Exhibit 3) BarriersIn the brewing industry, barriers to entry were high. If you were not able to produce beer with minimum efficient you probably would not survive in this industry. The large firms in the industry integrated automated facilities to help produce beer. Anheuser-Busch committed over $300 million in 1989 to be a state of the art brewery in Cartersville, Georgia. The brewery opened in 1992 with an annual capacity of 6.3 million barrels. Microbrewers entered the industry, but had with smaller facilities and much higher operating cost. It would be impossible for them to keep up with the larger firms in the industry. With such a vast difference in the number of barrels the microbrewers and brewpubs produced compared to the large domestic production being a small firm in this industry affects the ability to compete in the marketand is a major barrier. (pg.4)Another barrier in the brewery industry is wholesalers who supplied to off-premise outlets (supermarkets, grocery and liquor stores) usually carried only one brand. This caused difficulty for competitors as they were unable to find large wholesalers to carry their product as the lead bran. If you are not able to compete with the large firms’ ability to distribute its product at a very low cost it will be difficult to get into the market. Anheuser-Busch distributes through a two-tiered system to wholesalers and retailers. They offer discounts on trucks, insurance and other items to its wholesalers. Many wholesalers refused to carry competitors’ products which make it almost impossible to be productive in the market. It is said that Anheuser-Busch’s distribution cost is 15% less than those of competing distributors. (pg. 6)   If one does not have the ability

to get their product distributed the market suffers because the consumer has limited choices and may have to travel to several different stores to shop to get the product they want. Another barrier in the brewery industry was the ability of the major firms’ to launching new brands as they were able to leverage their existing brand in conjunction with production and distribution capabilities, which were so vast that sales volume was achieved quickly.   Bud Dry for an example was a new product of Anheuser-Busch family had gained 2.5%of the market less than one year after it was put on the market. This affects the market because if a major firm continues to push new products out and their market share continues to rise, they could possibly take over the market. Product Differentiated  In the brewing industry there was product differentiation. All beer is mad of the same materials, but there are several different types of beer produced in the industry. The breweries would do something different with their products to make them different from the regular beer. Miller introduced lite, low calorie beer in the mid 1970’s. This different beer allowed them to draw in older drinkers. Miller also introduced cold filtered Genuine Draft Beer which was a filtered product instead of a pasteurized product. Microbrewed beer is different from domestic brands. Microbrewed beer is darker and heavier than premium beer and it often competed with imports rather than domestic beer (pg.10). By making the microbrewed beer dark and heavier firms where able to sell the beer at premium prices.   Nonprice Competition   Nonprice competition is used by many firms in the brewery industry. In 1989 Miller held a six-city party in Texas that was said to be the largest party in history.   Anheuser-Busch sponsored sporting events. Anheuser-Busch sponsored a social-responsibility campaign (pg.6). They wanted to bring awareness to beer drinks knowing when to stop drinking. Anheuser-Buschalso emphasized recycling programs and animal care. These two programs were launched at Sea World and Busch Gardens

Theme Parks that Anheuser-Busch owns. Being the owner of the theme parks allowed Anheuser-Busch the exclusive right to promote their programs with little or no additional expense to the firm. Competitive StructureEconomists generally find it useful to classify markets into four broad types: perfect competition, monopoly, monopolistic competition, and oligopoly.   Each of these terms describes a particular type of market structure or organization, and there are several factors influencing the market structure.   These factors include the number of firms within the industry, the firms’ control over pricing, product type, the amount of nonprice competition, and the barriers to entry and exit from the industry. In Economics, an oligopoly is a market form in which a market or industry is dominated by a small number of producers affects but does not control the market. In the brewery industry in 1990 there were 286 brewers in America, but only seven firms affected the market. These seven firms’ production, price and innovations affected the market. (pg. 1) Looking at the chart below the brewing industry fits into the category of an Oligopoly.

The firms in the brewery industry produce some products that are standard such as the Domestic beer which is produced by Anheuser-Busch, Miller, Coors, and Stroh.Within the domestic beer there are differences in the beer. Some beer is filtered and some is pasteurized. Microbrewed beer is different from domestic brands. Microbrewed beer is darker and heavier than premium, popular and light beer. There is also imported beer. This beer is imported from outside the USA. 5% of all beer consumed in the USA is imported (pg. 11). There are several barriers to enter the market, nonprice competition is evident and the power of price is interdependent. Each firm’s actions often depend on the actions or response of the other firms in the industry. Federal Government Regulations

Federal Government regulations affect all industries in one way or another. I believe government regulations is a must to make certain that the consumer is protected and it helps keep the market competitive. Federal Government regulations did impact the brewery industry. In January 1991 the federal excise taxes were doubled to $18 per barrel. Congress eventually passed legislation that allowed brewers who sold less than 2 million barrels of beer a year an exception to this tax. Small firms only had to pay $7 on their first 60, 000 barrels (pg. 3). In November of 1991 the Surgeon General ask firms to voluntarily remove any advertising that appealed to youth. Firms were not obligated to remove the advertising, but if they did not, the Federal Government would likely pass legislation that forced them to (pg 13).

European Brewing IndustryQ) Apply PESTEL analysis to the European Brewing Industry identifying key opportunities and threats in 2010. PESTEL analysis:Political factors:* The government is campaigning strongly against drunk-driving, which is affecting the tendency to drink beer in restaurants, pubs and bars* The Government has the power to set potential fines for the industries that do not meet there standard law requirements* Decline in traditional key markets such as the United Kingdom is due to the fact that there is growing hostility towards 'binge drinking'* Restrictions on packaging, such as; the usage of cans in DenmarkEconomical factors:* Low growth in consumption of beers* In the European industry where beer growth is historically high, there is a decline in the demand for beer, whilst in the developing economies such as; China and Brazil, the consumption of beer is steadily growing* Growing trend towards cross-border mergers* A recession creates increased activity at the lower ends of product price ranges, therefore the rate of interest will increase depressing business and causing lower spending levels along the waySocial factors:* Growing concerns about health and fitness* Growing concerns about drunk-driving* Underage drinking levels increasing * Binge-drinking in pubs and clubs is being discouraged* Changing

social attitudes and tastes such as the way individuals spend their leisure time, for example; going to the cinema, or just 'hanging' out with friends* Peer pressure is an ongoing issueTechnological factors:* Changes to certain products* Introduction of new products, such as; fruit flavored beers* Economies of scale in brewing and distribution* Consumer's tastes and preferences changing depending on one's moodEnvironmental factors:* Ban on cans in favour of environmentally friendly recyclable bottles* Government intervention for bottled beerLegal factors:* Changes in laws* Stronger enforcement of underage drinking regulations Key opportunities and threats in 2010Opportunities:* Opportunities for growth are the increase in demand for alcoholic beverages, predominantly beers* Increase in off-trade beer consumption worldwide* Steady growth for demand for premium products, such as; extra cold lager and fruit flavoured beer* Demand for beers and alcoholic beverages is rising in developing countries, such as China and Brazil, this is an advantage to the European Industry, because there is always the opportunity to mergeThreats:* Consumers are growing more and more health conscious and fitness aware that the affects of alcohol are similar, whereas on the other hand beer has the following side effects, such as; weight gain and bloating. These side effects could push consumers to drink

Business Enviorment of the Brewing IndustryBy x67jagx, Sep 2009 | 10 Pages (2,355 Words) | 1321 Views|

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To discuss the environment of a particular industry or business, firstly one should attempt to define what a business environment is or entails. Simply stated in the Merriam-Webster dictionary, Business Environment is defined as circumstances, objects or conditions surrounding a commercial or mercantile activity engaged in as a means of livelihood. This is a very broad definition, as it should be, considering the variety of elements that can affect a business thus determining its environment. There are literally hundreds of factors that can dictate, shape, and or mold the environment of a business. Those factors differ slightly depending specifically which business is being discussed now. In this paper, I will delve in to the most significant factors that shape my business environment.      Salient points to be discussed at length include inflation rates and interest rates which have been a topic of hot discussion in the midst of this credit crisis. The issue of employment or lack thereof is also a point of merits not to be ignored. Wholly influencing the business environment is the arena of politics, especially in these times, is a consuming topic of discussion. Newly important areas concerning environment and ecology single handedly have changed the face and processes of manufacturing.      To discuss the business environment of the Brewing Industry in the U.K there are several factor to consider. To comprehensively examine the brewing industry one must alsoconsider the factors of the economy, social ramifications of your product, the political climate, and the arena of technological advances within the business environment of the brewing

industry. This breakdown of individualized environment is an analysis known as PEST. The acronym is formulated using the aforementioned components.      Looking at the political environment illustrates how big alcohol consumption and thus the brewing industry impacts the legal and political systems. The World Health Organization (WHO) has found that the potential hazards of an unchecked brewing industry warrants legislative action. The WHO is a sector of the United Nation that specialized with dealings in international public health. The WHO regulates a number of elements involved in the brewing industry spanning from deeming the percentage of alcohol content that specifies the classification of types of alcohol to minimum pricing of alcohol.      “Alcoholic beverages are commercial products and, as such, subject to the same economic principles as other consumer products. Retail prices of alcoholic beverages are composed of the wholesale price plus profit and other costs. In addition, taxes specific to alcoholic beverages are often added. One of the factors explaining price differences is the rate of alcohol taxes. Production costs per litre of pure alcohol are higher for making wine and beer than distilled spirits. That is one of the reasons for the usually higher tax on spirits.Another reason is that, in some countries, the official policy of the pricing system is to steer people towards a particular type of low-alcohol or non-alcoholic beverage, in order to substantially reduce risky or high blood alcohol levels, i.e. discourage spirits drinking and encourage beverages with lower alcohol content (Holder et al., 1998)”. (WHO pg 49 2004)Such action could seem intrusive and outside the scope of governmental power and/or concern. But when doing a PEST analysis of an industry often it is seen that the environmental elements overlap with each other. The broad use of legislation also has a social responsibility aspect accompaniment. One would not be as hard pressed to say there are huge ramifications regarding the brewing industry at the political level. Although, it seems that the political action is taken not because the leaders of the brewing industry have paved the way for action, but it seems

they are the cause for the action. Of course the legislation is geared to keep retail giants in check as well. But the brewing companies create such a large volume of product it only behoves retailers to take the steps necessary to attract their customers through the door.The necessary legislative interjection is largely fuelled by the social contract citizens tend to believe they have with their respective governments. The contract of paying taxes and generally being good human beings in return for protection from themselves is a notionheld, perhaps subconsciously. Particularly in Great Britain, there is a deeply embedded cultural dynamic of social drinking. As an American citizen, I can relate to the deep roots the brewing industry had in the West. America has had initial economic markets built sturdily on the brewing industry. However, there still is a bit of reluctance to imbibe the large amounts as frequently as those in the U.K. This statement has come from primary personal observational research.Though the brewing industry is an integral part of European culture that would also lend one to believe that the brewing industry would feel a constantly renewed sense of responsibility to it consumers. Feeling that sense of responsibility and manifesting the sense of responsibility are two different things, are the brewing companies performing the latter? The question is only raised because literally every day there are new studies that come out saying that now women in the U.K are more likely to die from alcohol related problems than men are in different parts of the world or more children are abusing alcohol than in any other country in Europe. Only recently in the Metro pg 34, there was a piece that claimed that women who drink two drinks or more everyday increase their chances of contracting oesophageal cancer to seven in ten thousand. It is unrealistic to expect brewing industries to cut production or take any action which would incur a decrease in sales, or product availability. Butperhaps ad campaigns that encourages drinking in moderation or even massive support for companies like GlaskoSmithKlein that

take on the daunting task of cancer research. These genuine sincere gestures would display a modicum of social awareness and responsibility.Also, the issue of underage drinking has been a subject of great concern in modern history. The reasons for this concern are sound. Young people are still developing physically, emotionally, and mentally. The very nature of alcohol is to affect/disrupt the processes of the body. The effect alcohol can have on young people can be permanently damaging hence the reason for a minimum age for drinking. Drinking whilst underage, including heavy and frequent use of alcohol, carries a variety of detrimental consequences in tow. Everlasting and instantaneous consequences of singular incidences resulting from impulsive alcohol fuelled actions up to including, injury and accidental death are frequently occurring. Youth, coupled with chronic binge drinking also often comes persistent absenteeism, abuse and addiction to alcohol, and anti social behaviour.      “Acute consequences of underage drinking include unintentional death and injury associated with driving or engaging in other risky tasks after drinking, homicide and violence, suicide attempts, sexual assault, risky sexual behaviour, and vandalism and property damage. In addition, these consequences appear to be more severe for those who start drinking ata young age. Hingson and Kenkel (in press), report on a series of studies that controlled for history of alcohol dependency, frequency of heavy drinking, years of drinking, age, gender, race or ethnicity, history of cigarette smoking and illicit drug use. These studies reveal that youth who started drinking before age 15, compared to those who waited until they were 21, were 12 times more likely to be unintentionally injured while under the influence of alcohol, 7 times more likely to be in a motor vehicle crash after drinking and 10 times more likely to have been in a physical fight after drinking." (Bonnie 2003)      The economic climate of the brewing industry’s business environment is a pertinent subject to discuss in the credit crisis

much of the world seems to be enduring now. Of the many economic factors that will affect the brewing industry one could argue that the decrease in interest rates will become the most hazardous component in the grand scheme of things. However, though the initial lowering of increase rates will prove beneficial for some, that sets the country down a very slippery slope and lost footing could prove to be very detrimental indeed. John Higginson, the Chief Political Correspondent for the Metro, illustrated my point exactly.          “The latest half percent rate cut is intended to make money so cheap that they [banks] will start offering loans again. Lloyds TSB, Nationwide, Halifax, and Skipton Building Society are all passingon the cut in fill to customers on standard variable rates – but not all lenders are certain to follow suit to keep up their profit margins. The cut should be passed on those on tracker mortgages but will hurt those who live off their savings." (Higginson pg1)The initial boost on the economy because banks are lending money again quickly deteriorates to an ugly situation. The government now will have to begin printing more paper money that will soon be needed because of the plummeting interest rates. Of course throughout history there is a direct correlation with the availability of printed money and/or available credit with exploding inflation. Inflation, one of the salient points that have to be heavily considered when factoring in the cost of doing business, as expected is going to drive up the cost of raw materials.      In turn the amount of disposable income is decreasing every so rapidly causing the once affordable luxuries enjoyed by the upper echelon of personnel on the corporate triangle to become not so affordable. Hence, there is there now come the choices of choosing to deny corporate fat cats luxuries previously beholden to them or beginning to trim the number the number of employees of which the brewing industry has on retainer. So often what is seen during this credit crisis fiasco, after a hurried perfunctory debate, redundancies are made. Unemployment has

been on the rise will continue for an undetermined amount of time. The civil unrestthat has spread like wildfire across the U.K. only to be fanned by the horrifying situation taking place in the banking industry is constantly bubbling under the surface.      The permeability of recent technological changes means that members of the public and privates sectors of the organization of all sizes have been influenced by the fluctuations of the technological environment. Simple technological advances are not the sole driver of change. It is the method by which new and improved culture is integrated into the business environment that creates the change. The modernity of the culture today has almost made improvement in technology the moving force behind change. But a driving force behind needing constant consistent technological change is due to the ever changing way we view the environment.      As I stated earlier, the elements which shape the business environment of the Brewing industry do overlap within on another. The issues of the Environment and Technology and Technology development, in the new millennium, go hand in hand. The globalization of our industries are due to improvements in transport and communication which in turn causes humans to view the world in a much more holistic manner. Gone are the days where there were “four corners” of the earth shadowed in mystery and trepidation. As our industries become larger our world becomes incredibly smaller. This does enable human to perhaps view less developed areas of the world yet be damagedby the constant battering of modern technology. Hence, allowing us to see what was once untouched and unspoiled. In seeing such things in the 1990's and in the new millennium, the sentiment of " the world is oyster” has take a much more figurative meaning. A sense of awareness has come about conveying that it may be wrong to dump toxic waste materials into rivers and streams and the like.      With this new way of thinking sweeping the developed nations, big industries have need to take giant steps to ensure

their brand name stayed positive in the eyes of the consumer. Ad campaigns featuring new and improved methods of brewing or encouraging the use of recycling programs all this done because the consumer called for it to be done. The technology had to change in order to keep up with the times. Scrubber put in manufacturing plants to reduce carbon admissions were the initial phase of improvements. In addition to methods used to create product, the issue of waste became an important issue for the consumer and the brewing industry. The consumer caring about the environmental aspects and manufactures wanting to incur the least amount of waste possible but for an economic reason are reason for development of technological resources.

      Works Cited

Chaloupka, F., et al. 2002. The Effects of Price on Alcohol Consumption and Alcohol-Related Problems. The National Institute on Alcohol abuse and Alcoholism, [Online] V26 (1), p. 22-34. [Accessed 01 January2009]

http://pubs.niaaa.nih.gov/publications/arh26-1/22-34.htm

World Health Organization. 2004 Global Status Report: Alcohol Policy.

Bonnie, R. (2003) Reducing Underage Drinking: A Collective Responsibility. Washington, DC: National Academies Press.Accessed 29 January 2009http://site.ebrary.com/lib/roehampton/Doc?id=10046854&ppg=76

Higginson, J. 2009. £150 bn: The Last Throw of the Dice. Metro. 6 March, pg1.

Hingson, R. And Kenkle, D. 2003. Committee on Developing a Strategy to Reduce and Prevent Underage Drinking, In Bonnie,

P 2003. Reducing Underage Drinking: A Collective Responsibility. Washington, D.C.: National Academies Press.Accessed 29 January 2009http://site.ebrary.com/lib/roehampton/Doc?id=10046854&ppg=76

Holder, H. Et al 1998. European Integration and Nordic Alcohol Policies. In World Health Organization, 2002. Global Status Report: Alcohol Policy.Geneva, Switzerland: World Health Organization, p 41.[Accessed 1 March 2009]http://site.ebrary.com/lib/roehampton/Doc?id=10067174&ppg=49

Jordan, A. Environmental Policy in the European Union : Actors, Institutions and Processes .London, , UK: Earthscan Publications, Limited.[Accessed 3 February 2009]http://site.ebrary.com/lib/roehampton/Doc?id=10128842&ppg=199

World Health Organization. 2004 Global Status Report: Alcohol Policy.Geneva, Switzerland: World Health Organization, p 41.[Accessed 1 March 2009]http://site.ebrary.com/lib/roehampton/Doc?id=10067174&ppg=49

Industry OverviewThe beer brewing industry is separated into two main strategic groups. The major

brewers in the United States are Anheuser-Busch and MillerCoors. These two companies enjoy 50 percent and 29 percent market share, respectively.1 The major brewers’ primary products consist of premium and sub-premium beer. The second strategic group is classified as “better beer” brewers and includes a variety of companies with small market share

percentages. The beer in this group is considered premium or super-premium by the market, has a higher retail price, and tends to have unique characteristics. This segment consists of two different types of beer: beer classified as an import, as the brewers of this type of beer are headquartered outside the U.S., and beer classified as craft, such as Samuel Adams®. Craft brewers and import brewers have a similar target market and sell significantly less volume than the major brewers. Heineken is one of the main companies in this strategic group, as is Crown Imports, a joint venture between Mexico’s Grupo Modelo and New York based Constellation Brands. Craft brewers such as The Boston Beer Company, Sierra Nevada and Craft Brewers Alliance also fall into this category.

Craft brewers, as defined by law, produce less than two million barrels per year.2 The craft beer segment comprises about four percent of the total beer industry and consists of 1,595 companies (2009) that produce 3,000 different types of beer.3 The craft beer segment has about $7 billion in revenues. With the increasing popularity of craft beer, the major brewers, MillerCoors and Anheuser-Busch, have also developed their own entrants into this field.

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There are four major categories in the craft beer segment.4 A brewpub is a restaurant that brews and sells most of its beer at its site. A microbrewery produces less than 15,000 barrels of beer per year and sells it to the public. A regional specialty brewery has the capacity to produce between 15,000 and 2 million barrels. They produce only specialty beer. A contract brewer contracts out the brewing of its beer but handles marketing, sales, and distribution itself.

From start to finish, the beer industry, as a whole, contributes $198 billion in output or 1.4 percent of GDP.5 The industry consists of much more than simply brewers and consumers. The beer brewing process begins with farmers who produce barley,

corn, rice and hops; continues to the brewers who produce the product; and then moves to the wholesalers who transport and store the finished product, ultimately selling it to various retail establishments including liquor stores, restaurants and bars, convenience stores, grocery stores and other establishments licensed to sell the product. Beer is also brewed overseas and imported. Domestically, nearly one million people are employed in the beer industry.6Porter’s Five Forces Analysis

An analysis of the industry shows that it can be an attractive industry to enter if planned and executed appropriately. Because two major brewers control nearly 80 percent of the U.S. market share, their influence on all strategic groups is significant. Entrance as a major brewer is difficult due to high start-up costs and a long brewing process, but mainly due to the vast resources of the two major brewers. Equipment and financial resources needed to produce, distribute, and sell over two million barrels per year present significant roadblocks. Additionally, beer takes time to brew so adding

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capacity must be planned for years in advance. Most prospective brewers have chosen to enter as craft brewers, as evidenced by the rapid entry into this industry in the late 1980’s and early 1990’s. While the major brewer strategic group has limited industry attractiveness, entrance in the better beer segment has potential. Less equipment, lower start-up costs and a smaller geographic focus allow new brewers to enter with relative ease. Yet, other forces may make staying in business not nearly as easy. The large number of companies in this segment and inability of the companies to achieve economies of scale due to their smaller production capacity cause this segment to realize lower profit margins than those of the major brewers.

The better beer segment benefits from the influence of the major brewers who have lessened the power of suppliers. Over 2,000 companies purchase their ingredients from numerous farmers

across the country. Large volumes are purchased annually and the ingredients are readily available to the brewers from a number of farmers. Brewers producing more barrels per year can control the price of their ingredients easier than smaller brewers based on volume; yet, smaller brewers may purchase more of their ingredients from farmers close to their brewery, thus having influence, as well. These purchases benefit the brewer and the local farmer, alike, by reducing transportation costs and chance of spoilage. The local brewer may be the main customer of the local farmer, further reducing supplier power.

Whereas supplier power is low, buyer power is high. Buyers in the industry consist of wholesalers/distributors who, in turn, sell the product to various retailers. Developing strong relationships with distributors is vital to the success of a brewer. Because federal law states that brewers cannot sell directly to retailers or consumers,

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distributors are automatically given some amount of power in the industry. Distributors cover a regional area and typically have an exclusive arrangement with one major brewer. While they do carry multiple brands, including imports, craft beer, and non-alcoholic beverages, their main line is that of one of the major brewers. Distributors control access to the end-user by purchasing product for the retailers’ shelves. The relationship between a major brewer and a distributor is one of mutual dependence; yet, without good distributors, brewers cannot access the consumer. Distributors have additional power over craft brewers and companies importing beer into the country because these brewers have significantly lower sales volumes. In addition to cultivating relationships with distributors, brewers also market directly to the consumer. Advertising expenditures are high for this industry, with the industry spending around $975 million on advertising in 2007.7 Incentives to switch and development of a brand image are common advertising tactics. Prices in the better beer segment tend to be higher than the brands of the major brewers, and marketing messages promote

high level taste and a unique image. While craft beer tends to command a higher price than premium or sub-premium beer produced by the major brewers and is in line with the price of beer offered by the import brewers, the great variety in craft beer brands allows buyers greater power than they had over the major brewers. The increase in popularity of craft beer caused numerous craft brewers to enter the market very rapidly. Over the last few years, the sales growth in craft beer has been greater than the growth in premium or sub-premium brands. However, limited distribution of certain craft brands, inability to consistently find a certain craft brand, and desire of consumers to try multiple types of craft beer also contributes to increased buyer power.

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Although approximately 85% of all alcohol purchases are beer, wine and spirits are also notable competition and substitutes. While the per capita consumption of beer has remained constant or decreased slightly over the last ten years, wine and spirits consumption has increased per capita.8 As a response to consumers’ changing preferences, brewers developed non-beer malt beverages or “malternatives.” While these beverages have become popular, it may have been at the expense of beer rather

than wine or spirits. 9

Beer is a mature industry, while both wine and spirits are in growing industries. This heightens the threat of substitutes.

Rivalry in the overall industry is high with thousands of varieties of beer, many brewers, the perishable nature of the product, and low switching costs for consumers. This rivalry extends across the entire industry where all companies are fighting to gain market share in an industry where sales have remained relatively flat. Gains in market share are only achieved by taking it from another brewer. Promotions, clever advertising, and new product features are continuously introduced by the major brewers. Additionally, the major brewers’ introduction of “craft” beer is a method to lessen the impact of craft brewers and solidify their presence in this

segment of the industry. The better beer segment seeks to broaden its niche by using advertising messages that show an appealing lifestyle image and highlight the benefits of “trading up” to this level of beer. Numerous craft brewers strive to capture market share and gain sales amongst peer competitors and the other strategic groups in the industry. Craft brewers aim to capitalize on their “small company” or “local” roots to give consumers of their products a sense of pride and ownership.

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Key Success FactorsThe beer industry is constantly changing while industry sales remain flat.

Mergers and acquisitions have narrowed down the number of brewers but varieties of beer have increased. The major brewers have the resources to compete in nearly all facets of the industry. Imports have gained market share in the U.S. and new craft beer varieties are continually introduced. With these dynamics, companies must focus on the following factors in order to be successful:

Offering great VARIETY in flavors and categories

Building good relationships with DISTRIBUTORS

Using innovative MARKETING & ADVERTISING strategies to build a BRAND

Controlling and reducing manufacturing COSTS. The consumer’s palette has become more sophisticated and they desire unique tastes in beer, wine, and other spirits.10 With the increased interest in import and craft beer came an increased interest in variety. Books, magazines, and internet sites devoted to beer have gained popularity as beer drinkers chose to learn more about the beer and the brewing process. The beer aficionado now learns which beer pairs well with which food.11 Seasonal flavors appeal to unique tastes and add to the allure of specialty beer. Yet, variety in the industry does not apply to the better beer

segment alone. Major brewers offer different choices of beer throughout the premium and sub-premium categories such as ice beer, light beer, and red beer. Additionally, they offer great variety in beer brands and produce brands that compete with the better beer segment. Import brewers offer variety while, at the same time maintaining their “elite” status among beer. And while the average consumer is spending less on beer in recent years, many still choose craft beer for unique flavors and variety.

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Because of the numerous brands and varieties of beer and the potential for substitutes, relationships with distributors are imperative to gaining access to the market. Distributors understand which products sell quickly and want to be sure those products are always available to their customers. Retailers put demands on wholesalers for products that sell well. New brewers must demonstrate that there is or will be demand for their product because both retailers and wholesalers know that taking shelf space away from a brand with high turnover is a bad business decision. Once relationships with distributors are established, the brewer’s sales representatives must continuously cultivate the relationship. Additionally, promised quantities must be available when requested and a product of superior quality must consistently be delivered.

Marketing by brewers is done in two ways. One is by developing relationships with distributors, or a “push” strategy. Another is by marketing directly to the consumer, or a “pull” strategy. Creative marketing strategies can attract new customers and build loyalty with existing customers. Offering incentives to entice consumers to purchase specific brands is not uncommon. Marketing directly to the consumer creates demand for the product, thus increasing the likelihood that distributors will purchase it. An IBISworld industry report states that development of a brand image will be critical to a company’s success due to the large selection of beer and also increased

competition from wine and spirits.12 The long-advertised campaign of “Tastes Great, Less Filling” argued that light-beer can still taste good. Coors’ “Cold Activated Can,” Miller’s “Vortex” bottle, and Anheuser Busch’s “Bud Bowl” all are attempts to develop a brand image that differentiates a brand from its competitors. Craft and import beer brewers promote “trading-up” to a better beer. Because of the higher retail price of the brands in the better

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beer segment, these brewers use variety and taste to convince the consumer that the higher price is worthwhile. Of course, these smaller brewers have significantly smaller advertising budgets than the major brewers. While some, like the Boston Beer Company, advertise nationally, most craft brewers use regionally focused advertising. Craft brewers’ small company status, local community involvement, and unique flavors aid in setting these companies apart from other brewers. Focus on both “push” and “pull” strategies can increase awareness, and thus, demand for a brewer’s products.

In recent years, the beer industry as a whole has seen flat or declining sales. While some companies closed, others worked on process improvements to reduce manufacturing costs. Major brewers, SAB-Miller and Molson Coors, merged and achieved production efficiencies, thereby reducing costs. Other brewers made acquisitions or consolidated operations. Import and craft brewers have grown sales and gained market share. Reducing manufacturing costs will allow brewers in all parts of the industry to stay in business and gain market share as other less efficient brewers close their doors.Driving Forces of Change

The constant activity in the beer industry presents a challenging environment in which to conduct business. Some of the forces acting to change the industry include:

Entrance of new brewers

Mergers, consolidation and joint ventures among brewers

Consumer taste preferences

Stricter enforcement of drunk driving and underage drinking laws

Consumer focus on reduction in alcohol abuse

Federal and state beer taxation

Consumer focus on living healthy lifestyles

Changing demographics and generational differences

Technological advances

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• Reduction in natural resources requiring companies to reduce energy use and their impact on the environment

• GlobalizationThe number of brewers entering the industry climbed quickly throughout the 1990’s. Most entrants were in the better beer segment, and specifically as craft beer brewers. Competition increased considerably and remains high today. While many new craft brewers were formed in the last 15+ years, some existing craft brewers grew larger, and imports increased their presence in the U.S. Major U.S. brewers began consolidating operations or developing partnerships to achieve efficiencies and international companies invested in U.S. operations to grow their global presence.

To accommodate the consumer’s maturing palette, brewers developed unique brands with varying tastes. Some of the first brewers to do this were craft brewers, but as their popularity grew, larger brewers introduced their options, as well. While consumers began to enjoy and appreciate diverse beer, they also became conscious of the impact of alcohol on society. An increase in beer “tastings” was coupled with an increase in

enforcement of laws enacted to protect society. A crackdown on drunk driving resulted in a drop in alcohol related traffic accidents and fatalities. Underage drinking declined as society became less tolerant of the negative impact it could have on the nation’s youth. Alcohol abuse, by people of all ages, has always been present in the background of society and treatment options have existed for years. The general public now has increased awareness of the prevalence of alcohol abuse. The impact on society from alcohol misuse has been complemented by some recent trends in consumer preferences. Specifically, many consumers now focus on maintaining a healthy lifestyle. Because of this, light beer now makes up about 40 percent of all beer sold.13 Historically, the major

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brewers have responded to health trends by introducing or promoting a beer that meets the consumers’ needs. Craft beer, however, typically has more calories than premium beer – whether regular or light. While some of the larger craft and import brewers have introduced a light beer, the smaller brewers have not.

Federal and state governments continually debate the necessity and structure of the beer tax. Opponents argue that this tax is recessive – taxing lower wage-earners more than higher wage-earners. Governments argue that an increased tax will reduce the amount of alcohol consumed and have positive societal and economic impacts. With recent legislation introduced to reduce the beer tax and enlarge the craft brewer segment, changes could soon be made.

Changing demographics in the U.S will continue to shape the beer industry. Beer consumption frequency and preference will change due to the growing diversity in ethnicity in the U.S. population. Different ethnic groups prefer light beer over regular beer, import beer over domestic beer, or craft beer over mainstream beer. As the population shifts toward one group or

another, consumption patterns will change. The beer industry should experience positive results as “Generation Y” has recently begun turning 21. This group is substantially larger than the generation ahead of it. Additionally, the aging population will impact the amount of beer consumed as the over age 50 demographic purchases 30 percent of beer sold.14 This may be positive; however this group also has a strong preference for wine. Specialty beer that can challenge the consumer’s palette, as wine does, may compete successfully in this demographic.

Technological advances continue to change the landscape of the world and make processes more efficient. Brewery operations have benefitted from advancements in

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construction materials and systems including heating, cooling and packaging. Alternative packaging including aluminum cans that are bottle shaped and small “kegs” for a household refrigerator were made possible by improved technology. Beer cans that show a consumer that their beer is cold are one of the newest innovations. Technology can aid in building awareness for a brand, as well as competitive advantages.

Worldwide, people have seen the depletion of the Earth’s natural resources and have taken action to conserve what is available. The trend toward lessening our carbon footprint has led to innovations in reuse of resources, product recycling, and alternative energy sources. Many in the beer industry have changed their processes to reduce reliance on oil and use alternative energy sources. Many brewers have increased their recycling efforts with the larger brewers having a goal of “Zero Waste.”15

Global trends have impacted the beer industry and will continue to have and affect as globalization increases. No longer do companies compete only within their nation. Global competition exists for market share, employees, and production inputs. An increase in wealth in many developing countries has led to

additional purchasing power in these countries. Globally, consumers’ preferences, attitudes, behaviors and beliefs will shape the future of the beer industry.

The above forces can be summarized into the following forces which will have the strongest influence on the industry over the next three to five years:

Globalization

Consumer Preferences

Laws and Regulations

Sustainability Globalization creates a larger market for beer but also lends itself to additional competition. Globalization has positively impacted the large U.S. brewers and

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international brewers, giving them a larger market in which to compete. Consolidations and partnerships among large brewers have altered the dynamics of the industry creating larger companies with greater market share, concentration of revenues, and greater profitability. While these changes may be good for the major brewers, they may limit the power of smaller brewers, especially craft brewers with fewer resources. Major brewers with great financial resources could cause a squeeze on craft brewers’ margins and market share. A result of this may be an interest from major brewers in acquiring successful craft brewers to complement their product line. This could change the entire craft beer segment. Currently, most craft brewers, except the few largest ones, compete locally or regionally. However, increased competition from international companies could have a large negative impact on craft brewers. Because craft and import beer are both classified in the better beer segment of the industry, consumers may choose new imports over craft beer. While competition may be difficult to manage within the industry, it may be beneficial to the consumer in the form of

numerous choices and potentially lower prices.

With globalization and a larger market come additional consumers with ever- changing preferences. The beer industry has continually responded to consumer preferences whether by introducing lower calorie options, greater variety, or alternatives to wine and spirits. As wealth increases in developing nations, spending on leisure and entertainment should increase – a benefit to the beer industry. Adapting to changes in preferences on a global basis could differentiate one brand from another. Demand for the unique tastes of craft beer has grown substantially in recent years; however, the brands of the major brewers still claim majority of the market share. So, while some U.S.

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consumers currently choose to “trade up” and purchase higher priced import or craft beer, majority are served primarily by the major brewers.

An important consumer preference, responsible drinking, will also put constant force on the industry. The consumption of alcoholic beverages is heavily regulated. Recent laws and actions to reduce drunk driving, underage drinking, and alcohol abuse have been successful in reducing alcohol related deaths. On each company’s website, both Anheuser-Busch and MillerCoors detail their involvement in programs aimed to promote responsible drinking. Alcohol misuse has been identified as a societal problem and legislators feel one way to address it is through taxation. The beer tax was increased substantially in 1991 and has been continually debated. Opponents argue it is a recessive tax that does not decrease alcohol consumption or misuse while proponents feel it is effective in managing consumption. New legislation has been proposed to make changes to the current law. This force will put pressure on the industry in varying degrees going forward.

Finally, conservation of the Earth’s natural resources has led to

a focus on sustainability. The major brewers have already instituted programs to reduce, reuse and recycle materials used in the production process. Additionally, they have committed to long-term strategies to reduce their impact even further. These activities require much financial investment which can affect shareholder returns and company profitability. Implementing conservation strategies should positively impact the planet, but may have negative financial effects on brewers in the short-term. Additionally, small brewers may not have the financial wherewithal to implement multiple conservation efforts.

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As the driving forces push on the industry, the attractiveness of the industry will change. Consolidations are shifting the power in the industry to fewer and fewer players making it more difficult to enter. Competing on a global basis will be left to a few major brewers in each country – each having the financial resources to keep new entrants out. Large brewers have had many years to build their presence and market share in the U.S. market. Production of over 200 to 300 million barrels does not come without years of planning and strategic development. Entrant as a craft brewer remains attractive as growth in the overall beer industry has been seen here. Establishing a small company and competing locally or regionally will still have the potential for profitability. Craft brewers who consider increasing their size may find they have to redefine their company. The “craft” status is seen as beneficial to many in the industry, differentiating them from the brands of the major brewers and causing them to be viewed in line with the brands of import brewers. Overall, the industry should still hold allure for those who plan to enter, yet entrance at the craft beer level still holds the greatest potential.

For further analysis and supporting arguments, please view Appendix C.

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Appendix A: Industry Analysis/Porter’s Five

Forces

Supplier Power

Various farmers supply the hops, barley, corn and rice used to produce beer. In 2008, there were 2,053 companies that purchased these ingredients.16 The overall beer industry sold nearly 206 million barrels of beer in 2009.17 For major brewers, the volume of ingredients purchased, the large number of farmers available to purchase the ingredients from, low switching costs on the part of the brewer, and inability of the farmers to forward integrate, supplier power in considered low in regard to the major brewers. Craft brewers who purchase fewer ingredients and sometimes more specialized ingredients may cause supplier power for this segment of the industry to be somewhat higher; yet, overall, suppliers have put limited pressure on price and supplier power is LOW.

Barriers to Entry

Investment in the equipment, buildings, ingredients, recipes, and human resources to produce over 2 million barrels of beer per year is significant, but not a barrier on its own. Additionally, once a brewery is constructed, it has few other uses. The major brewers control about 80 percent of the U.S. market share. Because of this, they have substantial financial resources that are available to invest in marketing, acquisitions, or other methods to discourage new entrants. Barriers to entry as a major brewer are HIGH. While it may be difficult to enter as a major brewer, entry into the better beer segment, producing under 2 million barrels per year, is relatively easier. This is evidenced by the entrance of over 1,600 companies over the last 60 years. Small, micro-breweries and brewpub restaurants are supported by their local customers and typically serve a certain region. Offering a product with a unique taste is one trait of a craft brewer. Customers have responded well to craft beer and the industry has seen rapid growth. However, major brewers with substantial resources also contribute to discouraging new entrants in the better beer segment. The economies of scale

achieved due to their large production capacity gives the major brewers higher profit margins than smaller brewers. With additional profits, these companies can reinvest in new facilities and equipment, do additional marketing, or even acquire smaller brewers. Smaller brewers with limited resources are not able to do these things. Because of the ability to enter with smaller investment and serve a smaller market; yet, recognizing the number of craft brewers in the country and power of the major brewers, barriers to entry in the better beer segment are considered MEDIUM.

Buyer Power

Once brewers produce their product, it is sold to wholesalers, who transport and store it and sell it to restaurants, bars, liquor stores, grocery stores, convenience stores, and other licensed outlets. From there it is purchased by the end user – the consumer. Consolidation among wholesalers has been great in the last 15 years and currently about 2,850 wholesalers serve this industry.18 Wholesalers carry multiple brands and purchase from all three strategic groups but typically only represent one major brewer. Wholesalers tend to be regionally focused.19 Because of the market share dominance of the major brewers, it may seem as if the wholesaler would have little power. However, regional wholesalers tend to dominate their market and provide the brewers access to

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retailers and the ultimate end user. Additionally, federal law regulates the process by which beer reaches the end user. Brewers cannot sell directly to retailers or consumers; they must use a wholesaler. So, while the consumer may have minimal control over price, the wholesaler does have some control in all segments of the industry. This power reduces the overall profitability of the brewer. Now, with limited market share and numerous companies competing for it, the import and craft beer

segments may experience even higher buyer power than the major brewers. Beer wholesalers tend to represent one of the major brewers and, through feedback from their customers, have a good idea of the amount of beer from the major brewers that will be demanded by consumers; yet it may be difficult to estimate the amount of import or craft beer that will sell. Beer retailers have limited shelf space and multiple companies to choose from. Additionally, specialty beers from the major brewers compete against the craft beer segment. Because of the control over access to the consumer and competition within the industry for shelf space, buyer power for both the major brewer segment and better beer segment is considered HIGH.

Threat of Substitutes

Beer accounts for about 85 percent of all alcohol sold in the

United States. 20

Other alcoholic beverages competing with beer would include other malt beverages, wine, and liquor. A Gallop Poll in 2009 found that 40 percent of respondents most often drink beer, followed by 34 percent wine and 21 percent spirits.21 Although beer still appears to be the drink of choice, wine and spirits have made steady gains. While the per capita consumption of beer has remained constant over the last ten years, wine and spirits consumption has increased per capita.22 Brewers of all sizes are affected by these substitutes and may need to adjust their pricing or do additional marketing to give consumers additional incentives to purchase beer over wine or spirits. This reduces profitability in the industry. While some better beer may be positioned as higher-class and in line with wine, these products still present a significant threat to this segment of the beer industry. Because of the gains in consumption levels of both wine and spirits, threat of substitutes is considered MEDIUM.

Degree of Rivalry

As stated above, two major brewers control the U.S. beer industry with about 80 percent market share, and around 1,600 small, specialty brewers are also part of the industry. While a

high concentration ratio typically leads to a low degree of rivalry, other factors lessen the degree of rivalry in this industry. Breweries have high fixed costs with large investments in plant and equipment. Because of these large costs, the major brewers and other smaller brewers in the industry strive to produce near capacity to achieve economies of scale. This increases rivalry as each brewer strives to produce and sell more product. While the major brewers do not tend to compete on price, their ability to increase prices is limited by the pricing of other similar products. This caps potential profitability. Instead of competing on price, the major brewers attempt to develop a brand image. In 2007, the beer industry as a whole spent $975 million on advertising. The major brewers accounted for over $700 million of the total.23 Additionally, beer is a highly perishable product. With pressure to grow production to achieve economies of scale and then sell the product as quickly as possible, rivalry is greatly increased.

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Consumers have numerous choices within the industry as well as other non-beer choices such as wine and spirits. Switching costs are low for consumers, again, increasing rivalry. Finally, exit barriers in the industry are high with specialized equipment designed around the production of one product – beer or another malt beverage. So, although the concentration ratio in the industry is high, the high fixed costs, high exit barriers, low switching costs for consumers, and the perishable nature of the product, degree of rivalry is considered HIGH.

Overall Industry Attractiveness

The threat of substitutes, the power of buyers, and the degree of rivalry are considered high for this industry in all segments. While barriers to entry are high for the major brewer segment, they are substantially lower for the better beer, specifically craft beer, segment. Additionally, suppliers have minimal power over price. Yet, overall industry attractiveness depends on the

strategic group a business plans to enter. Investment in equipment, buildings, recipes, ingredients and processes is a sizeable barrier to entry into the category of major brewer. While this portion of the industry typically enjoys high levels of sales and profits, the significant market share of the two major U.S. companies makes attractiveness of the major brewer group very low. However, this is significantly different for craft brewers. Lower investment is required making it easier to enter. Yet, considerable competition exists upon entering this industry. This results in reduced profit margins in the better beer segment. Producing and selling product locally or regionally is dependent on creating awareness of the brand. Even though the unique nature of the craft brewer’s product is attractive to many consumers, it is difficult to develop brand loyalty in this segment. Many consumers who prefer craft beer enjoy tasting multiple brands. However, as brewers grow larger, brand loyalty can develop. Although also classified in the better beer segment, import brewers reviewed in this analysis produce a significantly greater number of barrels than craft brewers. Attractiveness of this level of production is not nearly as great as the craft portion of the segment. Production of over two million barrels of beer requires a significant level of lead-time as well as solid distributor relationships. Based on these factors, overall industry attractiveness is medium with the better beer segment (specifically craft brewer) having the most attractiveness and the major brewer segment having the least attractiveness.

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Appendix 2: Strategic Group Map

Please review the attached spreadsheet and graphs for Strategic Group Map information.

Company revenue was first reviewed as a possible measure of the position of a company in a strategic group. The economic impact of the industry is measured in total sales. Brewers with a high level of sales typically have higher profits and access to

resources that brewers with a lower level of sales do not have. Higher sales allow companies to invest in tools that can aid in the development of efficiencies. Increased advertising expenditures may be the result of sales or the cause of sales. While the industry is analyzed in terms of revenue generated, brewers are also classified by the number of barrels produced. At the federal level, producing over 60,000 barrels and then over two million barrels subjects brewers to different levels of taxation. Federal law states that the craft brewer classification is reserved for brewers producing under two million barrels per year.24 Because of the industry standard in measuring the size of brewers by the number of barrels produced annually, this measure was used in the strategic group map.

Market share is another primary measure of the beer industry. All market share data was taken from the Beer Industry Overview for 200825 and the Beer Industry Update for 2008.26 Market share measures the prevalence of the company’s product in the market.

Finally, sale price of the product can be used to classify brewers in the appropriate strategic group. Terms such as premium, sub-premium, super-premium, import, and craft beer are constantly used to describe the beer produced by companies in the industry. Classifying the companies based on the price of the product will aid in determining which companies sell which kind of beer.

Strategic Map Placement

The main U.S. brewers, as well as the import brewers who are primary competitors in the U.S. were evaluated and placed on the strategic map. The craft beer segment has a significant number of low volume brewers, so a representation of this segment was created by calculating average sales and average barrels sold. Additionally, three of the largest craft brewers were included.

Anheuser-Busch27

With $37 billion in sales in 2009 and 50 percent market share,

Anheuser-Busch is the largest of all brewers located in the U.S. Although no longer headquartered in the U.S., the company maintains its breweries in the U.S. and conducts much of its business in the country. With the largest U.S. market share of all brewers, it must be included in the strategic map in order to see an accurate picture of the industry.

MillerCoors28

The joint venture between SAB-Miller and Molson Coors formed the second largest brewer in the United States. Now, MillerCoors is the largest brewer headquartered in the

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country. The second of the two major brewers, MillerCoors had $21 billion in combined revenues in 2009 and 29 percent market share.

Crown Imports29

A joint venture between Mexican company, Grupo Modelo, and Constellation Brands, headquartered in New York. Beer brands such as Corona, Negro Modelo, and St. Pauli Girl are the primary offerings of this company. Crown maintains about a five percent market share and had combined sales of over $2 billion in for the most recent fiscal year ended February 28, 2010.

Heineken30

With its headquarters in The Netherlands, but having a U.S. division, Heineken produces super-premium brands such as Heineken, Dos Equis, Newcastle, and Amstel Light. Heineken produced revenues of over $20 billion in 2009 and holds four percent of U.S. market share.

Pabst31

Though it experienced tough times and loss of market share in

the late 1990’s and early 2000’s, Pabst may be poised for a comeback with its recent purchase by well-known investor C. Dean Metropoulos. Recent reports show Pabst at $500 million in sales and having a notable three percent market share. Barrels produced topped out at 18 million in 1977, but sunk to around one million in 2001. The company currently contracts with MillerCoors to produce its beer. Recently, Pabst has been experiencing growth and consumers have developed a new appreciation for the brand, so barrels produced has grown in recent years.

Boston Beer Company32

Known as the largest craft brewer in the country, the Boston Beer Company just surpassed the two million barrel mark in 2009, producing 2.2 million. Revenues in 2009 were $415 million, continuing the growth trend of the last five years.

Sierra Nevada33

Boasting that it is the largest privately-held craft brewer in the United States, California- based Sierra Nevada has grown from a microbrewery to a craft brewer since its inception in 1979. It was reported to have sold around 700,000 barrels of beer in 2005 and was estimated to have sales of around $100 million.

Craft Brewers Alliance34

A consolidation of Redhook Breweries and Widmer Brothers Brewery, Craft Brewers Alliance produces and distributes its products regionally in Oregon, Washington, and New Hampshire. It also distributes the products of Kona Brewing Company. In 2009, it was listed as the eighth largest brewer in the United States with $132 million in revenues and 582,500 barrels sold.

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Average Craft Brewer35

The size of the average craft brewer was estimated by using

2009 data on craft brewers, including: 1,595 total brewers with $3 billion in sales and 9,115,635 barrels sold.

Results

The two major brewers stood out significantly in their own strategic group with a high level of sales, both in dollars and barrels. Another strategic group was identified which consists of the import brewers and craft brewers and was termed the “better beer” group. This term has been used in the industry and is reflected on the Strategic Group Map. While these companies produce lower revenues and fewer barrels than the major brewers, the sale price of a 12-pack is greater. One prominent company in the industry, Pabst, did not fall into either group. Interestingly, while revenue and barrels sold is significantly lower than that of the major brewers, Pabst has claimed a market share higher than most in the better beer segment. However, it has positioned itself as producing sub-premium beer which is reflected in its lower retail price. While the major brewers also produce beer classified as sub-premium, their primary products tend to be in the premium range and have higher prices.

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Appendix 3: Macro-Environmental Analysis

Economic Activity

The brewing industry as a whole accounts for $198 billion in output or 1.5% of U.S. GDP.36 The brewing industry in the United States consists of two major brewers: Anheuser-Busch and MillerCoors. SABMiller and Molson Coors formed MillerCoors as a joint venture in 2008; while, also in 2008, Anheuser-Busch was purchased by InBev, a Belgian company. Another strategic group in the beer industry consists of brewers that produce substantially less beer and have significantly less market share than the major brewers yet sell products with a higher retail price. This group consists of two different types of companies. Some companies in this group are not headquartered in the U.S., thus, their beer is classified as imports. Heineken

and Crown Imports are two of the companies that fall into this category. Imports have gained market share in recent years and were reported to have a 14% market share in 2007 with almost 30 million barrels sold.37 Other companies in this group are classified as craft brewers with small, independent breweries producing unique beer. This group has, by far, the largest number of brewers and biggest variety of beer. Companies such as The Boston Beer Company, Sierra Nevada, and Craft Brewers Alliance are included in this group.

In 2009, beer sales in the U.S. were down 2.2 percent, while sales of craft or specialty beer were up 10.3 percent.38 Despite flat or somewhat declining sales since the early 1980’s, activity in the industry has been vast. Rapid entry of small, craft brewers shifted the focus from premium and sub-premium beer to multiple varieties of unique, craft beer. As of July 2010, there were 20 traditional breweries and 1,599 specialty/craft breweries in the United States. Of the specialty/craft brewers, 994 are brewpubs, 534 are microbreweries, and 71 are regional craft breweries.39 While traditional breweries have steadily decreased from 403 in 1948 to 93 in 1968 to 31 in 1988 to the present number of 20; specialty/craft breweries increased slowly and then exponentially from zero in 1947 through 1965, then one entering in 1966, another entering for a total of two in 1977, then growing to eight in 1980, 150 in 1988, 1,277 in 1996 and finally, to the present number.40 In the 1990’s and early 2000’s the industry also saw explosive growth in brewpubs and microbreweries.41 U.S. brewers have about 81 percent of the U.S. market share.42 This market share has dropped slightly over this same time period as imports gradually increase their market share.43

While there are a large number of brewers in the country, there is also a large variety of beer brands. In 2007, there were 139 premium and sub-premium brands of beer and 1,583 imports/craft beer brands.44 Currently, 39 percent of the adult population drinks beer regularly and 31 percent buy beer once per week or more.45

The recent economic downturn has affected the beer industry. Unemployment rates have climbed over the last two years from six percent in September 2008 to over nine percent in September 2010.46 Under-employed and discouraged workers who have given up searching for work are not included in this number. Some believe that, if they were, real unemployment would jump to 17 percent.47 Long-term unemployment has become more prevalent, as have the resulting negative economic and social implications. Disposable

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income for those still employed has remained relatively constant over the same time period, with no inflationary increase.48 Of concern has also been the suspected erosion of the middle class. This phenomenon has been brought to light again with the recent recession as individuals who have high levels of education and had been earning a good income have also lost their jobs and have had difficulty finding new ones.49 Economic conditions will have an impact on any industry, including the beer industry. The affects tend to be positive in a good economy and negative in a bad economy. However, beer has been said to be “recession-proof.” Because flat or somewhat declining sales do not support this argument, beer may instead be “recession-resistant.”50 Although one may expect the better beer strategic group would feel a negative impact first, it has actually been the major brewers who have felt much of the impact. While some shift to sub- premium brands has been seen, a new trend has been toward purchasing large packages of beer to save on a per-can/bottle basis.51 However, in addition to these changes, purchases of craft beer, typically sold in six-pack bottles have been steady. Additionally, import beer has grown its market share in the U.S. So, while consumers have become more cost conscious in a difficult economic environment, they still remain taste conscious and may be willing to pay a little more for variety.

Law and Ethics

Since the legal drinking age of 21 was established in 1984, underage drinking has declined. In fact, 26% fewer high school seniors drink now than in 1983. However, 43% of high school seniors still report drinking.52 A 2008 study shows that 74% of underage youth (ages 12-20) do not drink. Additionally, the percentage of college freshman drinking declined from 73.7% in 1982 to 39.5% in 2008.53 Community groups such as MADD and SADD started the push to control underage drinking. Since then, other groups have joined and many brewers, themselves, choose to be involved in this movement. Because underage drinking has been identified as a societal problem and the consumption of alcoholic beverages is heavily regulated, industry-wide movements such as “We Don’t Serve Teens” (www.dontserveteens.gov) have been pioneered. The Beer Institute, which represents the industry in federal and state government as well as in public discussions, supports this effort and keeps its members involved in its activities.

Stricter enforcement of drunk driving laws has also had an effect on the beer industry. Penalties for driving under the influence (DUI) have been increased and law enforcement has been more diligent in its efforts to apprehend those who do not follow the law. Additionally, all states have lowered the legal blood alcohol concentration limit to .08.54 Because of these actions, drunk driving fatalities have dropped from 21,113 in 1982 to 11,773 in 2008.55 Fatalities with teen drunk drivers have also dropped dramatically from 4,214 in 1982 to 1,130 in 2008. Both of these trends occurred despite an increase in the number of drivers, an increase in the number of miles driven, and an increase in the number of registered motor vehicles. While these are positive trends for both society and the beer brewers, these trends may contribute to flat or declining sales in the overall industry. Major brewers have taken an active role in promoting responsible drinking. SAB-Miller, for example, has implemented an internal education program aimed to prepare its employees to sell and market its products responsibly. The company has

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developed a website to promote its efforts at www.talkingalcohol.com.56 Other brewers have implemented similar programs, as well.

In addition to reducing the number of drunk drivers on the roads, focus is also on providing resources to heavy drinkers to help them lessen their consumption of alcohol. While under ten percent of U.S. citizens fall into the category of heavy drinkers,57 the economic costs of alcohol abuse to society are estimated at $184 billion.58 These costs come in the form of increased health care costs, higher occurrence of accidents and crime, treatment expenses and lost productivity. The impact of alcohol abuse on society, as a whole, lends itself to constant scrutiny and the potential for additional legislation limiting the use of alcohol.

At the federal government level, the Alcohol and Tobacco Tax and Trade Bureau (TTB) regulates all breweries, distilleries, and wineries in the U.S., as well as importers and wholesalers.59 Additionally, each state has different laws that further regulate the industry which include taxes at the state level as well as licenses to manufacture and sell the product. The federal beer tax is currently $18.00 per 31-gallon barrel produced. Brewers who produce less than two million barrels receive a discounted rate of $7.00 on the first 60,000 barrels and then pay $18.00 per barrel after 60,000.60 This provides significant savings to craft brewers, especially local microbreweries and brewpubs. States also have varying beer taxes in addition to the federal tax. The taxes are ultimately passed on to the end user. In fact, taxes make up 40 percent of the retail cost of beer.61 In 1991, when Congress doubled the federal beer tax, most brewers raised prices to cover it, as profit margins are insufficient to absorb increased costs.62 Another concern about increased beer tax is the loss of brewers as operations are closed or moved overseas. When InBev purchased Anheuser-Busch in 2008, a caveat in

their contract stated the company could close plants in the U.S. if federal or state beer taxes increased substantially.63 Because of its large U.S. presence, market share, and economic impact, this could have a sizeable effect on the U.S. economy. Although this is only one brewer, the benefits of the company’s size extend to all strategic groups in the industry. Recently, some states have chosen to increase their state tax. In 2009, the Brewers Excise and Economic Relief (BEER) Act was introduced. It called for a reduction in the federal excise tax from $18.00 per barrel to $9.00 per barrel. Another bill introduced in 2009 proposes to further reduce the tax for smaller brewers from $7.00 per barrel to $3.50 per barrel for the first 60,000 barrels. Additionally, it would raise the number of barrels produced to qualify for the reduction from two million to six million.64 Legislators have said that as health care costs rise, the federal deficit increases, and states continue to feel fiscal pressure, the beer tax will continue to be a topic of discussion.65

Advertising and labeling of products is also closely regulated by the TTB. The Beer Institute set forth advertising guidelines for its members to aid in compliance with the law.66 Being advertising is so closely regulated, brewers must be cautious and prepared for challenges of their practices.

All laws and regulations discussed could impact the entire industry negatively if they are not followed. The TTB has the power to penalize or close brewers that do not comply

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with regulations. Each brewer’s response to existing and additional laws and regulations will determine the positive or negative impact each business receives.

Diversity

Demographic

The U.S. population is approximately 310 million as of October

2010.67 It is projected to grow to 439 million by 2050.68 The consumer demographic for beer in the U.S. is primarily men who account for 80 percent of consumption.69 Additionally, most of these beer drinkers are white. White men tend to prefer light beer over regular beer and both over imported beer. The black and Asian populations tend to prefer regular beer over light beer. It is interesting to note that the Hispanic population in the U.S. has increased considerably over the last 20 years and that this ethnic group prefers imported beer over domestic regular or light beer.70 The overall preference for beer in the U.S. is split almost equally between regular and light beer at 27.3 percent and 28.5 percent of the population, respectively, drinking each. Additionally, 25.3 percent of the population reports to drink imported beer while 9.4 percent drink micro/specialty beer.71 In the craft beer segment, it was found that 26 percent of craft beer drinkers were age 25 to 34 and 38 percent have incomes of $100,000 or more.72 This differs substantially from the overall industry, where those individuals with under $50,000 in annual income account for about 50 percent of beer consumption.73 Additionally, while men tend to be interested in domestic regular and light beer, women tend to be more interested in craft and specialty beer than in the major brand names.74

Traditionally, the target market for the beer industry has been those at the legal drinking age of 21 through their late 20s. This group is on the rise as the 79.5 million strong “Generation Y” began to turn 21 in 2006.75 Those in “Generation X” have shown a preference for specialty and craft beer, yet this is a much smaller group.76 The Beer Industry Overview study conducted by the grocery industry correctly anticipated significant increases in the Latino and Asian population, as well as in the age 50+ population.77 These changing demographics have had mixed effects on the industry. The age 50+ population currently accounts for 30 percent of alcohol purchases; however, 42 percent of those aged 55 and older report wine as their preferred drink with 30 percent reporting it as beer.78 As this segment of the population continues to grow, this could

negatively impact the beer industry. Additionally, both Mexico and many Asian countries rank lower than the U.S. in alcohol consumption.79 It remains to be seen if this trend changes because these individuals live in the U.S.

Beer brewers have felt the pressure from increased ethnic diversification in the form of increased consumption of imported beer. This has caused an erosion of the market share of major brewers and other brewers in the better beer segment. The growing “younger” age group should have a positive impact on the overall industry simply because more consumers exist and still 39 percent of the general population reports drinking.80 Of concern for the industry is the growth in the “older” age group, as beer is the preferred drink of choice by only 30 percent of them.

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Cultural

Laws enacted to reduce underage drinking, drunk driving, or even alcohol abuse resulted from a cultural shift toward less tolerance of these activities. According to a recent PEW study, 61 percent of those surveyed felt excessive drinking is morally

wrong. 81

With the prevalence of the internet and social media in society, information is shared quickly and spreads rapidly. As society continues to share information and voice their opinions, the voice of the consumer has more influence on businesses.

In the early 2000’s, beer drinkers wanted healthier options. Healthy lifestyles became important and consumers shifted toward lower fat, lower calorie choices. A greater focus on physical fitness and exercise coupled with a desire to continue enjoyment of beer propelled the demand for light beer. While light beer had always had a significant presence in the beer market, it gained additional footing during this time and now makes up about 40% of the market.82 Women drink a larger percentage of light beer than men and the 35-44 age group

drinks more light beer than other ages.83 Regular beer can have a significantly higher number of calories than light beer. Anheuser Busch’s Budweiser has 145 calories, while MillerCoors offers Miller Genuine Draft (MGD) with 152 calories or Coors with 149 calories.84 Both companies offer light counterparts to each brand with Bud Light at 110 calories; MGD Light at 110 calories or new MGD 64 at 64 calories; and Coors Light at 104 calories. With full-bodied offerings, the products of the craft beer segment tend to have a significantly higher calorie count. For example, Samuel Adams Boston Lager has 160 calories, while the company’s light version has 124 calories.85 Also in the early 2000’s, many new diet options were introduced with a focus on low-carbohydrate foods. As a response to this, many beer brewers introduced low- carbohydrate options and continue to market these offerings as a “healthier” choice. Although some of the diet options may have been passing fads, the health trend has proven not to be.

Social

American culture is ever-changing. Ideals and beliefs shift as each generation comes of age. The U.S. (as well as the rest of the world) has four distinct generations: Traditionalists, Baby Boomers, Generation X and Generation Y/Millenials.86 The differences among all generations are vast. As the Baby Boomers approach retirement, it is expected a large amount of knowledge and expertise could be lost. Employers may be faced with loss of efficiencies and intellectual property. Although younger employees may make up for some of this with new ideas, strategies for minimizing the impact of retirements are necessary in all industries. A cultural shift has been seen in marriage rates with many choosing to marry later. This can affect spending behaviors both in the short-term and in the long-term when marriages do take place. Generational differences in alcohol consumption will have an effect on beer sales. Where currently 50 percent of 18 to 34 year olds prefer beer over wine or liquor, 50 percent of those aged 55 and older prefer wine over beer or liquor. Forty-four percent of the 35 to 54 age group

prefers beer over wine or liquor.87

Diversity in values, beliefs, attitudes and ethnicity could have a major impact on the industry as a whole. Consumer preferences such as healthy living and the intolerance of

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alcohol misuse, demographic trends such as a diversifying and an aging population, and generational differences in preference and spending will all force brewers to adapt their products and processes.

Technology

The last two decades have seen major technological advances in all industries and beer production, transportation and storage have not been untouched. While major advances in the industry in the early 1800’s included refrigeration and pasteurization, today’s advances have to do with brewery equipment and quality control. Most breweries are constructed with stainless steel and have advanced heating and cooling systems.88 As equipment becomes more specialized, it also becomes more expensive. Upgrades may be necessary in order to maintain competitive advantage; however, a reasonable return on investment may be more difficult to achieve.

As consumers debate the bottle vs. can battle, brewers have tried to offer alternatives to meet consumer demands. American consumers want cold beer, so companies have found ways to achieve this. Coors recently introduced the “Cold Activated Can” that turns the mountains on the can blue when the beer is cold. It now has a “Cold Activated Window” that allows the consumer to see inside the box to determine if the beer is cold. Miller Lite and Coors Light are now available in a 5.7 liter draft beer unit called “Home Draft” that allows consumers to keep beer on-tap in their refrigerator. Once opened, it stays fresh for 30 days.89 Heineken has also developed its “DraughtKeg,” of similar design.90 Some brewers have also begun to use cans made with aluminum that are in the shape of a beer bottle. Craft

brewers, with fewer resources, have not achieved technological advances of this caliber. However, all small brewers have seen benefits from the high investment in research and development made by the major brewers through the improvements in production equipment and processes.

Environmental Sustainability

One of the biggest natural resources used in the brewing process is water. It is the main ingredient in beer and is used throughout the brewing process. The growing global population is putting a strain on this natural resource with an anticipated global supply being only 40 percent of what is demanded by the year 2030.91 The two major brewers have committed to reducing their water usage and many smaller brewers have followed suit.92 In its 2009 annual report, SAB-Miller has formally committed to sustainable development and states that “flourishing, sustainable communities are the heart of development.”93 The company is focused on a 25 percent reduction in water used per hectolitre of beer produced.

Achieving energy efficiencies has been a big part of U.S. industry in recent years. Massive plants with high needs for electricity, heat, and other utilities make the beer industry a prime target for environmentalists. Additionally, brewery emissions are regulated similar to other industries and standards for the amount of harmful gases that are released into the air have been imposed. If not met, penalties such as monetary fines could be imposed. Another way brewers have been achieving energy efficiencies is in the reuse of waste. At a MillerCoors location, heat that normally would be released into

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the air is able to be reused in the brewery.94 Anheuser-Busch began using alternative fuels to power one of its locations and now expects 70 percent of the fuel for this location will be supplied by alternative sources.95

Throughout the United States, environmental impact is a major concern. Along with reducing our carbon footprint comes an interest in recycling. Recycling glass, plastic, cardboard, paper and aluminum are a way of life for many individuals and offices. Recycling also gets much focus in the beer brewing industry. Because of the volume of materials large companies use and their ability to generate substantial amounts of waste, companies turn to recycling to lessen their environmental impact and potentially generate monetary savings. The major brewers both have recycling policies and boast that nearly 100% of all brewery waste is recycled or reused.96 The Boston Beer Company has implemented a recycling program where it washes and sanitizes returned, used glass bottles and re-uses them in the bottling process.97 While cost savings may be achieved in the long-run, initial implementation of these systems and policies may be expensive. Smaller brewers with limited financial resources may not be able to implement such sophisticated systems; however, some effort at recycling is expected by many U.S. consumers today.

Global Issues and Trends

Population growth is a major global trend with the global population expected to surpass seven billion this year.98 Majority of this growth will be in developing countries. Cities are getting larger as urbanization increases and the number of mega-cities has grown and will continue to grow, as well.99 Wealth in the global economy is “shifting” to Eastern and Southern countries.100 Consumers in developing countries see improvements in their quality of life and accumulation of material goods because their disposable incomes and discretionary spending are growing.

Along with the growth in population, globalization continues to increase. Companies now compete on a world-wide basis, not only nationally. Globalization is having and will continue to have profound effects on the entire beer industry. Global competition and the expanding global market will be a larger

issue for the major brewers and import brewers, bringing both positive and negative results. While new and emerging markets are accessible, additional competitors are also on hand to serve them. The two major U.S. brewers already conduct business on the global market and global consolidation among large brewers has been a dominant force in the industry. This has been done as a way to increase volume and also achieve efficiencies which decrease costs.101 Combining production, packaging or shipping processes may help the large brewers achieve economies of scale. This global environment also means that non-U.S. based brewers can compete in the U.S. The increasing U.S. market share of import beer shows that these brewers do present formidable competition for the entire industry both domestically and worldwide. These companies also tend to have a significant presence in their home country, in addition to a presence in other countries. While consolidations in the industry and increased global presence should be beneficial to the larger brewers, these trends could lessen the ability of smaller craft brewers to compete. Most U.S. craft brewers have a regional or local domestic focus. Unlike other craft brewers, The Boston

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Beer Company, the largest craft brewer in the U.S., does have a small international presence.102

Changes in preferences and attitudes toward beer consumption throughout the world will impact how much beer is consumed, what type of beer is consumed, and what brands thrive.

Overall Economic Analysis

The beer industry has been through much change in recent years with numerous entrants in the better beer segment and consolidation among larger brewers. Focus on responsible drinking has led to stricter enforcement of laws related to alcohol use. New legislation has been proposed to change the industry structure. An increase in the older population could negatively impact the industry if these consumers continue to

show a preference for wine; yet, the growing group of those turning age 21 could prove to be positive. And, recent economic conditions have resulted in declining sales in the overall industry. A company’s ability to identify and capitalize on consumer preferences, changing technologies and untapped global markets could differentiate it from its competitors. The macro-environment creates challenges in this mature industry that must be addressed with financial and operational resources.

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15 MillerCoors. “MillerCoors Leads in Waste Reduction Achievements” Retrieved on 10/2/10 from

http://www.millercoors.com/news/press releases/release/sustainable development‐ ‐ ‐report.aspx

16 Beer Institute. “Beer Institute and Brewers Association Applaud Introduction of Bipartisan Tax Relief Legislation for Brewers” 2009. Retrieved on 10/2/10 from http://www.beerinstitute.org/tier.asp?nid=546&archiveyear=2009&bid=102

17 Brewers Association. “Beer Sales” 2009. Retrieved on 9/27/10 from http://www.brewersassociation.org/pages/business ‐tools/craft brewing statistics/beer sales‐ ‐ ‐

18 America’s Beer Distributors. “What is a beer distributor?” Retrieved on 10/2/10 from http://nbwa.org/about/what is a beer distributor‐ ‐ ‐ ‐

19 Reference for Business. “SIC 5181: Beer and Ale Distribution” Retrieved on 10/2/10 from

http://www.referenceforbusiness.com/industries/Wholesale Trade/Beer Ale‐ ‐ ‐Distribution.html

20 Goldammer, Ted. “The Brewer’s Handbook” October 2008. Retrieved on 9/28/10 from http://www.beer brewing.com/beer brewing/book_excerpts.htm‐ ‐

21 Jones, Lester. “Beer Industry Update, 2008” June 2009. Retrieved on 9/27/10 from

http://www.beerinstitute.org/statistics.asp?bid=22022 Beer Institute. “Brewers Almanac: 2009” Retrieved on 9/17/10 from http://www.beerinstitute.org/statistics.asp?bid=200

23 Goldammer, Ted. “The Brewer’s Handbook” October 2008. Retrieved on 9/28/10 from http://www.beer brewing.com/beer brewing/book_excerpts.htm‐ ‐

24 TTB.gov. “Taxes: Tax and Fee Rate” Retrieved on 9/28/10 from

http://www.ttb.gov/tax_audit/atftaxes.shtml

Jennifer Pontinen 29

25 HTB Marketing. “Beer Industry Overview 1st Quarter 2008.” Retrieved on 9/19/10 from

http://www.grocerynetwork.com/progressivegrocer/profitguides/beer/images/pdf/IndustryOverview.pdf

26 Jones, Lester. “Beer Industry Update, 2008” June 2009. Retrieved on 9/27/10 from

http://www.beerinstitute.org/statistics.asp?bid=220

27 Anheuser Busch/InBev data was retrieved from: ‐ http://www.sec.gov/edgar.shtml and http://www.anheuser busch.com/investors.html ‐ and http://library.morningstar.com.libpdb.d.umn.edu:2048/stocknet/MorningstarAnalysis.aspx?Country=USA&Symbol=BUD&Cu stId=&CLogin=&CType=&CName=

28 MillerCoors data was retrieved from: http://phx.corporate ir.net/phoenix.zhtml?‐c=101929&p=irol reportsannual ‐ and http://ua.sabmiller.com/files/reports/ar2009/overview/overview.html and http://www.sec.gov/edgar.shtml

29 Crown Imports data was retrieved from: http://yahoo.brand.edgar online.com/displayfilinginfo.aspx?FilingID=7213434 ‐ ‐264657 267590&type=sect&TabIndex=2&companyid=1073&ppu=%252fdefault.aspx‐%253fcik%253d16918 and http://seekingalpha.com/symbol/stz/description and http://biz.yahoo.com/e/100111/stz10 q.html ‐ and http://www.crownimportsllc.com

30 Heineken data was retrieved from: www.heineken.com and www.heinekenusa.com and http://www.sec.gov/edgar.shtml

31 Pabst data was retrieved from: http://www.nytimes.com/2003/06/22/magazine/the marketing of no ‐ ‐ ‐ ‐marketing.html?pagewanted=all and http://dealbook.blogs.nytimes.com/2010/06/25/pabst brewing co sells itself to ‐ ‐ ‐ ‐ ‐ ‐metropoulos/ andhttp://www.inc.com/news/articles/2010/06/metropoulos buys‐ ‐pabst brewing company.html‐ ‐

32 Boston Beer Company data retrieved from: www.bostonbeer.com and www.samueladams.com 33 Sierra Nevada data retrieved from: www.sierranevada.com and

http://www.cnbc.com/id/39233398/The_10_Biggest_US_Craft_Breweries?slide=1034

Craft Brewers Alliance data retrieved from www.craftbrewers.com and http://www.sec.gov/edgar.shtml

35 Information on craft brewers was retrieved from http://www.brewersassociation.org/pages/business tools/craft brewing ‐ ‐ ‐statistics/facts

36 Jones, Lester. “Beer Industry Update, 2008” June 2009. Retrieved on 9/27/10 from

http://www.beerinstitute.org/statistics.asp?bid=220

37 Goldammer, Ted. “The Brewer’s Handbook” October 2008. Retrieved on 9/28/10 from http://www.beer brewing.com/beer brewing/book_excerpts.htm‐ ‐

38 Brewers Association. “Beer Sales” 2009. Retrieved on 9/27/10 from http://www.brewersassociation.org/pages/business ‐tools/craft brewing statistics/beer sales‐ ‐ ‐

39 Brewers Association. “Number of Breweries” July 31, 2010. Retrieved on 9/27/10 from

http://www.brewersassociation.org/pages/business tools/craft brewing statistics/‐ ‐ ‐number of breweries‐ ‐ 40 Beer Institute. “Brewers Almanac: 2009” Retrieved on 9/17/10 from http://www.beerinstitute.org/statistics.asp?bid=200

41 Reference for Business. “SIC 5181: Beer and Ale Distribution” Retrieved on 10/2/10 from

http://www.referenceforbusiness.com/industries/Wholesale Trade/Beer Ale‐ ‐ ‐

Distribution.html

42 Jones, Lester. “Beer Industry Update, 2008” June 2009. Retrieved on 9/27/10 from

http://www.beerinstitute.org/statistics.asp?bid=22043 Beer Institute. “Brewers Almanac: 2009” Retrieved on 9/17/10 from http://www.beerinstitute.org/statistics.asp?bid=200

44 HTB Marketing. “Beer Industry Overview 1st Quarter 2008.” Retrieved on 9/19/10 from

http://www.grocerynetwork.com/progressivegrocer/profitguides/beer/images/pdf/IndustryOverview.pdf

45 HTB Marketing. “Beer Industry Overview 1st Quarter 2008.” Retrieved on 9/19/10 from

http://www.grocerynetwork.com/progressivegrocer/profitguides/beer/images/pdf/IndustryOverview.pdf

46 Bureau of Labor Statistics. “Current Population Survey” September 2010. Retrieved on 10/2/10 from

http://www.bls.gov/cps

Jennifer Pontinen 30

47 Schulz, Thomas. “The Erosion of America’s Middle Class” August 19, 2010. Retrieved on 10/3/10 from

http://www.spiegel.de/international/world/0,1518,712496,00.html

48 US Bureau of Economic Analysis. “Personal Income and Its Disposition” Retrieved on 10/3/10 from

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=58&Freq=Qtr&FirstYear=2008&LastYear=2010

49 Schulz, Thomas. “The Erosion of America’s Middle Class” August 19, 2010. Retrieved on 10/3/10 from

http://www.spiegel.de/international/world/0,1518,712496,00.html50 Reuters. “Beer Still Recession Proof?” March 30, 2010 http://www.reuters.com/news/video?videoId=101160

51 Beer Business Daily. “The Year of the Sub Premium 30 pack can” December 7, 2009. ‐ ‐Retrieved on 10/3/10 from

http://www.beernet.com/publications_daily.php?id=1933&comment=add 52 Data retrieved from www.dontserveteens.gov

53 Beer Institute. “Signs of Progress: Declines of Underage Drinking and Drunk Driving” Retrieved on 9/28/10 from

http://www.beerinstitute.org/statistics.asp?bid=201

54 T., Buddy. “Why You Should Never Drink and Drive” May 13, 2010. Retrieved on 9/28/10 from

http://alcoholism.about.com/od/dui/a/impaired.htm

55 Beer Institute. “Signs of Progress: Declines of Underage Drinking and Drunk Driving” Retrieved on 9/28/10 from

http://www.beerinstitute.org/statistics.asp?bid=20156 Retrieved from: http://ua.sabmiller.com/files/reports/ar2009/overview/overview.html

57 NIAAA. “Twelve month prevalence of...alcohol abuse...” January 2005. Retrieved on 9/28/10 from

http://www.niaaa.nih.gov/Resources/DatabaseResources/QuickFacts/AlcoholDependence/abusdep1.htm

58 NIAA. “Estimated economic costs of alcohol abuse in the United States.” March 2004.

http://www.niaaa.nih.gov/Resources/DatabaseResources/QuickFacts/EconomicData/Pages/cost8.aspx

59 Goldammer, Ted. “The Brewer’s Handbook” October 2008. Retrieved on 9/28/10 from http://www.beer brewing.com/beer brewing/book_excerpts.htm‐ ‐

60 TTB.gov. “Taxes: Tax and Fee Rate” Retrieved on 9/28/10 from http://www.ttb.gov/tax_audit/atftaxes.shtml 61 Beer Institute. “Beer Tax Facts” Retrieved on 9/29/10 from

http://www.beerinstitute.org/beerInstitute/files/ccLibraryFiles/Filename/000000000742/BeerTaxFacts_2008update.pdf

62 McWilliams, Jeremiah. “Brewers Fear Beer Tax.” June 2009. Retrieved on 9/27/10 from

http://www.allbusiness.com/legal/tax law excise tax/12517285 1.html‐ ‐ ‐ ‐

63 McWilliams, Jeremiah. “Brewers Fear Beer Tax.” June 2009. Retrieved on 9/27/10 from

http://www.allbusiness.com/legal/tax law excise tax/12517285 1.html‐ ‐ ‐ ‐

64 Beernews.org. “How Congress could help shape the future of craft beer.” May 14, 2010. Retrieved on 10/3/10 from

http://beernews.org/2010/05/how congress could help shape the future of craft‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐beer/

65 McWilliams, Jeremiah. “Brewers Fear Beer Tax.” June 2009. Retrieved on 9/27/10 from

http://www.allbusiness.com/legal/tax law excise tax/12517285 1.html‐ ‐ ‐ ‐

66 Beer Institute. “Marketing and Advertising Code.” January 2006. Retrieved on 10/2/10 from

http://www.beerinstitute.org/tier.asp?bid=249 67 Retrieved from www.census.gov

68 Population Reference Bureau. “World Population Data Sheet.” 2009. Retrieved on 10/10/10 from

http://www.prb.org/Publications/Datasheets/2009/2009wpds.aspx

69 Goldammer, Ted. “The Brewer’s Handbook” October 2008. Retrieved on 9/28/10 from http://www.beer brewing.com/beer brewing/book_excerpts.htm‐ ‐

70 Simmons Market Research Bureau. “The Demographics of Beer.” 2003.

http://www.thefreelibrary.com/The+demographics+of+beer a0134384833‐

Jennifer Pontinen 31

71 Simmons Market Research Bureau. “The Demographics of Beer.” 2003.

http://www.thefreelibrary.com/The+demographics+of+beer a0134384833‐

72 Adams, Steve. “Craft Beer Sales on the Rise.” April 25, 2009. Retrieved on 9/29/10 from

http://www.patriotledger.com/business/x1899319866/Craft beer sales on the rise‐ ‐ ‐ ‐ ‐

73 Beer Institute. “Beer Tax Facts” Retrieved on 9/29/10 from

http://www.beerinstitute.org/beerInstitute/files/ccLibraryFiles/Filename/000000000742/BeerTaxFacts_2008update.pdf

74 Goldammer, Ted. “The Brewer’s Handbook” October 2008. Retrieved on 9/28/10 from http://www.beer brewing.com/beer brewing/book_excerpts.htm‐ ‐

75 Beacon Asset Managers. “Beer Here: Generation Y Poised to Boost Sales.” June 17, 2009.

http://seekingalpha.com/article/143646 beer here generation y poised to boost sales‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

76 Beacon Asset Managers. “Beer Here: Generation Y Poised to Boost Sales.” June 17, 2009.

http://seekingalpha.com/article/143646 beer here generation y poised to boost sales‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

77 HTB Marketing. “Beer Industry Overview 1st Quarter 2008.” Retrieved on 9/19/10 from

http://www.grocerynetwork.com/progressivegrocer/profitguides/beer/images/pdf/IndustryOverview.pdf

78 Newport, Frank. “U.S. Drinking Rate Edges Up Slightly to 25 Year High” July 30, 2010. ‐Retrieved on 10/2/10 from

http://www.gallup.com/poll/141656/drinking rate edges slightly year high.aspx‐ ‐ ‐ ‐ ‐

79 OECD Health Data. “Food Statistics>Alcohol Consumption” 2005. Retrieved on 10/2/10 from

http://www.nationmaster.com/graph/foo_alc_con food alcohol consumption current‐ ‐ ‐ ‐

80 HTB Marketing. “Beer Industry Overview 1st Quarter 2008.” Retrieved on 9/19/10 from

http://www.grocerynetwork.com/progressivegrocer/profitguides/beer/images/pdf/IndustryOverview.pdf

81PEW Research Center. “A Barometer of Modern Morals” 2006. Retrieved on 10/3/10 from

http://pewsocialtrends.org/pubs/?chartid=76

82 America’s Beer Distributors. “What is a beer distributor?” Retrieved on 10/2/10 from http://nbwa.org/about/what is a beer distributor‐ ‐ ‐ ‐

83 Simmons Market Research Bureau. “The Demographics of Beer.” 2003.

http://www.thefreelibrary.com/The+demographics+of+beer a0134384833‐

84 Data retrieved from http://www.beer100.com/beercalories.htm

85 Data retrieved from http://www.beer100.com/beercalories.htm

86 Express Employment Professionals. “Talking about our Generations.” August 2010 presentation

87 Saad, Lydia. “Drinking Habits Steady Amid Recession” June 29, 2009. Retrieved on

10/3/10 from

http://www.gallup.com/poll/121277/drinking habits steady amid recession.aspx‐ ‐ ‐ ‐

88 Moore, Jesse. “Beer Brewing Methods Have Changed Greatly Over the Years” Retrieved on 10/3/10 from

http://ezinearticles.com/?Beer Brewing Methods Have Changed Greatly Over the‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐Years&id=3275764

89 Data retrieved from www.millercoors.com

90 Data retrieved from www.heineken.com and www.heinekenusa.com

91 Keys, Tracey and Thomas Malnight. “10 Key Trends to Watch.” 2010. Retrieved on 10/3/10 from

http://www.globaltrends.com/features/strategy a leadership/67 10 key trends to‐ ‐ ‐ ‐ ‐ ‐ ‐watch 92 Data retrieved from http://www.millercoors.com/our beers/innovation.aspx‐

and http://www.anheuser busch.com/Environment/timeline.html‐ 93 Data retrieved from http://ua.sabmiller.com/files/reports/ar2009/overview/overview.html 94 Data retrieved from http://www.greatbeergreatresponsibility.com95 Data retrieved from http://www.anheuser busch.com/Environment/timeline.html‐

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96 Data retrieved from http://www.anheuser busch.com/Environment/timeline.html ‐and http://www.greatbeergreatresponsibility.com

97 Data retrieved from http://thomson.mobular.net/thomson/7/3090/4213 98 Data retrieved from www.census.gov

99 National Intelligence Council. “The Emerging Global Trends.” 1997. Retrieved on 10/3/10 from

http://www.dni.gov/nic/special_globaltrends2010.html#emerging

100 Ramos, Cesar Noriega. “Developing Countries Wealth Will Surpass That of Rich World by 2030.” September 16, 2010. Retrieved on 10/4/10 from http://www.infozine.com/news/stories/op/storiesView/sid/43480/

101 Gallagher, Richard. “Consolidation Remains on Tap for Brewers.” July 14, 2010. Retrieved on 10/4/10 from

http://www.valueline.com/Stocks/Commentary.aspx?id=9044102 Data retrieved from http://thomson.mobular.net/thomson/7/3090/4213

Jennifer Pontinen 33

Strategic Group Map Input Data

Brewer Boston Beer

ProductSamuel Adams Boston Lager

Total Company Revenue $ 415,100,000 $ 415,100,000 $ 21,020,000,000 $ 21,020,000,000 $ 20,515,500,000 $ 20,515,500,000 $ 132,000,000 $ 2,256,200,000 $ 2,256,200,000 $ 500,000,000 $ 100,000,000

Total Barrels Sold 2,200,000 $

Price/12

pack 27.99 22.70 21.89 21.89 27.99 25.69 31.98 27.99 31.99 16.89 30.00 27.99

Market Share 1%50% 29% 29%4%4%0%5%5%3%0%0%

Anheuser Busch MillerCoors MillerCoors Heineken Heineken‐

Bud LightMiller LiteCoors LightHeinekenDos EquisRedHook Sampler Pack Corona

348,198,364 $ 221,478,440 $ 221,478,440 $

Craft Brewers Alliance Crown Imports (e) Crown Imports (e) Pabst (e)

Negra Modelo PBRPale Ale

21,000,000 $ 21,000,000 $ 582,500 $ 25,000,000 $ 25,000,000 $ 1,000,000 $ 723,880 $ 5,715 $

Sierra Nevada (e) Average Craft Brewer*

$

1,880,878

Hectolitre =

26.4172052 gallons31 gallonsperbarrel

Revenue and Barrels Sold data for Boston Beer Company is taken from the company's 2009 10 K and Annual Report.‐

Revenue and Barrels Sold data for Anheuser Busch, Miller Coors, Heineken, ‐and Craft Brewers Alliance is taken from each company's 2009 10 K report ‐and/or most recent annual report.

Revenue and Barrels Sold data for Crown Imports is estimated using data from Constellation Brands most recent 10 K report Revenue and Barrels Sold data ‐for Sierra Nevada is estimated using data gathered from:

http://www.cnbc.com/id/39233398/The_10_Biggest_US_Craft_Breweries?slide=11 Market Share data was found at http://www.beerinstitute.org/statistics.asp?bid=220

Price data was found at http://capecodpackagestore.com/webupdate/typeindex.htm

*Average Craft Brewer was found using data from the Brewers Association at http://www.brewersassociation.org/pages/business tools/craft brewing statistics/‐ ‐ ‐facts Average sales estimated by taking 2009 industry sales ($3 billion) divided by ‐number of craft brewers (1,595). Average barrels estimated by taking the 2009 total ‐number of craft barrels sold (9,115,635) divided by number of craft brewers (1,595).‐Used price of Samuel Adams 12 pack for average price.‐

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5/20/2011

Strategic Group Map

Market Share and Price per 12 pack

60%

50%

Anheuser Busch‐

40%

30%

Miller Coors

20%

10%

Crown (Corona) Crown (Negro Modelo)

Pabst

Heineken Heineken (Dos Equis) Boston Beer Company

0%

Average Craft Brewer $25.00

Craft Brewers Alliance

$‐

$5.00

$10.00

$15.00

$20.00

Sierra Nevada $30.00

$35.00

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5/20/2011

Strategic Group Map

Barrels Sold and Price per 12 pack‐

400,000,000

350,000,000

Anheuser Busch‐

300,000,000

250,000,000

MillerCoors

200,000,000

150,000,000

100,000,000

50,000,000

Crown (Negro Modelo)

Crown (Corona) Heineken

Pabst

Heineken (Dos Equis)Boston Beer

Craft Brewers Alliance

‐

Sierra Nevada $30.00

$‐

$5.00

$10.00

$15.00

$20.00

$25.00

$35.00

Jennifer Pontinen

5/20/2011

IntroductionThe Boston Beer Company has grown rapidly from sales of 500 barrels in 1985 to over two

million in 2009. From the start, founder, Jim Koch, insisted on a focus on quality which began with using the world’s finest all natural ingredients. Still today, Koch and other company executives travel around the world to hand-select the highest quality ingredients. The Boston Beer Company is now the world’s largest craft brewer with numerous unique beer tastes – from Cherry Wheat to Harvest Pumpkin Ale to Chocolate Bock. In 2009, Boston Beer sold 30 varieties of Samuel Adams beer.1 Production of its beer is done at three company breweries – Boston, Pennsylvania, and Cincinnati – and also on a contract basis with other brewers.

As discussed in the external analysis, the U.S. beer industry consists of two main strategic groups. The major brewers include Anheuser-Busch/InBev and MillerCoors. In 2008, major changes took place in this part of the industry when Belgium’s InBev purchase Anheuser-Busch and SAB-Miller and Molson Coors embarked on a joint venture. These brewers produce multiple product lines and 200 to 300 million barrels of beer each year. They enjoy nearly 80 percent of the market share in

the U.S.2 The second group is classified as the better beer segment and includes import brewers and craft brewers. Import brewers in this group include Heineken and Crown Imports. These companies are headquartered outside the U.S. which is why their beer is classified as an import. Craft brewers produce less than two million barrels per year and consist of nearly 1,600 companies across the U.S. They are noted for producing beer with distinct flavors and unique tastes and include companies like The Boston Beer Company, Sierra Nevada and Craft Brewers Alliance. The retail price of both import and craft beer is comparable and both produce significantly fewer barrels of beer than the major brewers. Boston Beer has classified itself as a “better beer” and the Strategic Map makes this distinction clear. While this category consists mainly of craft and import brewers, some of the major brewers also produce specialty beer that would qualify for this category. Ultimately, the industry’s two strategic groups are: major brewers

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that produce large quantities and have numerous beer brands in the premium and sub-premium categories and better beer brewers that produce smaller quantities of specialty, “better” beer.

When compared to other craft brewers, Boston Beer has some distinct competitive advantages. Innovation and continuous development of a large variety of flavors is the cornerstone that the company was built upon. The company seeks constant renewal of its product line by adding new flavors and removing unsuccessful ones. Seasonal flavors offer added allure when they become available. The Boston brewery operation serves as a testing ground for potential flavors before they are introduced to the general public. The company has been recognized with awards for product innovation dating back to the very beginning of the company. Another advantage is the transferability of its brewing process. The Boston Beer Company historically contracted out the brewing of most of its product. In order to

assure the product was brewed precisely to its standards, using traditional recipes, the company developed a brewing process which could be easily replicated. This resulted in greater product consistency and enabled the company to more easily move majority of its brewing process in-house. If, at some point, it becomes necessary to rely on contract brewers again, the company can more easily adapt. A final competitive advantage is in the company’s ability to reach its target customer. Relationships with wholesalers and retailers are vitally important to the company as good relationships mean access to shelf space or a place at a restaurant or bar. The company’s large, highly-trained sales force is responsible for developing and strengthening relationships with distributors. Distributors control access to retailers who control access to shelf space and ultimate sale to the end user. As the company’s products are not the primary product for majority of its distributors3, Boston Beer practices differentiation in its sales methods, as well, by providing education to distributors, retailers, and consumers alike.Company Strategy

The Boston Beer Company aims to be different. Starting at the corporate level, Boston Beer chooses to focus on one purpose – building a better beer. The company employed a focus strategy

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upon entering the craft beer segment, acknowledging that it is different than the major brewers offering beer with a unique taste, a higher price, and a distinct image. The name of the company’s beer, Samuel Adams®, speaks of proud, American heritage. The company capitalizes on the success of its flagship brand, Samuel Adams® Boston Lager, by promoting it in much of its advertising. Additionally, the company continues to develop and introduce new brands to the market while staying focused on this distinct image. Differentiation of itself and its product is another component of the company’s strategy. Continuous innovation is a norm at The Boston Beer Company. The Samuel Adams® “Brew Crew” consists of nine individuals

skilled in selecting ingredients, developing flavors, and brewing the beer. Creativity is rewarded in the company and consumer involvement is recognized as an important part of the process. The company constantly seeks to expand its product offerings to meet the needs of consumers and to gain additional customers. It uses special, high-quality ingredients including Noble hops from Germany and the Czech Republic and proprietary strains of yeast. Growing its market share domestically is a priority, while international expansion has less, but ever-increasing, focus. The company’s international strategy has been applied using recent cooperative strategies. A strategic alliance with Moosehead Breweries in Canada gives Boston Beer a presence in the Canadian market. Additionally, the company has teamed up with Weihenstephan in Germany, the world’s oldest brewer, to create an exclusive, “champagne style” beer.

Financial Analysis & Assessment of Strategic EffectivenessSales growth has been considerable over the last three years, growing about 41% over this

time period. Growth in the number of barrels sold has contributed mainly to the increase in sales, with the company reaching over 2 million barrels of core product sold in 2009. Additionally, sale price per barrel has also increased in recent years. While sales have grown, gross profit margin has fluctuated. In 2008, the company voluntarily recalled some of its product, resulting in over $9 million in additional costs and $13 million in lost revenue.4 As a result, gross profit margin

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3

dropped considerably from 2007 to 2008. In 2009, the company was able to control costs and generate energy efficiencies at its breweries to generate a gross profit margin of nearly 52%. While this is still less than gross profit margin in 2007 of 55%, the company hopes to continue to achieve efficiencies by brewing majority of its product itself at its own breweries and

expects a high gross profit margin in 2010.5 Operating expenses have dropped consistently over the last three years, reaching 38% of sales in 2009. Company earnings recovered from a lean year in 2008 and, in 2009, were $31 million or $2.21 per share.

Due to the purchase and renovation of the Pennsylvania brewery in 2008, fixed assets increase by $91 million to $150 million. Stockholder equity has grown steadily and the company has no long-term debt. Because the company has no obligation to pay back equity, this financing is favorable to debt. However, stockholders expect a return on their investment either in the form of dividends or a steadily increasing stock price. While the stock price at December 31, 2008 of $28.40 was down from the December 31, 2007 price of $37.65, it grew significantly in 2009 to $46.60 by December 31. Management has achieved operational efficiencies by maintaining inventory at appropriate levels, collecting quickly from customers, and issuing timely payments to vendors. Return on investment at the end of 2009 was 31.40%, a return superior to many investment options.

Financial performance as of the most recent quarter ended June 26, 2010 shows similar results. Sales are up slightly compared to the same period in 2009 but barrels sold are down. However, this is due to the termination of the company’s brewing agreement with Diageo. Sales of the company’s core products are actually up quarter-to-date. Gross profit margin is up over two percent and net profit margin is up nearly three percent – both positive signs.

Comparison of the company to other companies in the industry also reveals positive news. The company has significantly greater liquidity and significantly less debt. Gross profit margin is better than the industry, while net profit margin is slightly low. The company seems to manage

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inventory and accounts receivable better than the overall industry and pays its vendors similar to the other companies.

Boston Beer Company has managed considerable sales growth over the last three years by investing in fixed assets, increasing equity, incurring no debt, following sound operational policies, and managing costs and expenses. The company seems well managed and financially responsible. Resource and Competences Analysis

The Boston Beer Company has numerous resources that aid in its success. As discussed above, the strong financial position of the company allows it much flexibility in managing daily operations and pursuing expansion options. High cash reserves help the company manage seasonal swings in sales or pay for unexpected costs. This, coupled with no long-term debt, is viewed positively by lenders and increases the company’s ability to secure long-term financing if needed. Additionally, sales growth, earnings growth, and an increasing stock price are all positive from an investing standpoint giving the company opportunity to raise additional equity if needed. This financial structure allows the company flexibility in carrying out its strategy. Continually producing and experimenting with new varieties of beer requires financial resources. Brewers without a strong financial position do not have the level of flexibility that Boston Beer has. The company’s focus strategy helped it achieve financial success. Financial success lends itself well to striving for differentiation.

Another resource the company has is Jim Koch himself. Koch’s knowledge and expertise of the brewing industry has made the company what it is today. Koch is ever-preset in both daily operations and company marketing and has set high standards for the company to follow. Koch developed the strategy that the company was built upon. Having Koch as a resource gives the company an advantage over other brewers, but, more important is how the company translates his knowledge into company policies.

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While product development has always been a focus of the company, expansion of its facilities has become more important in recent years. With the purchase and renovation of the Pennsylvania brewery in 2008, the company substantially increased its production capacity. Where, in the past, only 30 to 35 percent of its product was brewed in-house, now the company has the capacity to brew 95 percent in-house. This transition has been taking place with expectations to reach the 95 percent mark in 2010. While this differs somewhat from traditional company strategy, this is an important strategic move. The company’s focus has not shifted from the production of better beer. Instead, its operations have changed to accommodate increased production. Greater control over the production process lends itself well to the pursuit of differentiation. This resource gives the firm a strong advantage over other brewers and helps maintain the integrity of the process and the product.

Where in-house production gained the company better control over the production process, it also helped protect the company’s most valuable resource: its beer formulas. From the generations old formula for Samuel Adams® Boston Lager to the formulas for newer brews, this is the heart of the company. The company strategy for differentiation is played out in the development of new formulas and production of unique tastes. This resource is vitally important to the company’s success. Without it, it could not exist.

Boston Beer also has numerous company competencies. Pursuit of a differentiation strategy requires commitment to innovation, and Boston Beer has done this well. New brands are constantly developed, unique partnerships are formed, and creative marketing is implemented. With much competition in the industry, the ability to innovate will set the company apart and give it a strong competitive advantage. Additionally, development of its brand image fulfills both strategies well. The Boston Beer Company has built its image as a distinctive company that produces high quality, high flavor craft beer that

competes in the better beer segment. The Brewers Association defines a craft brewer as being “small, independent and traditional.”6 Boston Beer has taken this definition to

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heart, displaying it in its marketing literature and promoting the unique properties of craft beer. While the company’s marketing has focused on building its brand, the company’s sales force has developed important relationships with distributors. The company boasts of having one of the largest and most highly educated sales forces in the beer industry. Because distributors control access to the end-user of the product, these relationships are vital to the company’s success. Company strategy is reflected in the company’s ability to communicate how it is unique to both consumers and distributors. The strong focus on its sales force gives the company a strong advantage in the industry. Finally, while the beer formulas themselves were recognized as a company resource, the process in which beer is brewed is a solid company competence. Developing a transferrable brewing process helped the company achieve a consistent product when it contracted with other brewers. Now, as it brings the production in-house, this competence will make the implementation easier. Brewing multiple brands requires continuous change to the production process. The company’s ability to manage this speaks to its dedication to differentiation. This competence gives the company an advantage over other brewers who do not brew internally or manage the production of fewer brands. Boston Beer can more easily adapt to changing industry trends.

Taken together, certain competencies complement each other and add symmetry to the company’s actions. Its ability to manage innovation by producing a variety of beer brands is made easier by its ability to incorporate consumer expectations into its product line. The company’s differentiation strategy is fulfilled in part by bringing together its competencies in brewing distinctive beer and successfully developing its brand image by using creative marketing channels to communicate. By bundling

these competences, the company has a greater advantage over its competitors and an additional advantage over simply focusing on each competence individually.

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Fit Analysis

Strategy and Internal CoherenceThe strategies of Boston Beer include focus – on being a craft brewer in the better beer

segment - and differentiation – with multiple and ever-changing brands. To carry out its strategy, the company uses innovative approaches to brewing, numerous unique brands, creative marketing techniques, and continuous follow up with and education for distributors. For the most part, the company’s tactics do line up with its strategy. However, of concern is the company’s high level of growth coupled with its desire to remain a craft brewer. Its actions in acquiring addition production capacity, increasing the number of barrels sold, and adding new geographic markets could quickly propel the company out of the craft brewer segment. In fact, based on the number of barrels sold, Boston Beer is on the brink of no longer being classified as a craft brewer according to federal law.7 In this regard, the company’s strategy is not completely coherent. However, coining the term “better beer” may have been the tactic used by the company to manage its status as a craft brewer in light of its level of growth.

Strategy and External Environment

The Porter’s Five Forces analysis conducted in the external analysis details the characteristics of the beer industry today. The barriers to enter this industry vary depending on which strategic group a business plans to enter. Entry as a major brewer is very limited as two brewers control this group domestically and their substantial resources alone may inhibit new entrants. However, the craft segment has seen numerous entrants over the last twenty years as it has notably lower

barriers including a smaller investment and automation of the brewing process. Due to the large number of suppliers of ingredients and many brewers to purchase these ingredients, supplier power was identified as low. While striving for quality, Boston Beer may give some additional power to suppliers to set price because the ingredients the company requires may not be readily available from multiple suppliers. While suppliers have limited power, buyers have a high

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level of power, controlling access to retailers and ultimately consumers. Large selection in the beer industry, and specifically the better beer segment, lends itself to increased buyer power. However, consumers are demanding unique brands and Boston Beer recognizes consumer desire to “trade up.”8 Maintaining consumer involvement in the crafting and selection of its beer brands also gives Boston Beer an advantage in the industry. Threat of substitutes is medium and has potential to be a larger threat, as wines and spirits have increased their market share in recent years. Rather than challenge or ignore this trend, Boston Beer has positioned its beers on a similar level with wine and spirits.9 The company feels beer is something to savor, should be enjoyed paired with carefully selected food, and should challenge the palate. Each of the Five Forces causes a high degree of rivalry in the industry. Boston Beer’s strategies of focus and differentiation are necessary to distinguish itself in this vast industry. Thus, its strategies are a good fit based on the current conditions in the overall beer industry and the better beer strategic group.

Current and future macro-environmental conditions must also be addressed as the company evaluates its strategy and determines its future direction. The constant activity in the beer industry presents a challenging environment in which to conduct business. While the beer industry as whole is classified as a mature industry, the craft segment still has potential for growth

as evidenced by positive sales growth in 2009 while the industry as a whole was down.10 So, despite the economic downturn in recent years, the higher price of better beer has not stopped customers from buying it. The company has successfully offered brands in line with consumer preferences. Consumers still expect variety and the popularity of craft beer is expected to remain high in the near future.11 While the number of craft brewers, brewpubs and microbreweries increased rapidly in recent years, it has leveled off in the most recent few years.12 Yet, mergers, acquisitions and joint ventures have occurred frequently over the last five years or so. Boston Beer has consistently grown the company with its differentiation strategy and has been successful in offering a product that consumers want. Changing demographics, including a growth in people over age 50 and in the number of people ages

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21 to 27,13 have been addressed by the company in its positioning of the product. Its beliefs that beer should be enjoyed and savored help it compete with wine, which is the preferred drink of the older population.14 Recent cultural changes include a focus on healthy lifestyles. Because craft beer is known to have higher calories than premium or sub-premium brands, Boston Beer introduced Samuel Adams® Light. Surprisingly, this brand has not become a huge seller, with consumers still preferring other Samuel Adams® flavors.15 It seems as if the consumer’s desire for a healthy lifestyle is somewhat in conflict with their desire for taste. This is favorable for Boston Beer. While Boston Beer has addressed the above macro-environmental conditions, it has not formally addressed the potential for changes to laws that affect the industry, a global focus on sustainability, and increased globalization. Boston Beer supports legislation that was recently introduced to increase the annual barrel limit for craft brewers.16 This, and other legislation related to taxation of the industry, and enforcement of drunk driving or underage drinking laws continues to be at the forefront of the industry. While Boston Beer has not

developed formal programs or policies to address these issues, as a member of the Brewer’s Association, it has access to member resources to use as needed. Additionally, the Beer Institute provides research in this area.17 Globalization continues to broaden the market for the beer industry. Boston Beer has a U.S. presence and has worked to establish itself in other countries, as well. Its partnership with Weihenstephan may increase its presence in Germany and provide guidance for developing other international partnerships. And finally, achieving sustainability in operations has become commonplace in the beer industry with the major brewers committing to reductions in their environmental impact. Boston Beer has taken a step toward sustainability by instituting a bottle- washing program at its breweries and reusing glass bottles that are returned.18 The company seems aware of these important macro-environmental trends and has addressed or has developed plans to address many of them.

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Boston Beer has implemented financial and marketing strategies in recent years that are in line with its overall strategy and cognizant of current and future environmental conditions. In 2008, the purchase of the Pennsylvania brewery began the process of bringing production in-house. Additionally, changes to the company’s marketing strategies in 2008 and 2009 resulted in cost savings and additional sales.19 Increased profits can be used in one of three ways: reinvestment in the company, payment dividends to shareholders, or payment of debt. Because the company pays no dividends and has no long-term debt, it is obvious the company is reinvesting its profits.20 Boston Beer is positioning itself for additional growth and has the financial ability to respond to changes in the macro-environment. It is on solid financial footing with an effective strategy for the current and future environment.Strategy and Resource Base

Boston Beer has focused on building a resource base consisting of financial resources, innovative processes, multiple brewery locations and strategic marketing efforts. This resource base

supports the company’s strategies of focus and differentiation. Boston Beer has never strayed from its focus as a beer brewer. Investment in breweries and brewing equipment has been a priority. Diversification of its operations into other products or processes has not been pursued. Continuous introduction of new products speaks to the company’s competence in its brewing process and commitment to its differentiation strategy. Consumers and distributors recognize Samuel Adams® beer fills a niche – one that many are interested in as evidenced by the growth in this segment. However, one inconsistency present in the company’s actions is its level of growth beyond the two million barrel mark. The number of barrels sold has steadily increased each year since the company’s inception. Currently, according to law, Boston Beer is too big to be considered a craft brewer21, yet too small to compete with the major brewers. If Boston Beer continues to grow, it will further distance itself from the significantly smaller craft brewers.

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While Boston Beer may be struggling to figure out where it fits in the beer industry, it has continued to achieve solid financial results. Although 2008 presented financial challenges due to the necessary product recall, the company has improved its financial performance in 2009. Increasing sales during a time when the major players in the industry are declining is a testament to Boston Beer’s quality and variety. Internal operations and the attraction of additional equity investment have financed the acquisition of resources and development of new products. Environment and Resource Base

The beer industry is constantly changing while overall industry sales remain flat. Mergers and acquisitions have narrowed down the number of brewers but varieties of beer have increased. The major brewers have the resources to compete in nearly all facets of the industry. Imports have gained market share in the U.S. and new craft beer varieties are continually introduced. With these dynamics, companies must focus on the following factors

in order to be successful:

Offering great VARIETY in flavors and categories

Building good relationships with DISTRIBUTORS

Using innovative MARKETING & ADVERTISING strategies to build a BRAND

Controlling and reducing manufacturing COSTS Boston Beer has embraced the culture of being unique. The consumer’s continually evolving palate represents a great opportunity for Boston Beer. The company is continually developing new beer brands with unique appeal. In 2009, the Samuel Adams® Barrel Room Collection was introduced. Inspired by Belgian brewing traditions and bottled in glass bottles with cork closures, each beer offers a different taste experience.22 This is but one distinctive offering by the Boston Beer Company. The constant focus on what’s best for the beer encourages creativity within the company. The Boston Beer “Brew Crew” is not afraid to brew a new flavor on a whim to see if it gains popularity. Getting the word out about the beer has been done through traditional beer industry advertising channels such as television and distributor relationships. The company has built a large

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sales force that communicates with distributors regularly providing them with industry education and company promotions. However, some of Boston Beer’s best advertising may come from its involvement in its programs and contests such as the Longshot® American Homebrew Contest® or Samuel Adams® Brewing the American Dream.23 The company also created a Hops Sharing Program in 2008 as a response to the worldwide shortage of hops. Knowing small craft brewers would have difficulty obtaining hops, Boston Beer developed a program that would allow small brewers to buy

hops directly from Boston Beer, at the company’s cost. The company gains positive publicity and increased consumer loyalty from these creative marketing channels.

The company’s acquisition of the Pennsylvania brewery put it in a position to further capitalize on industry trends. Consolidations in the industry in recent years reduced the capacity of contract brewers. By bringing majority of its production process in-house, Boston Beer has better control over the production process and relies little on other brewers. Additionally, this acquisition leaves the company additional room for growth, delaying the need for the acquisition or construction of other brewing facilities. The company has achieved efficiencies by brewing in- house and has implemented cost-savings strategies enabling it to realize substantial energy savings. The company realized increased margins in 2009 due to these changes and expects an additional increase in 2010.24

Boston Beer has implemented strategies that are in line with the key success factors in the industry; however, industry challenges must also be addressed. The consolidation in the beer industry has been somewhat addressed by the company by bringing most of its beer production in- house. It will be important for the company to constantly be aware of this trend as mergers, acquisitions, and joint ventures put the power in the industry in fewer and fewer hands. In 2008, the Anheuser-Busch acquisition by Belgian company, InBev, and the joint venture between SAB-Miller and Molson Coors consolidated numerous beer brands and created two companies with a large global presence.25 Additionally, major brewers have seen the opportunity in craft beer and have

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introduced varieties of their own. While the Better Beer segment is different from the major brewers, it will still be influenced by the actions of companies with larger market presence. Heineken’s announcement in January of its acquisition of Mexican company, Femsa Cerveza, solidifies the company as

the largest in the better beer category and second-largest brewer in the world.26 Boston Beer has a formidable competitor in the better beer category on a global basis. Boston Beer has established itself as the largest craft brewer in the U.S., has developed numerous distributor relationships, and has delved into joint ventures of its own. The resources possessed by the company now will be useful in addressing these threats. Additional brewing capacity and incremental increases in market share, both domestically and internationally, will help Boston Beer better position itself.

Leadership and Management IssuesThree major management issues face the company right now. Most importantly, the

company must determine its capacity to manage internal production of its product. Until the purchase of the Pennsylvania brewery in 2008, only 35 percent of the company’s beer was produced in-house. While, at times, there were problems related to contracting with other brewers to produce the company’s product, for the most part company management was successful in managing these relationships. Since 2008, the company has increased its in-house production and should produce nearly 95 percent of its product in-house. Efficiencies in operations have already been achieved; yet, management is unproven in its ability to fully manage production. If the company can successfully transition from management of contract brewers to management of complete brewing operations, it could increase the number of barrels produced which could lead to increased sales and greater market share. If a solid plan for managing production is not implemented, the company could sink rapidly. However, handled correctly, this increased capacity could enable the company to grow within the better beer segment. Additionally, the ability of leadership to sustain the level of growth the company has enjoyed must also be examined. While the company has made short-term

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decisions to increase marketing efforts and build its brand, a plan for the continuation of these efforts must be developed and the appropriate personnel must be trained or hired to carry it out.

The second issue is apparent lack of a succession plan. Although a formal succession plan may actually be in place, the emotional fall-out of Jim Koch no longer being involved in the company will have an unknown impact. Preparing the company and its employees and implementing a slow transition is imperative in order to let the impacts of change sink in. A leadership team that is actively involved and has authority for day-to-day decision-making and communicates regularly with Koch is necessary to successfully move the company beyond Koch’s leadership. Related to this, the company must evaluate its ownership structure. Jim Koch currently owns 100% of Class B voting shares, giving him voting preference over Class A shares. If not addressed, this could limit the attraction of additional equity. Additionally, as Koch sells his shares and the ownership structure changes, the company must be conscious of the impact this will have or new owners may lead the company in a different direction.

The final issue is the company’s status as a craft brewer. A craft brewer is defined by law to produce less than two million barrels of beer per year. In 2009, the company produced nearly this amount and is in jeopardy of losing this legal status. While loss of this status has financial consequences arising from higher taxes, more importantly is the consumer view of the company. Jim Koch feels the craft brewer status is the essence of what the company is all about. If the company outgrows this status, consumers may view its beer as less distinctive than that of other craft brewers. While holding on to the importance of the craft brewer status, the company has moved itself into the self-created better beer segment. Positioning itself in this category allows room for growth but could also change the brand image.

To ignore these issues could lead to the company’s demise. Good management decisions up to this point have led to

success. To continue the company’s success, the company must address these issues.

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Appendix A: Strategy Analysis

Corporate/Business-Level Strategy

The Boston Beer Company has chosen a single-business strategy as its main over-arching corporate-level strategy.

On a business-level, Boston Beer has chosen to follow both a focus strategy and a differentiation strategy. In 1984, the company began by using traditional recipes passed down for generations in the Koch family and continues to brew its trademark brand, Samuel Adams® Boston Lager with the same recipe. The company chose to focus on one niche in the beer industry – craft beer. The craft beer segment consists of brewers who are small, independent, and traditional.27 Jim Koch, the company’s founder, believes the craft description is part of what makes the company unique and recognizes that craft brewers have traits exclusive to their segment of the industry.28 Building on the success of the unique characteristics of its beer and using the best ingredients gathered from around the world, the company continually strives to be different. The company takes pride in its beer and company leaders, brewers and employees are passionate about the beer they develop. Boston Beer always tries to do “what’s best for the beer”29 and continually seeks innovation in its brands and processes. The company’s nine-person “Brew Crew”30 continuously reviews its product line and, in addition to developing new brands to add to the product line, discontinues brands when they feel it is necessary. Review and input from its customers is an important factor in determining if a newly created beer stays in the product line. At its Boston facility, the company test brews beer and lets the drinker evaluate it. The company’s original philosophy still holds true today: “Offer beer lovers a better beer and teach them what makes a beer great.” According to the 2009 annual report,

“The Company’s business goal is to become the leading brewer in the better beer category by creating and offering high quality full-flavored beers. With the support of a large, well-trained sales organization, the Company strives to achieve this goal by increasing brand availability and awareness through advertising, point-of-sale and promotional programs.”31 The company boasts a sales force of 265 people (one of the largest in the industry) who are well-trained in the brewing process.32 They are responsible for maintaining the company’s 400 distributor relationships and cultivating new ones. While the main focus of the sales force is on distributors, salespeople use promotional tactics and educational programs aimed at both retailers and consumers, as well. The Boston Beer Company uses unique means to attract the targeted end-user of its product – the consumer. The company directs its advertising message to consumers who want to savor the taste of beer – true beer aficionados. Its website offers resources for food and beer pairings as well as education on the brewing process and ingredient choices and methods for tasting and evaluating beer. Additionally, it has developed the Longshot® American Homebrew Contest® which allows homebrewers across the country to submit their entries – six of which will be chosen to be part of a limited edition variety pack of Samuel Adams® beer. This event creates positive public relations and is a unique marketing strategy targeted directly at its preferred drinker.

But, overall, the focus of the company is always on the beer. According to Jim Koch’s father, Charles, “Good beer makes its own friends.”33

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Cooperative Strategy

Recently, Boston Beer has formed two strategic alliances to help achieve the company goals. At the end of 2009, the company developed a distributor relationship with Moosehead Breweries of Canada. Moosehead will be responsible for distribution

throughout Canada. Developing this alliance is beneficial to both companies as both should achieve financial gains. Boston Beer is continuously seeking ways to increase its market share both domestically and internationally. Capitalizing on the relationships Moosehead Breweries has already developed with its distributors may help Boston Beer more easily achieve sales growth in Canada.

In 2010, Boston Beer announced it is teaming up with the world’s oldest brewer, Weihenstephan in Germany to create a new beer that is a combination of German heritage and brewing method’s and Boston Beer’s innovativeness. Boston Beer strives to be different and on the cutting edge in the beer industry. This unique beer with more than 10 percent alcohol content attempts to meets that goal.

International Strategy

While 99 percent of its beer is sold in the United States, Boston Beer also has markets in Canada, Europe, Israel, the Caribbean, Pacific Rim and Mexico.34 Although the international markets have been virtually untapped for company sales, many ingredients used in the production of Samuel Adams® beer are purchased overseas. Barley is purchased mainly from the U.S. and Canada and the companies Noble hops are purchased from companies in Germany and the Czech Republic, while others are purchased in England.

The Weihenstephan venture detailed above and the newly forged distributor relationship with Moosehead Breweries of Canada are part of the company’s international strategy as it tries to increase awareness of the product as well as its international market share.

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Appendix 2: Financial Analysis35

Sales in 2009 were $415 million, a 4.18% increase from the

prior year. According to the 2009 Annual Report, this increase was attributed to an increase in prices. In 2008, the company initiated a voluntary recall of some of its product. When factoring out the impact of this recall ($13.2 million), actual

sales growth was $3.5 million or 1%. 36

While modest, this still represents growth during a difficult economy. Additionally, the overall beer industry experienced a decline in sales in 2009, so this result is positive for the company. Sales in 2008 represented nearly a 17% increase over 2007. Total barrels sold in 2009 were 2.2 million, of which 2 million were core products. Sales per barrel for core products were $205 in 2009 compared to $200 in 2008 and $185 in 2007. Sale price per barrel can fluctuate depending on the packaging mix each year. If more beer is bottled and sold rather than sold in a keg, the sale price per barrel will be higher. Additionally, the company may increase prices each year.

Gross profit margin grew substantially – up 5.36% to 51.52%. Much of this increase can be attributed to the recall costs of $9.5 million that were recognized in 2008. When removed from the calculation, actual change in gross profit margin was 2.98%, still a significant increase. The company credits much of this improvement to lower energy costs at its breweries. Gross profit per barrel on core products was up from $92.31 in 2008 to $105.80 in 2009. Gross profit margin in 2007 was 55.43%. This extreme fluctuation in gross profit margin over the last three years can be somewhat explained by one-time occurrences in 2008. In 2008, start-up costs of the Pennsylvania brewery, the product recall, and penalties from not meeting the minimum brewing requirement with its contract brewers all contributed to higher costs, and thus, a lower gross profit margin. While the three year picture is not consistently positive, gross profit margin is greatly improved from 2008 to 2009 which is a good trend. Because the company was able to better control and reduce its costs, additional profitability was generated.

Total operating expenses in 2009 were 38.44% of sales, down 4.19% from 42.63% in 2008. Although the company had a full

year of expenses related to operating the Pennsylvania brewery, compared to only seven months in 2008, the company seems to have achieved efficiencies in other areas to compensate for these increased costs. Operating expenses in 2007 were at 45% of sales. The company has been able to reduce expenses each year over the last three years. These results are reflective of good management decisions meant to control costs while still increasing sales.

Overall profitability was at $31 million or 7.5% of sales. This was up from $8 million in 2008. The company’s ability to reduce its costs of goods sold and operating expenses, coupled with no recall in 2009 caused the company to generate significantly better results. Net profit was 6.6% of sales in 2007, showing the company was able to rebound from the 2008 recall and generate even better results in 2009. Earnings per share on an undiluted basis was $2.21 in 2009 compared to $0.58 in 2008 and $1.58 in 2007. All income statement measures show favorable results in 2009.

On the Balance Sheet, total assets in 2009 grew $43 million to $262 million. In 2007, total assets were $198 million. Significant current assets include cash which fluctuated from $95 million in 2007 to $9 million in 2008 to $55 million in 2009. To support additional sales, inventory grew each year from $18 million in 2007 to $23 million in 2008 to $26 million in 2009. Fixed assets remained nearly the same as 2008, showing little investment in property or equipment in 2009. In 2008, the company purchased the Pennsylvania brewery which caused fixed assets to rise by $91 million to $150 million. Minimal investment in fixed assets in 2009 comes as no surprise because

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the company completed its purchase and renovation of the Pennsylvania brewery in 2008 and focused on operating it in 2009, rather than pursue further expansion.

Working capital was $39 million in 2009 compared to $1 million in 2008 and $78 million in 2007. The company had excess liquidity each year, which is positive; however, this number dropped significantly in 2008. According to the company, the 2008 purchase of the Pennsylvania brewery was financed primarily by company cash, thus accounting for this decline.37 The Current Ratio was 1.53 in 2009, 1.03 in 2008 and 2.29 in 2007. This ratio measures the ability of the company to pay its bills. In 2009, for every dollar of current liabilities, the company had $1.53 in current assets with which to pay it. This is positive and shows that at this point in time, the company is solvent and has liquid assets. The Quick Ratio measures the ability of the company to generate cash. It is similar to the Current Ratio except it only measures two of the most liquid assets – cash and accounts receivable – compared to Current Liabilities. The Quick Ratio was .99 in 2009, .40 in 2008, and 1.89 in 2007. While this number has declined from its high in 2007, the ratio in 2009 was still acceptable.

The company used a mixture of short-term liabilities and equity to finance its growth. Stockholders Equity grew from $134 million in 2007 to $140 million in 2008 to $173 million in 2009. The company has no long-term debt. The Debt-to-Equity ratio, which measures the mix of debt and equity used to finance company assets, changed slightly over the three year period. It was 0.48 in 2007, 0.57 in 2008, and 0.52 in 2009. Because Boston Beer is financed more by equity than by debt, the company shows financial strength and has flexibility in financing additional growth.

Management efficiency is measured by the ability of the company to use its assets effectively and generate a sufficient return on assets and a return on investment that is in line with what the investor seeks. In 2009, sales-to-assets was 1.58 compared to 1.81 in 2008 and 1.73 in 2007. Sales growth and the timing of investments in fixed assets have caused this number to fluctuate over the last three years. Because company profits were small in 2008, the 7.21% return on assets that year

was unimpressive, yet the company’s approximately 21% return on assets in both 2009 and 2007 was much better. The 2007 number is reflective of company operations and return- generating ability before the purchase of the Pennsylvania brewery, while the 2009 number is reflective of the company adjusting to and integrating the new operational methods into existing operations, developing efficiencies, and getting back on track. The approximately 31% return on investment in both 2009 and 2007, and an 11.31% return in 2008, reflects the above trends, as well. Considering that the stock market, as measured by the S&P 500 generated returns of 27.11% in 2009, -37.22% in 2008 and 5.46% in 2007, 31%, and even 11%, are excellent annual returns.38

Efficiency is also measured by the ability of the company to collect from customers, manage its inventory, and pay its bills. The average collection period in 2007, 2008, and 2009 was 19, 16, and 15, respectively. Assuming the company gives its customers 30-day terms, this shows that customers are paying on time. The positive trend shows customers are paying more quickly. Inventory turnover has fluctuated from 43 days in 2007, to 38 days in 2008, and to 46 days in 2009. The drop in 2008 can again be explained by the product recall. The average payment period for payment of bills was 42 days in 2007, 34 days in 2008 and 45 days in 2009.

The Boston Beer Company stock is publicly traded on the New York Stock Exchange under the symbol SAM. As of market close on December 31 of 2007, 2008, and 2009, the stock was priced at $37.65, $28.40, and $46.60, respectively. Evaluating stock data is important because it gives an indication of how the public views the company – either positively or negatively. In 2008,

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the recall negatively impacted the stock price, but 2009 performance made up for it with a much increased stock price. As shown with the analysis above, investors saw increased

earnings per share in 2009 and a substantial return on investment each year. The company’s price-to-earnings ratio was 23.76 in 2007, 48.90 in 2008, and 21.05 in 2009. This shows that investors see value in the stock and are willing to pay a high premium for this stock compared to its earnings.

For the most recent quarter ended June 26, 2010, the company reports sales of $224 million with 1.089 million barrels sold. Sales dollars are up slightly from the same period in 2009 while the number of barrels sold was down from 1.144 million. This was the result of a 13.3% increase in barrels of core products, but significant drop in sales of non-core products due to the termination of Packaging Services Agreement with Diageo North American in May 2009. Gross profit margin in 53.74%, up from the 2009 year-end number of 51.52%. Operating expenses as a percentage of sales were 37.22%, while in 2009, they were at 38.44% of sales. Improvement in gross profit margin and reduction in expenses resulted in a 10% net profit margin. The stock price has grown exponentially to a market close on June 25, 2010 of $70.10. The company has a high price-to- earnings ratio of 43.27, showing that investors continue to see value in the company’s stock.

Financial analysis of the company would not be complete without evaluating it against other companies in the industry. For this analysis, the most recent fiscal year was used for: Anheuser- Busch/InBev, SAB-Miller, Molson Coors, Heineken, and Craft Brewers Alliance. Compilation of this data resulted in industry averages to use in comparison to the financial results of The Boston Beer Company. The company performed better than the industry on all Balance Sheet measures with positive working capital, significantly higher Current and Quick Ratios and significantly lower Debt-to-Equity Ratio. Boston Beer has greater liquidity than nearly all other companies analyzed. Additionally, while the overall measure of debt for the industry is nearly three times that of Boston Beer, two companies are skewing that number greatly. Anheuser-Busch has a Debt-to-Equity Ratio of 2.71 and Heineken is at 2.77. With both

companies completing expansions and acquisitions in the last few years, this level of debt is understandable. However, it seems as if maintaining a low level of debt is an industry preference, one which Boston Beer shares. Gross Profit Margin for the company is nearly 5% higher than the industry average; however, Net Profit Margin is less by over 1%. While the company controls costs and pricing better than the industry, it has higher operating expenses. Sales growth of 4.18% seems low compared to the industry, yet further analysis must be done. SAB-Miller, Molson Coors, and Heinken all showed a drop in sales from 2008 to 2009.Craft Brewers Alliance showed a large increase of 65.4%. Anheuser-Busch also showed a substantial increase of 56.37%. Prior analysis of the beer industry in the external analysis showed that major brewers actually saw a significant drop in sales from 2008 to 2009, while craft brewers saw increases. This is illustrated by the results of SAB-Miller, Molson Coors, Heineken, and Craft Brewers Alliance. It is believed that the large increase for Anheuser-Busch was due to its acquisition by InBev in 2008 and subsequent consolidation of financial results. Boston Beer does significantly better than the industry in overall efficiency, achieving, in 2009, a 20.68% return on assets while the industry achieved 5.65% and a 31.4% return on investment while the industry achieved 15.47%. Specific efficiency measures include maintaining inventory of about ten days less than the industry, collecting accounts receivable nearly 36 days faster than the industry, and paying bills three days faster than the industry. From an investor’s viewpoint, Boston Beer has earnings per share in the most recent fiscal year of $2.21 compared to the industry at $1.91 and the company’s price-to-earnings ratio is comparable at 21.05 compared to 23.57 for the industry. When looking at individual company price-to-earnings ratios, Boston Beer is only lower than Craft Brewers Alliance and SAB-Miller. These measures are both positive indicators for the company.

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The data used in this analysis was chosen because it is key in

evaluating the performance of the company. All information for The Boston Beer Company was taken from the company’s 2009 Annual Report and Annual 10-K reports filed with the Securities and Exchange Commission. Information on other brewers was taken from each company’s most recent annual report, Annual 10-K reports, Google Finance, and Yahoo Finance. Evaluation of both the income statement and balance sheet is necessary to get the complete picture of financial performance. Analysis of the financial statements will answer questions about sales growth, cost and expense control, investment in assets, and changes in the financing structure of the company. Boston Beer Company has managed considerable sales growth over the last three years by investing in fixed assets, increasing equity, and managing costs and expenses. The company seems well managed and financially responsible.

See attached Excel spreadsheet for the complete analysis.

Jennifer Pontinen 21

Appendix 3: Internal Analysis

The Boston Beer Company has many positive traits that have led to its growth and success. Yet, the following management issues (ranked in order of importance) must be addressed:

1. New production process and ability to sustain growth

2. Succession planning & stock ownership

3. Craft beer distinction

Since the company’s inception, majority of its beer has been brewed under contract by other brewers. The company has historically brewed about 35 percent of total production in-house. With the purchase of the Pennsylvania brewery in 2008, that increased to 95 percent in 2009.39 By 2010, the company expected to continue to brew 95 percent in-house.40 While the company has successfully managed its contracts and grown sales through good marketing and distribution, it is not certain

they have the ability to manage production. It is not apparent that in-house production fits with the overall company strategy of differentiation. This management issue must be addressed immediately as it could have immediate effects on the business. Appropriate planning will help ensure the effects are positive; however, there is much uncertainty that this was a fitting strategy. Rapid capacity expansion could negatively affect the company. Results to-date show that the company has achieved efficiencies by bringing production in-house. While the company has continually focused on a differentiation strategy, it had never had as part of its operational strategy the brewing of its entire product line. The company must ensure it modifies its functional strategies to accommodate this change. While the added capacity gives the company the room to grow, of more importance is its ability to manage and sustain the level of growth it has enjoyed since the company’s inception. In this first quarter of 2010, the company spent $3.2 million more in marketing efforts than it did in the same period in 2009 in order to build its brand and stimulate future growth.41 It is necessary to determine if the company has the appropriate functional strategies and personnel with which to carry them out.

Jim Koch is a very visible figure both within the company and in company advertising. As founder of the company and current chairman, Koch is very involved in day-to-day operations. Because he is such an important part of the company’s success, it is necessary to evaluate the impact on the company if Koch was no longer involved. Research shows that Koch himself currently travels to select ingredients at the start of the brewing process and taste tests each batch before it leaves the brewery at the end of the process.42 Koch’s management style may be seen as being too involved, especially from the current viewpoint as the Chairman of the Board, not the company CEO nor a functional manager. In addition to a succession plan that outlines who would take over Koch’s responsibilities, it is necessary to evaluate the impact on the company. How will employees react to new leadership? Would shareholders have faith in new management? Because he is such a figurehead for

the company and ultimate decision making lies with him, succession planning is of high priority. While Boston Beer is a publicly traded company, under the symbol SAM, with over 13 million shares outstanding, Jim Koch currently owns 100% of the Class B voting shares of the company.43 This gives him preference in voting over Class A share holders. While not as immediate an issue as the prior two, the ownership structure could be troublesome. Without Koch the company would not exist; however, this level of decision-making authority could limit the attraction of additional equity investment. With minimal long-term debt and steady increases in equity each year, this does not seem to be a problem yet, but it must be monitored. As Koch sells his shares, the direction of the company could change if new owners vote differently

Jennifer Pontinen 22

than he had. Research on the company’s ownership structure identified this issue, and while it is not inconsistent with the company’s strategy, it could affect the success of the company for the long-term. Developing a plan for management of the production process has immediate operational and financial impacts, so it has higher priority, but succession planning is a close second.

The Boston Beer Company’s website, annual reports, and company literature boast that the company is the largest craft brewer in America.44 And while the company has successfully positioned itself this way it is in jeopardy of losing this distinction. Legally, brewers who sell more than two million barrels per year are not considered craft brewers. This equates to an increase in taxation on the first 60,000 barrels produced.45 Initially, this loss of status will have increased financial cost to Boston Beer. Yet, of greater concern is the classification of the company in the consumer’s view. Jim Koch coined the term “better beer” to include both craft beer and import beer.46 This strategic move grouped his growing business with both small craft brewers and much larger import brewers, putting the focus on style of the beer, rather than size of the company. The effort

seems to be working. Consumers have come to view both import and craft beer as belonging in the same category.47 Now, even if growth causes the company, by law, to lose the craft brewer distinction, it may be able to further transition into the better beer segment and compete will multiple brands of flavorful, unique brands. While Koch’s development of the Better Beer segment seems to be succeeding, the company still feels its status as craft brewer is important.48 Recent legislation has been introduced to increase the limit from two million barrels to six million barrels, but promotion of itself as a craft brewer may be limited by law unless this legislation passes.

Jennifer Pontinen 23

Appendix 4: Resource and Competence Analysis

Company resources include a strong financial position; expertise and involvement of the company founder, Jim Koch; multiple brewery facilities; and numerous proprietary formulas for beer.

The Boston Beer Company has a solid financial position including a significant cash balance, no long-term debt and availability of a $50 million line of credit.49 While cash was down slightly at June 26, 2010 compared to the 2009 fiscal year-end, the company attributed that to an increase in its stock repurchase program. Having excess liquidity with which to repurchase stock also shows the company is on strong financial footing. As the company goes forward, it has much flexibility in securing funds for expansion. A strong equity position and significant, positive cash flow make securing long-term debt easier. Availability of the line of credit can be useful for opportunities that the company wants to act quickly on. By managing costs and expenses, financing growth internally, and managing inventory, accounts receivable and accounts payable, the company has achieved financial results that are favorable to long-term growth.

Company management has always believed that if a high-quality product was developed, customers would follow. The ability to

evaluate and choose the best ingredients is a competence the company founder, Jim Koch, possesses and has instilled in other brewers in the company. Because of his knowledge, involvement and visibility in the company, Koch himself is a valuable resource of the company. Although it is not possible to quantify Koch’s worth, it is easy to see that his involvement and attention has grown the company from 500 barrels to over two million barrels sold. Koch himself still tastes each batch before it is approved for bottling.50

Boston Beer has focused on capacity expansion by acquiring breweries and establishing operations in Boston, Cincinnati and Pennsylvania. When sales growth occurred quickly in the first few years, the company developed contractual relationships with other brewers to produce its beer. While the company was able to maintain control over the ingredients used, it gave up control of the brewing process for majority of its product. In fact, for many years, only 30 to 35 percent of its beer was brewed in house. With consolidations and acquisitions in the industry, other brewers excess capacity dropped and Boston Beer felt this would impact its ability to rely on other brewers to produce its beer. So, with its purchase and renovation of the Pennsylvania brewery in 2008, Boston Beer developed the capacity to produce about 95 percent of its beer itself.51 This valuable resource will give the company greater control of the quality of its beer. This transition has taken place slowly over the last two years with about 95 percent produced in-house in 2009 and an expectation to produce 95 percent in-house in 2010.52 The company also feels it has ability to expand its capacity another 10 percent over current production levels.53

Old Koch family formulas for beer were used to start The Boston Beer Company and these beer formulas are still used today. The company’s flagship brand, Samuel Adams® Boston Lager was originally brewed by Jim Koch’s great-great-grandfather. This beer is the best selling beer in the Samuel Adams® line and loss of this proprietary formula would be devastating to the company. Over the years, numerous other

formulas have been developed, each with unique properties. Safeguarding the formulas is essential to the long-term success of the company.

Numerous competencies have helped the company grow successfully since its start in 1984. The most significant competencies include commitment to innovation; development of a brand

Jennifer Pontinen 24

image; well-established distributor relationships and the ability to strengthen them; and a well- managed and easily transferrable brewing process.

The Boston Beer Company develops beer with distinct tastes. Its beer is characterized as full-bodied and flavorful. Jim Koch’s knowledge of the brewing industry and desire to offer something different shaped the strategy of the company. Over time, the company became proficient at creating, marketing and selling a number of brands. Innovation is a core competency of the Boston Beer Company and straying from the beer industry norm is a usual occurrence. Customer favorites plus a fresh lineup of new varieties are always available. Additionally, seasonal brands are available at certain times of the year. The company’s differentiation strategy sets it apart from its competitors across the entire industry. This competence is a direct result of the company’s strategy and makes it what it is today.

While it has always been important for the company to provide to quality product, it has also been important to provide a product that consumers want. The company solicits constant feedback from consumers regarding their opinions on new beer brands that are developed. Through its brewery operation in Boston, participants in the brewery tour can taste and evaluate new brands – sometimes even before they are bottled and sold to the general public. Development of this relationship with its customers benefits Boston Beer because it truly delivers the

product the customer wants. Additional benefits come in the form of increased customer loyalty and inexpensive test marketing. The company knows how to manage consumer involvement. Using consumer involvement is one way the company builds its brand. It also holds its status as craft brewer in high regard. As one of the original craft brewers, and now as the largest craft brewer in the U.S., promotion of its uniqueness is at the forefront of its messages. Whether it be in the form of advertising, promotion of the programs and contests it has developed and sponsors, or in the innovative partnerships it develops, the company focuses on building a consistent brand image. The ability to develop and promote its unique brand is a key competence and vitally important as it competes with nearly 1,600 other craft brewers plus larger brewers with greater resources.

While marketing directly to the consumer is a solid competence, Boston Beer has focused even more on developing relationships with its main customers – the distributors. The company has been successful in developing over 400 relationships with distributors. These relationships are very important because the distributors’ customers, the retailers, have limited shelf space and want to stock products that will turnover quickly. Additionally, many distributors have long-standing relationships with the major brewers and may be reluctant to add a new product to their line. Craft brewers who are successful in maintaining distributor relationships will ensure their product is readily available to consumers. These relationships give the company a significant advantage over other craft brewers.

Lastly, while the beer formulas are recognized as a valuable company resource, the ability to brew the beer from traditional recipes is a competence of the company. In the beginning, the company contracted out majority of the brewing of its flagship brand to other brewers. The ability to transfer the process to another brewer and receive the appropriate product is testament to the company’s knowledge of the process and the inherent reliability of the process itself. As the company now brings

majority of its brewing in-house, this will be valuable. Because the production process was not a main part of the company until recently, the transferability of the brewing process will aid the company in its transition to all in-house brewing. This competence is very important to the future direction of the company.

Jennifer Pontinen 25

Bibliography1 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

2 Jones, Lester. “Beer Industry Update, 2008” June 2009. Retrieved on 9/27/10 from http://www.beerinstitute.org/statistics.asp?bid=220

3 America’s Beer Distributors. “What is a beer distributor?” Retrieved on 10/2/10 from http://nbwa.org/about/what is a beer distributor‐ ‐ ‐ ‐

4 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213 and annual 10k reports found at http://www.sec.gov/edgar.shtml

5 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/42136 Brewers Association. “Craft Brewer Defined.” Retrieved on 9/17/10 from http://www.brewersassociation.org/pages/business‐tools/craft brewing‐ ‐

statistics/craft brewer defined‐ ‐

7 Goodnough, Abby. “Small Brewer Outgrowing Label.” June 8, 2010. Retrieved on 9/27/10 from

http://www.nytimes.com/2010/06/09/us/09beer.html?_r=3&ref=beer

8 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

9 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

10 Brewers Association. “Craft Brewing Statistics: Facts” Retrieved on 9/27/10 from http://www.brewersassociation.org/pages/business tools/craft brewing statistics/facts‐ ‐ ‐

11 Gorham, Philip. “Boston Beer Company, Inc. (SAM)” August 5, 2010 Retrieved on 9/28/10 from

http://library.morningstar.com.libpdb.d.umn.edu:2048/stocknet/MorningstarAnalysis.aspx?Country=USA&Symbol=SAM12 Beer Institute. “Brewers Almanac: 2009” Retrieved on 9/17/10 from http://www.beerinstitute.org/statistics.asp?bid=200

13 HTB Marketing. “Beer Industry Overview 1st Quarter 2008.” Retrieved on 9/19/10 from

http://www.grocerynetwork.com/progressivegrocer/profitguides/beer/images/pdf/IndustryOverview.pdf

14 Saad, Lydia. “Drinking Habits Steady Amid Recession” June 29, 2009. Retrieved on 10/3/10 from http://www.gallup.com/poll/121277/drinking habits steady amid recession.aspx‐ ‐ ‐ ‐

15 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

16 Data retrieved on 10/3/10 from http://thomas.loc.gov/cgi bin/query/z?c111:S.3339: ‐ and Beernews.org. “How Congress could help shape the future of craft beer.” May 14, 2010. Retrieved on 10/3/10 from http://beernews.org/2010/05/how congress could help shape‐ ‐ ‐ ‐ ‐the future of craft beer/‐ ‐ ‐ ‐

17 Beer Institute. “Programs for Responsible Drinking” Retrieved on 10/3/10 from http://www.beerinstitute.org/tier.asp?bid=241

18 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

19 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

20 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213 and annual 10k reports found at http://www.sec.gov/edgar.shtml and http://finance.yahoo.com

21 “Small Brewers Reduced Rate” October 2000. Retrieved on 10/29/10 from http://www.ttb.gov/public_info/cm2000 10.pdf ‐ 22 Data retrieved from the company website at http://www.samueladams.com/enjoy our beer/barrel room.aspx‐ ‐ ‐

23 Townsend, B. “Beer Town: Atlanta’s Richard Roper Longshot Winner” September 29, 2010. Retrieved on 10/2/10 from http://blogs.ajc.com/drink/2010/09/29/beer town atlanta‐ ‐%E2%80%99s richard roper longshot winner ‐ ‐ ‐ ‐ and http://www.samueladams.com/company/community involvement.aspx‐

24 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213 25 Gallagher, Richard. “Consolidation Remains on Tap for Brewers.” July 14, 2010. Retrieved on 10/4/10 from

http://www.valueline.com/Stocks/Commentary.aspx?id=9044

Jennifer Pontinen 26

26 Goldstein, Steve. “Heineken to buy Femsa’s beer operations for $5.5 billion.” January 11, 2010. Retrieved on 10/4/10 from

http://www.marketwatch.com/story/heineken to buy femsas beer ops for 55 billion‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐2010 01 11‐ ‐

27 Brewers Association. “Craft Brewer Defined.” Retrieved on 9/17/10 from http://www.brewersassociation.org/pages/business tools/craft brewing statistics/craft‐ ‐ ‐ ‐brewer defined‐

28 Goodnough, Abby. “Small Brewer Outgrowing Label.” June 8, 2010. Retrieved on 9/27/10 from

http://www.nytimes.com/2010/06/09/us/09beer.html?_r=3&ref=beer29 Data retrieved from Boston Beer Company’s 2009 annual report at

http://thomson.mobular.net/thomson/7/3090/4213 30 Data retrieved from Boston Beer Company’s website at http://www.samueladams.com/discover craft/brew crew.aspx ‐ ‐ 31 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213 32 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213 33

Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213 34 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

35 Data for Boston Beer Company retrieved from Boston Beer Company’s annual 10k reports for 2009, 2008, 2007 Boston Beer Company’s quarterly 10Q for the most recent quarter ended June 2010 found at http://www.sec.gov/edgar.shtml; Other brewers’ data gathered from reports filed at http://www.sec.gov/edgar.shtml and each company’s individual website. Data for all brewers was also found at http://www.google.com/finance?ie=UTF‐8&hl=en&tab=we and http://finance.yahoo.com

36 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/421337 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213 and annual 10k reports

found at http://www.sec.gov/edgar.shtml

38 Data retrieved from http://www.moneychimp.com/features/market_cagr.htm

39 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

40 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

41 Lynch, Jake. “Boston Beer Chips Away at Bud, Miller.” July 7, 2010. Retrieved on 10/4/10 from

http://www.thestreet.com/story/10799647/2/boston beer chips away at bud miller.html‐ ‐ ‐ ‐ ‐ ‐

42 Data retrieved from Boston Beer Company’s website at http://www.samueladams.com/discover craft/standards.aspx‐

43 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

44 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

45 TTB.gov. “Taxes: Tax and Fee Rate” Retrieved on 9/28/10 from http://www.ttb.gov/tax_audit/atftaxes.shtml

46 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

47 Stagnito Media. “Life’s Little Luxuries.” 2010. Retrieved on 10/2/10 from http://www.gourmetretailer.com/print topstory ‐ ‐tgr_exclusive__life__8217_s_little_luxuries 8799.html‐

48 Goodnough, Abby. “Small Brewer Outgrowing Label.” June 8, 2010. Retrieved on 9/27/10 from

http://www.nytimes.com/2010/06/09/us/09beer.html?_r=3&ref=beer49 Data retrieved from the Boston Beer Company quarterly 10Q dated June 2010 retrieved from http://www.sec.gov/edgar.shtml 50 Data retrieved from Boston Beer Company’s website at http://www.samueladams.com/discover craft/standards.aspx‐ 51 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/421352 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/421353 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

Jennifer Pontinen 27

The Boston Beer Company

HISTORICAL

INCOME STATEMENT

(000's)

YTD 6/26/10

2010

2009

2008

2007

GROSS SALESLess: Cost of Goods

------------------ ----------------- 223,593 100.00% 103,427 46.26%

----------------- ------------------ 415,053 100.00% 201,235 48.48%

----------------- ------------------ 398,400 100.00% 214,513 53.84%

------------------ ------------------ 341,647 100.00% 152,288 44.57%

GROSS PROFIT

------------------ ----------------- 120,166 53.74%

----------------- ------------------ 213,818 51.52% ----------------- ------------------

----------------- ------------------ 183,887 46.16% ----------------- ------------------

------------------ ------------------ 189,359 55.43%

------------------ -----------------

------------------ ------------------

EXPENSES: Advertising.Promotion,Selling Expenses General & Administrative Expenses Impairment of Long-lived Assets

64,228 19,000

28.73% 8.50% 0.00%

121,560 36,938 1,049

29.29% 8.90% 0.25%

132,901 34,988 1,936

33.36% 8.78% 0.49%

124,457 24,574 3,443

36.43% 7.19% 1.01%

TOTAL OPERATING EXPENSES:

------------------ ----------------- 83,228 37.22%

----------------- ------------------ 159,547 38.44% ----------------- ------------------

----------------- ------------------ 169,825 42.63% ----------------- ------------------

------------------ ------------------ 152,474 44.63%

OPERATING INCOME Other Income

------------------ ----------------- 36,938 16.52%

54,271 13.08% 96 0.02%

14,062 3.53% 1,778 0.45%

------------------ ------------------ 36,885 10.80%

11 0.00% ------------------ -----------------

----------------- ------------------ 54,367 13.10%

----------------- ------------------ 15,840 3.98% 7,752 1.95%

4,759 1.39% ------------------ ------------------

NET PROFIT BEFORE TAXLess: Provision for Income Taxes

36,949 16.53%

41,644 12.19%

14,419 6.45% ------------------ -----------------

23,249 5.60% ----------------- ------------------

----------------- ------------------

19,153 5.61% ------------------ ------------------

NET PROFIT AFTER TAX

22,530

10.08%

31,118

7.50%

8,088

2.03%

22,491

6.58%

Barrels SoldCore Products Non-Core Products

2,021 201 2,222

1,992 349 2,341

1,848 28 1,876

Total Barrels Sold

1,089

Sale Price per BarrelSale Price per Barrel - Core Products Gross Profit per BarrelGross Profit per Barrel - Core Products

$ $ $ $

205.32 206.19 110.35 110.86

$ 186.79 $ 205.37 $ 96.23 $ 105.80

$ 170.18 $ 200.00

$  78.55

$  92.31

$ $ $ $

182.11 184.87 100.94 102.47

Figures are taken from the Company's 2009 annual report, Annual 10-Ks, and Quarterly 10-Qs for the corresponding periods.

Jennifer Pontinen

5/20/2011

The Boston Beer Company

HISTORICAL BALANCE SHEET (000's)

Gross SalesNet Profit After Tax

CashAccounts Receivable InventoryOther Current Assets

TOTAL CURRENT ASSETS TOTAL FIXED ASSETS TOTAL ASSETS

Accounts Payable Accrued Expenses

TOTAL CURRENT LIABILITIES

Deferred Income TaxOther LiabilitiesTOTAL OTHER LIABILITIES

TOTAL LONG-TERM LIABILITIES

TOTAL LIABILITIES

STOCKHOLDERS EQUITY

TOTAL LIABILITIES & STOCKHOLDERS EQUITY

26-Jun 2010

223,593 22,530

53,679 26,801 25,337 14,651

-------------------- 120,468

-------------------- 145,626

-------------------- 266,094

22,538

53,860 --------------------

76,398 --------------------

13,439 3,705

-------------------- 17,144

-------------------- -

-------------------- 93,542

-------------------- 172,552

-------------------- 266,094

2009

415,053 31,118

55,481 17,856 25,558 14,135

------------------ 113,030

------------------ 149,906

------------------ 262,936

25,255

48,531 ------------------

73,786 ------------------

13,439 2,556

------------------ 15,995

------------------ -

------------------ 89,781

------------------ 173,155

------------------ 262,936

2008

398,400 8,088

9,074 18,057 22,708 19,015

----------------- 68,854 ----------------- 150,903

----------------- 219,757

20,203

46,854 ----------------- 67,057 -----------------

9,617

3,055 -----------------

12,672 -----------------

- ----------------- 79,729 -----------------

140,028 ----------------- 219,757

2007

341,647 22,491

95,489 17,972 18,090

6,342 ------------------

137,893 ------------------

60,062 ------------------

197,955

17,708

42,449 ------------------

60,157 ------------------

1,215

2,995 ------------------

4,210 ------------------

- ------------------

64,367 ------------------

133,588 ------------------

197,955

Jennifer Pontinen

5/20/2011

Liabilities Assets P/L

Ratio

Working Capital Current

Quick Debt-to-Equity

Gross Margin

Net Margin Sales Growth

Sales-to-Assets

Return on Assets

Return on Investment

Inventory Turnover

Inventory Turn-Days

Accts. Rec. Turnover

Avg. Collection Period

Accts. Pay. Turnover

Avg. Payment Period

Formula

Current Assets - Current Liabilities Current Assets

Current Liabilities Cash & A/R

Current Liabilities Total Liabilities

Owner's Equity

Gross Profit

SalesNet Profit Before Tax

SalesCY Sales-PY Sales

Prior Year Sales

Sales

Total Assets

Net Profit Before Tax

Total AssetsNet Profit Before Tax

Stockholders Equity

Cost of Goods Sold

Inventory 360

Inventory Turnover Sales

Accts. Rec. 360

Accts. Rec. Turnover Cost of Goods Sold

Accts. Pay. 360

Accts. Pay. Turnover

$

26-Jun 2010

44,070 1.58

1.05 0.54

The Boston Beer Company

HISTORICAL

RATIO ANALYSIS

2009 2008 2007

Balance Sheet Ratios

$ 39,244 $ 1,797 $ 77,736 1.53 1.03 2.29

0.99 0.40 1.89 0.52 0.57 0.48

Significance

Measures the excess of Current Assets over Current Liabilities.

Measures Solvency: e.g. a ratio of 1.76 means that for every $1of current liabilities, the Co. has $1.76 in Current Assets with which to pay

Measures Liquididity: e.g. a ratio of 1.14 means that for every$1 of current liabilities, the Co. has $1.14 in Cash & AR with which to pay

Measures Financial Risk: e.g. a ratio of 1.05 means that for every $1 of owner's equity, the Co. owes $1.05 in debt to its creditors

Measures Gross Profitability: e.g. a ratio of 34.4% means that for every $1 of sales, the Co. produces 34.4 cents of gross profit

Measures Net Profitability: e.g. a ratio of 2.9% means that for every $1 of sales, the Co. produces 2.9 cents of gross profit

Measures the percentage change in sales (+ or -) from year to year.

Measure Efficiency of Total Assets in Generating Sales: e.g. a ratio of 2.35 means that for every $1 invested in total assets, the Co. generates $2.35 in total sales

Measure Efficiency of Total Assets in Generating Net Profit: e.g. a ratio of 7.1% means that for every $1 invested in total assets, the Co. generates 7.1 cents in Net Profit Before Tax

Measure Efficiency of Stockholders Equity in Generating Net Profit: e.g. a ratio of 16.1% means that for every $1 invested in stockholde equity, the Co. generates 16.1 cents in Net Profit Before Tax

Measures the Rate at Which Inventory is Being Used on an Annual Basis: e.g. a ratio of 9.81 means that the average dollar volume of inventory is used up almost ten times during the fiscal year

Measures the Average Number of Days that Inventory Remains in Stock: e.g. a ratio of 37 means that the Co. keeps an average of 37 days worth of inventory on hand throughout the year.

Measures the Rate at Which Accts. Rec. are Being Collected: e.g. a ratio of 8.00 means that the average dollar volume of Accts. Rec. ar collected 8 times during the year

Measures the Average Number of Days that the Co. Must Wait for Its Accts. Rec. to be Paid: e.g. a ratio of 45 means that it takes the 45 days on average to collect its receivables

Measures the Rate at Which Accts. Pay. Are Being Paid: e.g. a ratio of 12.04 menas that the average dollar volume of Accts. Pay. are paid about 12 time during the year

Measures the Average Number of Days that a Co. Takes to Pay its Accts. Pay.: e.g. a ratio of 30 means that it takes the Co. 30 days on average to pay its bills

Measureshowmuchaninvestorispayingfor$1.00ofcompany earnings. The higher the P/E ratio, the more investors are willing to pay on a per-share basis for the stock.

Income Statement Ratios

53.74% 51.52% 16.53% 13.10%

46.16% 3.98%

55.43% 12.19% 19.70%

1.73

21.04% 31.17%

8.42 42.76 19.01 18.94 8.60 41.86

4.18% 16.61%

Overall Efficiency Ratios

0.84

13.89% 21.41%

4.08 88.19 8.34 43.15 4.59 78.45

13,899 1.62 70.10

43.27

1.58

20.68% 31.40%

1.81

7.21% 11.31%

Specific Efficiency Ratios

7.87 9.45 45.72 38.11 23.24 22.06 15.49 16.32 7.97 10.62 45.18 33.91

Stock Analysis

Weighted-average shares outstanding - basic Net Income per share - basicStock Price @ DATE

$ $

14,059 13,927 14,193 $2.21$0.58$1.58 $ 46.60 $ 28.40 $ 37.65

P/ERatio

Marketvaluepershare

Earnings per share

21.05

48.90

23.76

Jennifer Pontinen

5/20/2011

Industry Data

2009

INCOME STATEMENT

(000's)

Anheuser-Busch

SAB-Miller ------------------ 18,020,000

(3/31/10)

Molson Coors

Heineken

Craft Brewers Alliance

GROSS SALESLess: Cost of Goods

------------------ 36,758,000 17,198,000

----------------- 100.00% 46.79% ----------------- 53.21% -----------------

4,531,000 ------------------ 13,489,000 ------------------

----------------- 100.00% 25.14%

---------------- 3,032,400 1,726,900

----------------- 100.00% 56.95%

----------------- 20,515,500 13,429,300

----------------- 100.00% 65.46%

----------------- 131,700 95,300 ----------------- 36,400 -----------------

----------------- 100.00% 72.36%

GROSS PROFIT

------------------ 19,560,000 ------------------

----------------- 74.86% -----------------

---------------- 1,305,500 ----------------

----------------- 43.05% -----------------

----------------- 7,086,200 -----------------

----------------- 34.54% -----------------

----------------- 27.64% -----------------

EXPENSES: SG&A Expenses Other Expenses

9,973,000 (1,982,000) ------------------

27.13%

4,096,000

22.73%

900,800 (349,300) ----------------

29.71% -11.52% ----------------- 18.19%

3,310,700

16.14% 7.35% ----------------- 23.48%

25,200 8,800 ----------------- 34,000 ----------------- 2,400

19.13% 6.68% ----------------- 25.82%

TOTAL OPERATING EXPENSES:

7,991,000 ------------------ 11,569,000 (3,906,000) ------------------

-5.39% ----------------- 21.74% ----------------- 31.47% -10.63% ----------------- 20.85% 4.86% ----------------- 15.99%

6,774,000 ------------------ 10,870,000 ------------------

37.59% ----------------- 60.32% -----------------

551,500 ---------------- 754,000

1,507,100 ----------------- 4,817,800 ----------------- 2,268,400

OPERATING INCOME Other Income

2,619,000 310,000 ------------------ 2,929,000 848,000

14.53% 1.72% ----------------- 16.25% 4.71%

----------------- 24.86% -1.20%

(281,100) ----------------- 1,987,300 398,000 ----------------- 1,589,300

----------------- 11.06% -1.37%

----------------- 1.82% -0.99%

(36,500)---------------- -----------------

(1,300) ----------------- 1,100 200 ----------------- 7.75% 900

----------------- 0.84% 0.15%

NET PROFIT BEFORE TAXLess: Provision for Income Taxes

7,663,000

717,500 23.66% (14,700) -0.48%

----------------- 9.69% 1.94%

1,786,000 ------------------ 5,877,000

------------------ 2,081,000

----------------- 11.55%

---------------- ----------------- 732,200 24.15%

-----------------

----------------- 0.68%

NET PROFIT AFTER TAX

Figures are taken from the Company's 2009 annual report, Annual 10-Ks, and Quarterly 10-Qs for the corresponding periods.

Jennifer Pontinen

5/20/2011

Industry

2009

BALANCE SHEET (000's)

SAB-Miller

18,020,000 2,081,000

800,000 1,800,000 1,295,000

------------------ 3,895,000

------------------ 8,915,000

24,694,000 ------------------ 37,504,000

1,605,000

616,000 3,756,000

------------------ 5,977,000

------------------ 7,809,000 3,808,000

------------------ 11,617,000 ------------------ 17,594,000 ------------------ 19,910,000 ------------------ 37,504,000

Gross SalesNet Profit After Tax

A-B

36,758,000 5,877,000

Molson Coors

3,032,400 732,200

734,200 717,200 236,200

75,200 ------------------

1,762,800 ------------------

1,292,500

8,965,800 ------------------

12,021,100

300,300 210,300 745,000 325,300

------------------ 1,580,900

------------------ 1,412,700 1,947,900 ------------------

3,360,600 ------------------

4,941,500 ------------------

7,079,600 ------------------

12,021,100

Heineken

20,515,500 1,589,300

767,600 3,314,300 1,449,100

427,600 ------------------

5,958,600 ------------------

8,632,800

14,361,700 ------------------ 28,953,100

1,866,600 5,302,800 189,400 325,700

------------------ 7,684,500

------------------ 10,618,500 2,972,800

------------------ 13,591,300 ------------------ 21,275,800 ------------------

7,677,300 ------------------

28,953,100

Craft Brewers

131,700 900

- 11,100

9,500

4,900 --------------------

25,500 --------------------

97,300

18,800 --------------------

141,600

- 14,700

5,600

7,800 --------------------

28,100 --------------------

- 32,900

-------------------- 32,900

-------------------- 61,000

-------------------- 80,600

-------------------- 141,600

Cash 3,744,000 Accounts Receivable 4,689,000 Inventory 2,354,000 Other Current Assets 66,000

-------------------- TOTAL CURRENT ASSETS 10,853,000

-------------------- TOTAL FIXED ASSETS 16,461,000

TOTAL INTANGIBLE & OTHER ASSETS 85,211,000 --------------------

TOTAL ASSETS 112,525,000

Short-Term Debt 2,043,000 Accounts PayableAccrued Expenses 526,000 Other Short-Term Liabilities 11,685,000

-------------------- TOTAL CURRENT LIABILITIES 14,254,000

-------------------- Long-Term Debt 49,028,000 Other Long-Term Liabilities 18,925,000

-------------------- TOTAL LONG-TERM LIABILITIES 67,953,000

-------------------- TOTAL LIABILITIES 82,207,000

-------------------- STOCKHOLDERS EQUITY 30,318,000

-------------------- TOTAL LIABILITIES & 112,525,000

STOCKHOLDERS EQUITY

Jennifer Pontinen

5/20/2011

Liabilities Assets P/L

Ratio

Working Capital Current

Quick Debt-to-Equity

Gross Margin

Net Margin Sales Growth

Sales-to-Assets

Return on Assets

Return on Investment

Inventory Turnover

Inventory Turn-Days

Accts. Rec. Turnover

Avg. Collection Period

Accts. Pay. Turnover

Avg. Payment Period

Formula

Current Assets - Current Liabilities Current Assets

Current Liabilities Cash & A/R

Current Liabilities Total Liabilities

Owner's Equity

Gross Profit

SalesNet Profit Before Tax

SalesCY Sales-PY Sales

Prior Year Sales

Sales

Total AssetsNet Profit Before Tax

Total AssetsNet Profit Before Tax

Stockholders Equity

Cost of Goods Sold

Inventory 360

Inventory Turnover Sales

Accts. Rec. 360

Accts. Rec. Turnover Cost of Goods Sold

Accts. Pay. 360

Accts. Pay. Turnover

A-B

(3,401,000) 0.76

0.59 2.71

53.21% 20.85% 56.37%

0.33 6.81%

25.28%

7.31 49.28 7.84 45.92 00

Industry

2009

RATIO ANALYSIS SAB-Miller Molson Coors

Balance Sheet Ratios

(2,082,000) 181,900 0.65 1.12

0.44 0.92 0.88 0.70

Income Statement Ratios

Heineken

(1,725,900) 0.78

0.53 2.77

34.54% 9.69% -1.97%

0.71 6.86%

25.89%

9.27 38.85 6.19 58.16 2.53 142.15

980,000 1.45 23.81

16.42

Craft Brewers

(2,600) 0.91

0.40 0.76

27.64% 0.84% 65.04%

0.93 0.78%

1.36%

10.03 35.89 11.86 30.34 6.48 55.53

17,000 0.05 2.40

48.00

INDUSTRY AVERAGES

(1,405,920) 0.84

0.57 1.56

46.66% 14.26% 15.58%

0.54 5.65% 15.47%

7.48 55.23 8.03 51.11 3.45 48.30

868,000 $1.91

23.57

SAM

39,244 1.53

0.99 0.52

51.52% 13.10% 4.18%

1.58 20.68% 31.40%

7.87 45.72 23.24 15.49

7.97 45.18

14,059 $2.21

46.60 21.05

74.86% 16.25% -5.06%

43.05% 23.66% -36.48%

Overall Efficiency Ratios

0.48 7.81%

14.71%

0.25 5.97%

10.13%

Specific Efficiency Ratios

3.50 102.89 10.01 35.96 00

7.31 49.24 4.23 85.14 8.21 43.84

Stock Analysis

Weighted-average shares outstanding - basic Net Income per share - basicStock Price @ DATE

1,593,000 1,564,000

186,000 3.92 45.16

11.52

P/E Ratio

Market value per share

Earnings per share

$ 2.90 $ $ 52.03 $

17.94

1.22 29.21

23.94

$ $

$ $

$ $

$

Jennifer Pontinen

5/20/2011

Analysis of Problems, Opportunities & ThreatsThe Boston Beer Company has grown considerably since its start in 1984. Yet, while the

company prides itself on being the largest craft brewer in the United States, this status may be in jeopardy. Federal law defines a craft brewer as one that produces less than two million barrels per year.1 In 2009, Boston Beer surpassed the two million barrel mark by selling 2.2 million barrels.2 While 200,000 of the barrels were produced on a contract basis for other companies, and all of the barrels sold were not necessarily produced in 2009, this brings the company alarmingly close to the two million barrel mark. Classification as a craft brewer equates to lower taxation, which has positive financial benefits for the company. Additionally, the Brewer’s Association provides guidance and resources for craft brewers and represents them at federal and state government levels. Because most craft brewers are small, this provides a collective voice and access to resources similar to those of the larger brewers. However, the primary concern with loss of craft brewer status is the public’s perception of the company. In a recent interview, Jim Koch said, “If we’re not a craft brewer, what else are we? We’re certainly not Budweiser.”3 In the consumer’s view, beer is classified according to its type, which include premium, sub-premium, import and craft.4 However, the strategic map in the external analysis shows that the beer industry is comprised of two strategic groups: major brewers and better beer brewers. Barrels produced, the type of beer produced, and beer price all serve to differentiate the groups. Craft beer falls into the better beer segment, as does imported beer. Interestingly, Jim Koch was the person who coined the term “Better Beer.”5 Craft beer has the

allure of being unique and flavorful compared to premium or sub-premium beer produced by the major brewers. It also costs more. A 12-pack of Samuel Adams Boston Lager will cost $27.99 where the same size Coors Light will cost $21.89.6 The popularity of craft beer has grown significantly with the craft segment realizing a sales increase of 10.3 percent while the beer industry as a whole was down 2.2 percent.7 The first half

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of 2010 showed even better results with a 12 percent increase in sales in the craft segment but a continued drop in the overall industry.8 While craft beer has a low overall market share of four percent9, its presence and popularity continues to grow. Being that beer is in a mature industry, the potential for continued growth in the craft segment is attractive. Yet, the craft beer appeal only applies if consumers view it as craft. Additional sales growth and expansion of its operations could cause the consumer to position Boston Beer as having a mainstream beer. Being Anheuser- Busch/InBev and MillerCoors, the major brewers in the U.S., have nearly 80 percent market share,10 it is reasonable to view the beer from these brewers as mainstream. In addition to a high level of market share, most mainstream beer enjoys a certain level of consumer loyalty. Many avid consumers have a preferred brand, whether it be Coors Light, Miller Lite, Budweiser, or another brand. Becoming more mainstream could have a positive impact on Boston Beer with the development of increased customer loyalty. However, this may also cause the unique appeal of the beer to wear off. Because its uniqueness has been a key company message, this could cause dramatic change.

While outgrowing the craft beer category is a significant problem facing Boston Beer, it also presents an opportunity. Where consumers had previously classified imported beer and craft beer separately, the distinctions are becoming fewer. Many consumers no longer classify beer mainly by where it comes from, but by the type of beer it is. In fact, the popularity of craft

beer has been partially responsible for an increased interest in import beer.11

Where the loss of its craft status poses both a problem and an opportunity for the company, so does its new production capacity. Boston Beer acquired a brewery operation in Pennsylvania in 2008.12 Prior to this purchase, the company had only its two breweries in Boston and Cincinnati and chose to contract out the brewing of 65 to 70 percent of its product.13 Seeing the changes caused by consolidation in the industry, the company felt it would have less opportunity to

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contract with other brewers for their excess capacity. Yet, management of an entire production process is much different than managing relationships with contract brewers. The company financed the acquisition and renovation through internal operations and by 2009 was producing about 95 percent of its product in-house.14 In 2010, the company expected to continue this level of production. Expansion of its production capacity presents a great opportunity for the company to gain better control over the entire process. It can help ensure consistency in the product taste, freshness, and temperature. Additionally, the company has room for further expansion at this location. Before locating the Pennsylvania brewery, the company had already planned to add to its production capacity by constructing a brewery on a parcel of land it purchased in Freemont, Massachusetts.15 Yet, when thorough analysis found that it may cost over $200 million to construct the facility the company wanted, purchase and renovation of the Pennsylvania brewery seemed more reasonable. However, as examined in the internal analysis, the company’s expertise had long been in managing production using contract brewers and developing solid relationships with distributors who purchase the product. Switching to an increased focus on all aspects of the brewing industry required initial changes in policies and processes. And, while the company seems to have achieved early successes and increased efficiencies, the long-term strategy must account for

both production and marketing. One key issue to address is the ability of management to sustain the level of growth it has enjoyed in recent years coupled with its ability to manage its operations.

Another internal issue is the company’s reliance on the founder, Jim Koch. Koch is very present both in the day-to-day operations and in company advertising. Each year, Koch travels to Bavaria to hand-selected the hops used in Samuel Adams® beer.16 Not only does Koch select the ingredients, but he is also one member of the “Brew Crew” responsible for formulating and brewing the beer. Koch has been featured in numerous Samuel Adams® commercials and is

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frequently interviewed for news articles and beer forums. Koch has been at the forefront of the company since he started it in 1984. Although he relinquished his role as the company’s Chief Executive Officer in 2001, Koch currently holds the position of Chairman of the Board of Directors.17 Along with Koch’s personal and managerial involvement in the company is his financial involvement. Koch owns all of the company’s Class B voting shares.18 While Boston Beer is a publicly traded company, all Class A shares sold to the public have no voting rights.19 Koch’s sense of pride in the company is apparent and stems from the hard work he did starting the company from scratch, brewing the first batches of beer in his kitchen, and initially, going door- to-door to sell it. His feelings of commitment and dedication to the company are expected. Yet, there are two challenges with Koch’s involvement in the company. First, majority of the decision making in the company ultimately is made by one person – Koch. Much control and knowledge is entrusted to one person. This could make raising additional equity difficult, as new shareholders have no vote. It could also affect the dedication of existing shareholders, existing directors, or existing executives. Additionally, if Koch were to die or become disabled, company operations would be affected. Undoubtedly, the company has contingency plans to

address these circumstances. Yet, thoroughness of these plans is of great concern. The second challenge is that transition to new leadership could change the company dramatically. A company succession plan would detail the steps to take and identify the appropriate individuals for each role. However, changes within the company culture and with the attitudes and feeling of employees must be managed throughout the process. The formal plan is not as much a concern as is the potential change in culture, mission, vision and morale.

External threats that must be addressed by The Boston Beer Company also exist. The composition of the beer industry presents a challenge for the company. As stated in the external and internal analysis, two major brewers, Anheuser-Busch and MillerCoors, control the market in

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the U.S. with nearly 80 percent market share and approximately 100 brands between the two. These companies are present in virtually all markets in which Boston Beer competes. While the Strategic Map further differentiated the beer of the major brewers from that of Boston Beer, these companies remain stiff competition. The growing consumer preference for craft beer has pulled market share from the major brewers, but this has not lessened their size or influence. Anheuser- Busch increased its global presence and company size when it was recently acquired by InBev of Belgium. SAB-Miller and Molson Coors formed a joint venture to combine operations and realize production and distribution efficiencies. Recognizing the popularity of craft beer, both companies have introduced “craft” varieties of their own. While the major brewers do not fit the definition of a craft brewer (small, traditional and independent20), consumers may still view these varieties of beer as “craft.” In fact, MillerCoors’ Blue Moon® is advertised as brewed by the Blue Moon Brewing Company in Golden, CO.21 Consumers categorizing beer by its taste, quality, style and uniqueness would place Blue Moon in the craft category. Even knowing the beer is a MillerCoors product does not cause it to be classified with other

products the company offers. While serious beer aficionados know Blue Moon is not a true craft beer, the average beer drinker may not.22 MillerCoors recently ramped up an advertising campaign for Blue Moon aimed at increasing its status as a craft beer.23 Boston Beer does not have the number of distributor relationship nor the advertising budget that major brewers like MillerCoors have. Somehow, Boston Beer must balance its marketing message between introducing consumers to its unique, flavorful craft beer, differentiating itself from the premium and sub-premium beer offered by the major brewers, and showcasing its beer as true craft beer. Yet, as discussed earlier, even Boston Beer may be in jeopardy of losing this craft status.

Another condition in the external environment is increasing globalization. No longer do U.S. companies compete only with one another, but competition comes from both domestic and

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international companies. Anheuser-Busch, the brewer with the largest presence in the U.S., is no longer U.S. owned. SAB-Miller is owned by South African Breweries. While Boston Beer does distribute a small amount of its beer internationally, its prime focus has been on domestic distribution. A recent partnership with Weihenstephan in Germany could improve the company’s international presence, but its initial focus is on the new product the companies are developing jointly, not on the Samuel Adams® existing line.

Lastly, the movement toward sustainability has been promoted world-wide and the beer industry has not been untouched. The major brewers have already introduced programs to reduce their impact on the environment. Anheuser-Busch has reduced its water usage by 37 percent since 2000 and has pledged to continue this reduction.24 MillerCoors has established two Zero Waste® breweries and has developed plans to convert additional facilities.25 Boston Beer currently has a program to accept used glass bottles and then wash them for re-use.26 However, as the

company grows, additional programs may be expected by consumers, shareholders, environmental activists, or by law.

Boston Beer must first define itself in terms of the industry, then, it must examine its operations to be sure it has the resources and capacity to meet this characterization. Deciding on the direction to pursue is the first step in developing a plan for the future of the company. The company can be capitalize on the opportunities for growth in the global market, increased competition with the major brewers, and other industry trends if it first determines if “craft”, “better,” or some other label best suits its products.

Determining its place in the industry is of first importance. Without this decision, all other efforts may be in vain. Once the company makes this decision, it can then more easily develop plans for utilization of production capacity and methods of competing against the major brewers. Together, these three issues focus on brand development for the company. To ensure the company

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delivers a consistent message to consumers and distributors, it is important to address these issues first. Next, the company should address succession planning. Koch is also part of the company’s “brand.” It is vital to the company’s continued success to have a plan in place to successfully transition ownership from Koch. While the plan may not be implemented immediately, it should be prepared and known throughout the company. Finally, the company must then address industry trends. New opportunities available because of globalization can be pursued and attention can be given to the increased competition and other challenges that come with competing on a global market. Moving toward sustainability will also become increasingly important as the company grows.

Analysis of Alternatives

The Boston Beer Company can continue its success through a

few different avenues. One alternative would be to solidify its position as a brewer of better beer. This would entail a slow transition away from its identification as a craft brewer. Unless legislation is approved increasing the production limit for craft brewers, Boston Beer, will, by law, no longer be classified as a craft brewer. With production expected to be over two million barrels in 2010, Boston Beer will feel immediate consequences including increased taxation on the first 60,000 barrels produced and loss of eligibility in the Brewers Association.27 With substantial financial resources, the company can absorb the increased costs; however, a long-term financial plan must be developed. This plan would focus on additional expansion by evaluating the feasibility of acquisition or construction of another brewery or addition to an existing brewery. It should focus on domestic expansion and acquiring additional domestic and international market share. This alternative would address the company’s identity issue head-on by setting its focus on the better beer label rather than craft beer label. This clear definition will help the company send consistent messages about its brand, creating its image in the consumers’ mind. Yet, some risks are inherent in this alternative.

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Continued growth and expansion could cause the company to lose its unique appeal. While the company must be mindful of this risk, this alternative is very much in line with the current company strategy “to become the leading brewer in the Better Beer category.”28 Increased investment in facilities is necessary to pursue this alternative, as is the continued focus on development of appropriate internal procedures for in-house production. The major stakeholders that would be affected by this alternative include general shareholders, employees, communities in which Boston Beer is located and Jim Koch. General shareholders would react positively to this alternative if it was carried out in line with the company strategy. Controlled growth could lead to additional profitability and an increase in the stock price. This alternative would also be positively viewed

by the major shareholder and Board Chairman, Jim Koch. Koch could direct the expansion and growth and receive financial benefits in the form of additional compensation and an increasing stock price. Employees are likely to view this alternative positively if they believe the company has the ability to manage the growth and maintain the company’s success. Communities in which Boston Beer has brewery locations are likely to react positively to this alternative as they will benefit from continued operation and increased production at their locations. Overall, this alternative is one for pursuit of expansion, sales growth and additional market share. It maintains existing company plans and strategy and focuses on continued growth.

Another alternative is for the company to position itself to be purchased by one of the major brewers. This alternative could capitalize on the power and influence of the major brewers. Utilizing the major brewers’ distribution networks and acquiring economies of scale in the production of Samuel Adams® product will help grow the company in the Better Beer segment and is in line with the company’s strategy. While this alternative successfully addresses company problems including production capacity, competition with the major brewers’ “craft” beer, globalization, and sustainability, it does not fully solve the problem of Jim Koch’s over-

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involvement in the company. While an acquisition could remove Koch from his leadership role, the effect of him suddenly leaving the company may have negative consequences. This is one risk involved in pursuing this alternative. Loss of the company’s unique appeal is also a risk of this alternative. Company strategy could remain similar, yet its focus on being small, independent and traditional would need to be removed. Additional resources may not need to be acquired as the major brewer may be able to incorporate the brewing of Samuel Adams® product in with its existing production. Additionally, company policies and procedures would be changed based on

the desires of the new owner. Numerous stakeholders would be affected by this alternative including: general shareholders, employees, existing communities where Boston Beer facilities are located and Jim Koch. General shareholders may view an acquisition positively if they believe it will increase sales and profitability, and thus, the stock price. However, earnings per share have been respectable and the growth in the stock price has been significant. Since closing at $46.60 on December 31, 2009, the stock has grown to $70.65 as of October 22, 2010 stock market close.29 The circumstances of the purchase would determine the general shareholders’ reaction. It is likely employees would have an initially negative reaction as they would be uncertain if they would be able to keep their jobs. Additionally, they may be concerned that a change in the company culture would occur. Jim Koch, the company’s largest and only voting shareholder, would be affected greatly by an acquisition. Koch would become extremely wealthy from the sale of his stock, but Koch’s passion for the company may override this financial benefit. If Koch feels ready to retire, he is likely to respond favorably to this alternative; however, if he is not ready to give up control of the company, he is likely to reject this option. Communities with existing Boston Beer locations will react with concern that the location in their community will be closed. While their initial reaction may not be favorable, reassurance that the production facility would remain in their community would change that. Yet, it is likely they will still be skeptical.

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Comparison of Alternatives to Criteria

Criteria were established in order to determine which alternative should be chosen. These criteria were chosen based on the company’s strategy, the key success factors in the industry, and the current industry trends and future industry expectations. The best alternative should:

1. Maintain focus on the beer by highlighting quality, variety and uniqueness. Making good beer has been a hallmark of the company since its inception. The founder and company employees continually focus on building a better beer and seek consumer input to determine what is preferred. This criterion addresses to the PTOs by solidifying the company image for the future. Weight = 3.

2. Fit with the company’s existing strategy. The company created the Better Beer segment in which to compete. Striving to be the best in this segment has been responsible for much growth and has the ability to serve the company well in the future. This criterion addresses the PTOs by continuing focus on a strategy that has been successful and fits with current and future industry trends. Weight = 3.

3. Take into account the influence the major brewers have on the industry. Mergers and acquisitions have lessened the number of brewers domestically but have increased the size and power of those remaining. Small brewers have less of an ability to compete because of these changes. This criterion addresses the PTOs by ensuring the company takes into account external industry challenges. Weight = 1.

4. Cause increased sales and market share while maintaining profit margins. Successful financial performance will allow the company to continue to grow, provide employment to existing and new employees, and attract additional equity investments. This criterion addresses the PTOs by planning for utilization of production capacity and capitalizing on opportunities to grow. Weight = 2.

5. Aid in the development of efficiencies that cause reduction in costs. Achieving efficiencies has been identified as a key success factor for continued profitability in this mature industry. This criterion addresses the PTOs by ensuring the company addresses cost reductions and makes smart

expenditures. Weight = 2.

6. Broaden the company’s customer base with additional entrance into international markets. The global market consists of numerous brewers and consumers. Untapped markets are available for additional growth. This criterion specifically addresses the threat of continued globalization and places importance on its consideration in the analysis. Weight = 2.

7. Be affordable and financially responsible. Whether it be financed by existing operations, by acquiring addition equity or by incurring long-term debt, the alternative chosen must not cause a significant reduction in the company’s financial strength. It must use the company’s financial resources wisely and have a likelihood of achieving a return acceptable by the Board of Directors. This criterion is related to all identified PTOs because each one has various costs associated with it. Weight = 3.

A weight of one, two or three (1, 2, or 3) was assigned to each of the above criteria. A weight of three (3) means the criterion is of utmost importance in determining which alternative is

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preferable. In the case of a tie or little difference in the end results, criteria weighted a three and their value in each alternative would be used to make the end decision. Based on the key success factors and the company’s strategy, it was determined that the criteria with the most importance in the decision include: product variety and uniqueness; fit with existing strategy; and financial responsibility. Criteria assigned a two (2) are important in making the decision but do not have overriding authority to, by themselves, determine the end decision. These criteria include: increased sales and margins; achievement of cost efficiencies; and international expansion. Lastly, criteria rated a one (1) must be considered in the decision making process, but do not have the power to sway the decision

by themselves, and may actually be addressed automatically in the implementation of the chosen alternative. The only criterion receiving this rating is the consideration of the impact of the major brewers on the industry. Once the weights were assigned, each alternative was rated on a scale of one to ten (1 – 10) on each criteria, with a ranking of one (1) meaning the criteria is not addressed by the alternative and ten (10) meaning it is effectively addressed by the alternative.

Criterion Alternative 1 Alternative 2

Focus on quality, variety & uniqueness of the beer 10 7

Fit with strategy 8 4

Consider impact of major brewers on the industry 6 9

Positively impact sales, market share and margins 6 8

Develop efficiencies to reduce costs 7 9

International focus 7 9

Financially responsible8

8

Alternative 1 better meets the first criterion than Alternative 2 because in this alternative, existing ownership and management retains control and can continue the strategic focus. Yet, it is likely that a company acquiring Boston Beer would also want to retain the unique qualities of the beer in order to be profitable. Alternative 1 has a much better fit with existing company strategy than Alternative 2. Jim Koch has extensive involvement in the company and the company continually prides itself on being small, traditional and independent. Sale of the company would

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deviate from existing strategy, but could be good for the company and the product in the long-run. The impact of the major brewers is better addressed in Alternative 2 as an acquisition would give the Samuel Adams® line access to the resources of the brewer that acquired Boston Beer. Alternative 2 has the potential to create a greater increase sales, market share, and margins over Alternative 1 because a larger brewer could use its distribution channels domestically and internationally to grow awareness and increase drinkers of the product. The larger brewers have achieved increased profitability in a mature industry by realizing economies of scale. Because of this, Alternative 2 has the potential to have a greater reduction in costs than Alternative 1. However, as Boston Beer grows, it too, could achieve additional efficiencies. Finally, if Alternative 1 is chosen, it is likely the company would continue it conservative financial approach. If Alternative 2 is chosen, the company as we know it would have no control over financial decisions, but an acquisition could have positive financial benefits for existing owners.

Alternative 1 Results

Criterion Weight

Focus on quality, variety & uniqueness of the beer 3

30

Fit with strategy 324

Consider impact of major brewers on the industry 1

6

Positively impact sales, market share and margins 2

12

Develop efficiencies to reduce costs 214

International focus 214

Financially responsible 324

TOTAL124

Based on the analysis, Alternative 1 should be chosen. Since 1990, the company has achieved consistent and significant growth by focusing on quality and on becoming the best Better

Beer. Continuous focus on its strategy and a conservative financial approach coupled with improvement of its internal production capacity is a realistic course of action. Continuous inquiries into international ventures, focus on its relationships with existing distributors,

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development of new distributor relationships, and innovative marketing techniques will all address the above problems, opportunities and threats. It is likely that major stakeholders will have few objections to this course of action as it does not deviate significantly from the company’s existing strategy. However, stakeholders will monitor the company’s success on a regular basis.

TimelineThe overall company strategy would remain unchanged as the company pursues

Alternative 1. However, this strategy must be expanded to include production, marketing and financial components in addition to the company’s focus on its product. Certain components in the organizational structure will need to change in order to accommodate additional production expansion. The ability to manage additional breweries and increased production will need to be planned for. Appropriate personnel who have prior knowledge of brewing processes will need to be hired as each expansion is pursued. Additionally, the company’s focus on its sales force will need to remain. Additional sales force will need to be hired as the company pursues expansion into additional markets, including international markets. Of great importance in the development of a leadership team that is involved in and has authority for major decision-making, communicates regularly with Jim Koch, and is viewed as the ultimate leadership by all within the company. The craft beer segment has a positive outlook and it expected to continue to grow.30 The ability of the company to sustain its historical level of growth is dependent on building this leadership team, hiring the appropriate personnel, and planning for added production

capacity. Construction of new brewery facilities was shown to have a greater cost than purchase and renovation of an existing brewery. Once capacity is reached at all three breweries, the company will need to purchase additional capacity. An addition to one of its existing facilities would be a preferred option in order to maintain control and achieve efficiencies. All company competencies will be useful in the company’s expansion process. By immediately increasing its sales force,

Jennifer Pontinen 13

Boston Beer can begin to plan for additional sales growth. It is expected that production capacity will be 100 percent utilized within two years, with excess of only 10 percent. Toward the end of 2011, the company should begin planning for an addition to one of its breweries. Then, with groundbreaking in mid-2012, it can be prepared to increase its capacity substantially one year later. Financing can be done in the form of internal operations or by raising additional equity. A long-term loan would be the preferred financing option and, based on existing and projected operations, the company should be able to secure adequate financing even in today’s lending climate.

Assuming the company increases its sales force by 25 percent (approximately 65 employees) and each employee makes $50,000 per year plus benefits of 30 percent of their salary, the total cost for this portion of the plan is $4.2 million. This would be a new annual expenditure and would be spread out throughout each year. Using prior purchase and renovation costs for the Pennsylvania brewery, in 2012, the company would incur costs of about $100 million. Subsequent expansion should not be taken on until the company is close to 100 percent capacity and then a similar process could take place. While this alternative does not entail major changes and the expenditures can be spread out over a number of years, it is the best course of action for the company at this time. Consistent, measured growth has made the company successful. It has numerous tools and competencies to continue this trend.Conclusion

The SWOT Analysis in Appendix 1 was used to further solidify the choice of Alternative 1. The company possesses numerous strengths and pursuit of the chosen alternative will allow it to capitalize on them. Its strong financial position, multiple production facilities, proprietary formulas and commitment to innovation will be instrumental in continuing the company’s success and allowing for growth. While capitalizing on its strengths, the company must be sure to address

Jennifer Pontinen 14

its weaknesses. This recommended course of action details plans to increase management depth and increase its expertise in beer production. Concentrated effort on functional strategies including marketing and operations should generate sales growth leading to an increased market share. Marketing efforts should be aimed toward the opportunities in the beer industry. Consumer preference for craft beer is expected to continue and demographic changes are favorable for the better beer segment. International growth could lead to gains in market share, while overall growth should cause the company to realize economies of scale in its operations, thereby reducing costs. The chosen alternative provides way for the company to take advantage of these opportunities and also addresses how it will respond to industry threats. Positioning itself as part of the better beer segment can minimize the effect of the potential loss of the craft brewer status. Growth in size and market share, focus on the production of better beer, and continued commitment to differentiation can lessen the impact of major brewers, industry consolidations, and distributor power.

After a thorough review of the beer industry as a whole, each segment of the industry, and The Boston Beer Company itself, it is clear that the company has developed a product consumers enjoy and has achieved positive financial results for itself and its shareholders. Continued growth in the better beer segment is expected and this course of action can assist the company in capitalizing on it.

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Appendix 1: SWOT Analysis

Strengths

Strong financial position Jim KochMultiple brewery locations Proprietary beer formulas Large sales force

Good distributor relationships Commitment to innovation

Opportunities

Continued popularity of craft beer Development of brand loyalty Population growth in age 50+ Economies of scale

Untapped global markets

Weaknesses

Low market shareInexperience at production management Management depth

Threats

Mergers and acquisitions in the industry Federal and state taxation increases Proposed legislation regarding craft brewers Distributors choice in stocking product Mature industry

Major brewers entrance into craft segment

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16

Appendix 2: Timeline 2011

Jan Feb Mar April May June July Aug Sept Oct Nov Dec

January 2011

Strategy• Add functional components including marketing, financial and operations • Determine leadership and personnel needs

February 2011

Organizational Structure & Leadership

• • •

Hire sales staffHire operational staff for production capacity expansion planning Train, hire and/or promote individuals for the company leadership team

September 2011

Resources & Competencies

• •

Beginning development of capacity expansion plan Identify potential brewery operations to purchase

2012

Jan

Feb

Mar

April May June July Aug

Sept Oct Nov Dec

May 2012

Resources & Competencies

• •

Finalize purchase of brewery facility Begin renovation of facility

December 2012

Resources & Competencies • Complete renovation of

facility• Begin additional in-house

production and expansion

Jennifer Pontinen

17

Bibliography

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3 Goodnough, Abby. “Small Brewer Outgrowing Label.” June 8, 2010. Retrieved on 9/27/10 from

http://www.nytimes.com/2010/06/09/us/09beer.html?_r=3&ref=beer

4 Fuhrman, Elizabeth. “Category Focus: 2010 Beer Report.” March 9, 2010. Retrieved on 10/29/10 from

http://www.bevindustry.com/Articles/Feature_Articles/BNP_GUID_9 5‐ ‐2006_A_10000000000000775677

5 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

6 Data retrieved from http://www.wineaccess.com/file/store/totalwine/beer‐corridorwine.pdf

7 Brewers Association. “Craft Brewing Statistics: Facts” Retrieved on 9/27/10 from http://www.brewersassociation.org/pages/business tools/craft brewing statistics/facts‐ ‐ ‐

8 Brewers Association. “Beer Sales” 2010. Retrieved on 9/27/10 from http://www.brewersassociation.org/pages/business tools/craft brewing statistics/beer‐ ‐ ‐ ‐sales

9 Brewers Association. “Craft Brewing Statistics: Facts” Retrieved on 9/27/10 from http://www.brewersassociation.org/pages/business tools/craft brewing statistics/facts‐ ‐ ‐

10 Jones, Lester. “Beer Industry Update, 2008” June 2009. Retrieved on 9/27/10 from

http://www.beerinstitute.org/statistics.asp?bid=220 11 Beverage Spectrum Magazine. “How Craft Brewers Boosted Import Beers.” September 2, 2010. Retrieved on 10/29/10 from

http://www.bevspectrum.com/feature/2009/How_Craft_Brewersimport_Beersboosted

12 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

13 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

14 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

15 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213 and from www.bostonbeer.com

16 Data retrieved from http://www.samueladams.com/discover craft/brew crew.aspx#Jim‐ ‐

17 Data retrieved from http://www.bostonbeer.com/phoenix.zhtml?c=69432&p=irol‐govboard

18 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

19 Data retrieved from Boston Beer Company’s 2009 annual report at http://thomson.mobular.net/thomson/7/3090/4213

20 Brewers Association. “Craft Brewer Defined.” Retrieved on 9/17/10 from http://www.brewersassociation.org/pages/business tools/craft brewing statistics/craft‐ ‐ ‐ ‐brewer defined‐

21 Data retrieved from http://www.bluemoonbrewingcompany.com22 Papazian, Charlie. “Blue Moon by MillerCoors ramps up marketing dollars” March 27, 2009. Retrived on 10/3/10 from http://www.examiner.com/beer in‐ ‐

national/blue moon by millercoors ramps up marketing dollars‐ ‐ ‐ ‐ ‐ ‐ ‐

23 Papazian, Charlie. “Blue Moon by MillerCoors ramps up marketing dollars” March 27, 2009. Retrived on 10/3/10 from http://www.examiner.com/beer in national/blue moon‐ ‐ ‐ ‐by millercoors ramps up marketing dollars‐ ‐ ‐ ‐ ‐

24 Data retrieved from http://www.anheuser busch.com/Environment/timeline.html‐

25 Data retrieved from http://www.greatbeergreatresponsibility.com/EnvironmentalSustainability/ZeroWaste.aspx

26 Data retrieved from http://thomson.mobular.net/thomson/7/3090/4213

27 TTB.gov. “Taxes: Tax and Fee Rate” Retrieved on 9/28/10 from http://www.ttb.gov/tax_audit/atftaxes.shtml and www.brewersassociation.org

28 Data retrieved from http://thomson.mobular.net/thomson/7/3090/4213

29 Data retrieved from http://www.google.com/finance/historical?q=NYSE%3ASAM&histperiod=weekly&start=0&num=30

30 Fuhrman, Elizabeth. “Category Focus: 2010 Beer Report.” March 9, 2010. Retrieved on 10/29/10 from

http://www.bevindustry.com/Articles/Feature_Articles/BNP_GUID_9 5‐ ‐2006_A_10000000000000775677

Jennifer Pontinen

Provide an analysis of the UK Brewing industryIntroductionThe world’s economy is facing so much recession nowadays. The ever increasing population, the resultant boost to the demands, the decrease of the sources, the

resultant raise in inflation as well as other external and natural factors are causing mayhem to the international markets. Brewing industry is the one that has been affected from this downfall the most. Being regarded as a luxury and wastage of needed money, many people are discarding its consumption. To add to it, anti-addiction agencies across the world are trying their best to make people believe that alcohol consumption will cause their health, senses and themselves great loss. Further, the governments are charging more and more taxes on this industry to regulate the monetary crisis. UK beer industry is no exception at all, and has been facing sheer fall today.

UK Beer IndustryBeer is called the national drink of UK. However, the present statistics have reported that beer consumption has decreased in UK by 3.1% in last 12 months (BBPA, 2008, p. 3). This reduction in the beer usage is causing UK brewing industries to downsize, and even close, the brewing factories. There are a number of key macro factors that are causing such decrease .Factors affecting UK beer industryChange of trendsThe change in trends has also affected the rate of beer consumption in UK. “Since 1979, per capita consumption of beer has fallen by 33 per cent” (BBPA, 2008, p.3). According to an approximate ratio “men fell from 17.2 units a week in 1998 to 14.9 in 2006. By women, it fell from 6.5 units to 6.3, having been at 7.6 in 2002” (BBPA, 2008, p. 8). The reasons for such a drastic fall to the brewing industries include:

Introduction of Carbonated and Soft DrinksThe change in people’s taste is a major contributing factor

in the low sales of the beers nowadays. It used to be a main drink a century ago, but today the introduction of sodas, various juices and drinks have lessened its charm and popularity.

Demographic ShiftThe migration and settlement of people from all over the world in UK can also be regarded an important factor in lowering the beer consumption rates. Especially the settlement of people following religions like Islam which forbid the alcohol usage strictly has caused the demand of the alcoholic drinks to decrease.

BanThe ban on the drinking of alcohol in the working environment, especially while travelling, is also affecting the sale of beer. Though there are toasts raised and wines served in social gatherings and business parties, but the average decrease is quite prominent. People prefer to remain in their senses for which they tend to avoid much beer.

Health ConsciousnessThe increase in the health consciousness is also causing people to avoid drinking alcohol. It is further promoted by anti drug agencies and nutritionists who regard alcohol drinking as a thing that not only affects one’s financial

sources, one’s senses, but also one’s beauty. The new diet plans do not include beer or wine at all.

Financial issueOther than the changing trends, financial issues are the macro factors affecting the brewing industry badly. People have found things more important to buy than a pint of beer. It has become a luxury today and the new policies of government are adding to these issues more and more. These basic factors include:

Rise in Prices of BeerThe most important factor in this regard is the constant rise in the price of beers. Bread and other edibles are cheaper than beer, and that is why people prefer to buy other things than alcohol. Commenting upon this continuous rise in the prices of beer in UK, Hammond argues, “£6.50 for a loaf of bread, £7 for a bag of pasta and £18 for a pint of lager — this is what the future looks like in Britain if we don’t prevent dangerous climate change” (Greenbang, 2009).Now the question arises, why the brewing companies are increasing prices knowing that this will decrease their customer base? The answer to it lies in the increasing taxation and excise duties implemented by the government on beers (Heimbuch, 2008,.

Unemployment

According to a report, the percentage of unemployment in developed countries is 2.5. With this much number of the people jobless, who will want to spend on a pint of beer than necessities of life. Thus, the sale of beer is decreasing with the increasing rate of unemployment.

Rising InflationThe rise in the prices of other things is also causing a decrease in the demand of beers, as people need to buy their daily necessities before spending on luxury. Obviously beer cannot be replaced by bread in any case.

TechnologyBrewing is a very old art and science but the changes brought by the macroenviromental forces of technology have greatly changed the industry. Refrigeration and motorised transport allowed for the consolidation of the brewing industry worldwide. Large brands of beer and alcohol are now internationally recognised and account for the majority of consumption. Small brewers were crowded out of the market after World War Two, all but disappearing, and have only recently began a resurgence.

ConclusionTo summarize, UK beer industry is facing downfall due to financial crisis mainly. The rise in the ration of unemployment, the rise in price of beers and other necessities of life, the newer trends towards health consciousness, ban on alcohol consumption while travelling, and migration of alcohol-prohibited people are causing brewing industries to shut down.Five forces analysisPorter’s Five Forces analysis is carried out to determine whether a certain market/industry holds potential for a company that is deciding to enter it. It is therefore, carried out to determine the structural attractiveness of an industry and also to determine whether it allows a company to fit in the industry or not. The structural attractiveness of an industry is verified by a set of five forces as mentioned by Porter that are the barriers in an industry that exist to prevent new entrants into the market, the bargaining power that buyers exercise over suppliers, the intensity rivalry between existing competitors, pressures that suppliers put on buyers in terms of bargaining powers and the threats posed by the substitutes of the products in the specific industry.

A comprehensive analysis of the competitive environment of UK’s beer industry is presented below using Porter’s Five Forces analysis.Bargaining Power of BuyersThe beer industry of UK is experiencing a higher bargaining power of buyers as more and more people have switched from beer and thus very few consumers are left in the market. This has also happened because the industry is facing low switching costs and buyers find it easy now to switch from beer to other substitutes. An increase in the bargaining power can also be attributed to the standardization of the product as beer is not, and cannot be, differentiated much from its substitutes.Bargaining Power of SuppliersIt would not be wrong to suggest that the suppliers of beer have also faced a decrease in the power to bargain. Despite many players of the industry exiting the arena, the existing suppliers cannot maintain a strong hand over the consumers. The main reason behind the inability to increase prices to increase profitability is the overall increase in prices resulting from government taxes. This has already caused many consumers to switch to substitutes and any further increase in price would do nothing but to cause a greater decline in the number of

consumers and thus further deteriorate profitability levels. Beer itself is not much of a differentiated product and thus suppliers are unable to charge consumers exceptionally high for it. A resulting decrease in the switching costs of beer has worsened the conditions of the industry and has minimized the bargaining power of buyers.Existing RivalryThe beer industry of UK is facing a high intensity of rivalry among competitors as these competitors are now fighting to gain a larger share of the ever shrinking profitability pool as the industry is now in the declining stage of the life cycle. The existing players in the market will do every possible thing to stub any company entering into the industry to prevent sharing of profits. The main players of the industry are almost equal in terms of strength and period of existence in market and will therefore pose serious threats to new entrants. The existing rivals face cut-throat competition from each other as they all fight to gain a greater share of the market.Barriers to EntryUK’s beer industry presents high barriers to entry for any company that wishes to enter the market of UK. The restrictions are majorly imposed by the government as it has levied higher taxes and regulatory costs on beer that have made it more costly for suppliers and thus lead to an overall high price of beer. The barriers are high also because existing breweries enjoy significant economies of scale as they are well-established and have been brewing beer over a considerable period that allows them to minimize their costs that is they enjoy cost advantages that are independent of scale of production. Customers and businesses that buy beer from these breweries have developed loyalty to their brands and thus are not willing to purchase beer manufactured by a new brewery.

The Brewing industry of UK has also faced significant drops in the profit margins as the government’s taxes and regulations have reduced the profit margin considerably. The fall in profits also acts as a barrier to entry as breweries would prefer not to enter a market that promises very little profit. Lower profitability has also resulted due to a considerable fall in the consumption of alcoholic drinks by both males and females. A hike in the prices of materials required for brewing is also having a negative effect on breweries considering UK as their new market.Availability of SubstitutesSubstitutes are classified into three categories namely close substitutes, distant substitutes and non-usage of the product. Analysis of all three types of substitutes is given in detail as follows along with an analysis of the effects of these substitutes.Close SubstitutesClose substitutes of beer comprise of non-alcoholic beers, spirit categories such as vodka, gin and rum (BBC, 2007), cider and wine. An overall increase in the number of people shifting to these substitutes over the past few years has resulted in deterioration and thus the decrease in profits for the beer industry. This renders the industry unattractive for breweries as the beer industry is constantly facing a decrease in the number of consumers who are shifting to substitutes of beer and thus decreasing the profitability pie of the said industry.Distant SubstitutesAn increase in the awareness about the cons of alcohol consumption has led to a shift from alcoholic drinks to soft

drinks. Soft drinks, as well as, fruit juices are going to become close substitutes for beer in the future as the ever increasing efforts of alcohol rehabilitation centres increases resulting in the rise of more awareness and health concern among beer consumers.Non-usage of ProductIt is apparent from the overall trends of beer consumption that the industry is going to face a huge decline in the demand for beer in near future. This, as mentioned earlier, will be greatly due to the hike in prices of beer, decrease in purchasing power of buyers, greater awareness among consumers and the increase in promotional efforts of beer’s close and distant substitutes (Dinkhoff, 2007).The demand for beer is price elastic. The increasing prices of beer have, therefore, resulted in a decline in the demand for beer. This is mostly because consumers deem it more appropriate to spend money on more necessities than to waste it on beer. An increase in awareness about the adverse effects of alcohol consumption has also led to a decrease in the switching cost of beer as consumers now find it easier to turn to substitutes. Lower switching costs have also resulted from an increase in the promotional efforts of companies that produce beer’s substitutes and the change in the fashion that depicts drinking non-alcoholic drinks as more fashionable (Dinkoff, 2007).Strategic directions chosen by AdnamIntroductionThe present UK brewing industry is facing a great decline due to economical and social factors. The prices of beer along with every other thing have raised a lot and the people prefer to fulfil their other needs before a pint of beer. The government is proposing more and more taxes on each pint that is not only causing brewing industries a lot, the sale is also decreasing day by day. As a result, UK brewing industries and pubs are closing on a regular basis. According to the report of BBPA, “From 2000 to

2005, pubs were closing at a rate of two per week…This has now accelerated to 35 per week” (2008, p. 6). This downsizing is causing people to lose their jobs and finding other means to earn their breads. In such a bad time for brewers, Adnams has managed to stay intact and prosperous by introducing various revolutionary strategies.Adnams: Company ProfileAdnams PLC is a regional brewery company of the Great Britain. George and Ernest Adnams had founded it in 1890 in Southwold, Suffolk, England. The company mostly produces barrel ale and pasteurised bottles of beers. Its production is up to 85,000 barrels a year. The establishment of the Copper House Distillery in 2010 has started the production of vodka, gin and whisky. The company is making new changes to make its sale and business more and more progressive each day.Adnams: Yearly ProgressThe annual progress of Adnams is quite impressive.Adnams: Business StrategiesIt is said that the strength of Adnams lies in its revolutionary and unique business strategies that indicate the presence of intelligent minds behind it. The eco-friendliness, pub-promotion and support deals and the relatively cheaper rates are all that make Adnams a name well desired. The fortune making strategies adopted by Adnams are as follows:Social TagAdnams loves to bear social tag upon its name. It contributes into various social activities to make its presence acknowledge and appreciated. Moreover, it alsoEventsEco-FriendlyToursOnline Sale and PromotionInternal Financial ControlIt arranges tours to brewery, holds events and invests into various national programs to compensate the government

taxes.There are numerous amazing strategies that have made Adnams’ name IS that of someone trusted and liked all over the country.Conclusion“Being a responsible business is a priority for Adnams and the company firmly believes that a small investment of time and resources into ‘doing things right’ can make a significant impact, resulting in better relationships with the local community, suppliers and employees.” (Green Marketing Conference 2010)“The balance of strategic direction with practical management has established Adnams online as a key contributor to the commercial success of Adnams Retail.” (Andy Wood, Managing Director Adnams PLC)“As a result our online performance has improved markedly. Online sales of wine and gifts have increased by 20% and visits to the site are up by 90%”.Organizing events: race “All runners receive a free bottle of Adnams beer for taking part.” (Howard, 2010)Buying shares in other things to minimize the financial needsInvestment in other plans to fight the effects of government taxes and to avoid rise in pricePartnership AgreementClose cooperation with pubs: “We meet them regularly to discuss what’s happening in their business and offer advice, training and support. Recently we conducted a survey to gauge opinions on more general issues.” (2009)Internal financial controlThe Board acknowledges its responsibility for maintaining a system of internal control which can provide reasonable, albeit not absolute, assurance against mis-statement or loss. To meet this responsibility, the Board relies upon:an organisation structure with clearly defined lines of authority and responsibility, limits for authorisation of transactions and segregation of duties

the production and review of regular monthly management information to agreed timescalesthe identification of key performance indicators with explanations of variancesa formalised process for reviewing all company activities during the yeardetailed annual operating budgets for all businessesFormal authorisation procedures for all investment and capital expenditure.The Audit Committee considers that the system of internal financial control operated effectively during the year.Directors’ responsibilities in respect of the accounts. The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare financial statements in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). The financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:select suitable accounting policies and then apply them consistentlymake judgments and estimates that are reasonable and prudentstate whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statementsPrepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in the business.The directors are responsible for keeping adequate accounting records that disclose with reasonable accuracy

at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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Whitbread Plc SWOT Analysisrodrigo | May 7, 2012Abstract: - An analysis of the FTSE 100 company Whitbread Plc, utilising the

SWOT tool as a framework to investigate the strengths, weaknesses, opportunities and threats that the company faces in relation to its position

within the Leisure industry. Drawing from an internal perspective, the SWOT analysis evaluates the company’s operation in both its national and

international domains.

Contents [hide] Introduction:

Whitbread Plc SWOT AnalysisConclusion: AppendixReferences

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Introduction:

The following essay comprises an analysis of Whitbread Plc, a company operating within the Leisure and Hospitality sector, presently ranked 85th on the FTSE 100 index (Source: etf.db.com). With engagements in the hotels, restaurants and coffee shop businesses, its portfolio of subsidiary companies includes the market leading brands Premier Inn and Costa Coffee, alongside a range of restaurant chains comprising Beefeater Grill, Brewers Fayre, Table Table and Taybarns. Analysis will centre around an investigation of Whitbread Plc’s internal strengths and weaknesses, examining the presence of opportunities and threats that stand to prepare or hinder its progress within the leisure industry. This theme will be examined both within the context of both its national and international operations.

The current operating environment that all brands falling under the Whitbread corporate umbrella face is undoubtedly a challenging one, owing to increased cautiousness on the part of consumers in light of an unstable economic climate. This is particularly the case with discretionary expenditure on leisure and non essential services, for which the company firmly caters. However, recent financial figures suggest robust performances across the board; the company share price in the 12 months to April 2012 has risen by 6.56 per cent (source ft.com), reaching a 52 week peak of 1889 pence per share on 28th March 2012 (Appendix 1). In line with this, the company are expected to announce a 15 per cent increase in underlying pre-tax profits of £314.2 million when their annual report is published on 26th April 2012 (Source business.scotsmann.com). Further, the trend in recent years has been to

peruse expansion both on the UK and international scenes. Costa Coffee has seen notable growth, with over 1600 stores worldwide; up from just 346 in 2003/04 (Appendix 2). It is now the leading UK coffee chain (Whitbread annual reports and accounts 2010/11). Similarly, Premier Inn has grown to 590 hotels throughout the UK and is targeting aggressive expansion into Dubai and India.

It appears that cautious optimism has been the basis for a continued strategy of growth in a market charged with both opportunities and threats for what is an established and experienced operator. Focussing on the company’s internal environment, what follows is a brief SWOT analysis, detailing the Strengths, Weaknesses, Opportunities and Threats within its national and international markets:

Whitbread Plc SWOT Analysis

Strengths:

Whitbread are in the position of owning a strong brand portfolio. Premier Inn and Costa are market leading performers (Appendix 3), where as their restaurant arm is expected to announce a 1.9 percent increase in total sales for the year ending April 2011. (Source scotsman.com) Further, the parent company is well established with many years experience in the brewery industry, before recently changing tack to focus on hospitality and restaurants. Recent managerial board moves in April 2012 have seen the well regarded company finance director, Chris Rogers, take control of the Costa business. (The Telegraph 03 Apr 12) This can perhaps be interpreted as a means of ensuring the future stability of a high performing brand.

Weaknesses:

Although the Costa brand has been very much the ‘Rising Star’ of Whitbread’s brand portfolio over the past 10 years, there is perhaps a perception that the underlying reason for the company’s rapid expansion has been based on a fad, subject to changing customer tastes and therefore lacking in longevity. Being situated at the luxury end of the coffee chain spectrum, Costa is also at risk of overpricing its products; perhaps a door through which competitor coffee chains can leverage some market share during a period of recession. Seeing as Whitbread has traditionally managed a domestic portfolio, many of its brands remain untested outside of the UK market, with only a small number of Premier Inn and Costa outlets competing in the international marketplace. There remains a lack of necessary brand awareness in what is already a very

saturated international leisure marketplace.

Opportunities:

On the domestic scene, with many traditional high street retailers facing store cutbacks or even complete closure, there exist strong opportunities to capitalise on the availability of prime high street retail space. There are further opportunities to become more flexible with the pricing structures employed in the Premier Inn chain, whereby the current CEO Andy Harrison has mooted plans to employ a ‘Dynamic Pricing Model’ which aims to maximise occupancy rates in each of its hotels. (Whitbread Interim Results Presentation 2011/12). This could prove particularly valuable at a time when UK residents are increasingly choosing domestic holidays over foreign travel. Viewing from an international perspective, there remains scope for considerable expansion, as is currently being undertaken with moves into Dubai and India, alongside Costa’s recent acquisition of Poland’s biggest chain, ‘ Coffeeheavan’ for £32m in 2009 (telegraph.co.uk/finance). The spectre of London 2012 is perhaps the most tangible short-term prospect, with many chances to capitalise on tourist expenditure over the Gamestime period.

Threats:

In the Annual Report and Accounts for 2010/11, Whitbread chairman Anthony Habgood wrote, “Over the next twelve months the focus will be on strengthening our value propositions, controlling costs and accelerating our expansion.” This intention to control capital expenditure will indeed need to be followed through rigidly, in order for expansion plans to progress without any financial backlash. With the global economic environment remaining turbulent, there remains a sizable degree of uncertainty in the process of expanding into new markets. The increasing frequency of news articles based in the instability of world markets, with current headlines reading ‘FTSE Tumbles Amid Political Doubt’ (The Press Association – 23.04.12) adds testament to this. Further recent speculationsuggests the Costa arm may be demerged from Whitbread, owing to its viability as an independent entity (The Independent, 22.04.12). This effects of move are an unknown in terms of its outcome on Whitbread’s stability.

Conclusion:

Approaching the theme of strengths and weaknesses from a national and international perspective, this essay has outlined the balance of opportunities and threats as they affect Whitbread Plc, using the SWOT tool to provide a structured investigation into the environment in which the company operates. It can be seen that whilst Whitbread possess the attributes of a strong brand portfolio containing highly recognisable national companies, there is considerable reason for future optimism of plans for expansion and growth to be tempered by the reality of an unstable global economic climate and current lack of presence on the international scene.

Appendix

1) Whitbread Plc – 52 Week share price to April 2012

Financial Times – http://markets.ft.com/Research/Markets/Tearsheets/Summary?s=WTB:LSE

2) Whitbread growth transformation over six years

3) YouGov brand index for Coffee Shops and Hotels

References

- Morning Star: Whitbread Plc Overview.

http://tools.morningstar.co.uk/uk/stockreport/default.aspx?Site=uk&id=0P000080E9&LanguageId=en-GB&SecurityToken=0P000080E9]3]0]E0WWE$$ALL

- Scotsman.com: The Week Ahead: Winning brew from Whitbread (23 April 2012)

http://www.scotsman.com/business/the-week-ahead-winning-brew-from-whitbread-1-2250386

- Press Association: Political uncertainty hits markets (23 April 2012)

http://www.google.com/hostednews/ukpress/article/ALeqM5jr0Ihkps5kKMnUFUTgLsKYszTe7g?docId=N0477601335169148049A

- The Telegraph: Whitbread to buy Polish coffee chain Coffeheaven for £32m (11 Dec 2009)

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/6790624/Whitbread-to-buy-Polish-coffee-chain-Coffeheaven-for-32m.html

- The Independent: Whitbread’s Premier Inn could Costa lot (22 April 2012)

http://www.independent.co.uk/news/business/news/whitbreads-premier-inn-loss-could-costa-lot-7668818.html

- The Telegraph: Whitbread finance chief Chris Rogers to head up Costa Coffee after John Derkach quits to join Tragus(03 April 12)

http://tinyurl.com/bpe6s42

Books

- Farndon, M., et al (2004). ‘Advanced Business’. Osborne Books Ltd

Journals

- MINT UK – ‘Hotels & Motels in the UK’ (2011).

Reports

- Annual Report & Accounts 2009/10

http://annualreport.whitbread.co.uk/pdfs/0910/Whitbread_AR-and-Accounts_0910.pdf

- Interim Results 2010/11

http://online.hemscottir.com/ir/wtb/pdf/WhitbreadInterims2010_showbook.pdf

Papers on Porter's Generic Strategies; Reports on Different Companies

The article focuses on the main aspects of Porter's generic strategies. The three generic strategies of cost leadership, differentiation, and focus are discussed along with the advantages and risks inherent with each strategic option. The article includes tips for students and analysts on how to write good generic strategies analysis for a firm. Moreover, sources of findings information for generic strategies analysis have been discussed. The limitations of Porter's generic strategies analysis have been discussed, and the relationship between these strategies and industry forces is also discussed.

IntroductionPorter's generic strategies framework constitutes a major contribution to the development of the strategic management literature. Generic strategies were first presented in two books by Professor Michael Porter of the Harvard Business School (Porter, 1980, 1985). Porter (1980, 1985) suggested that some of the most basic choices faced by companies are essentially the scope of the markets that the company would serve and how the company would compete in the selected markets. Competitive strategies focus on ways in which a company can achieve the most advantageous position that it possibly can in its industry (Pearson, 1999). The profit of a company is essentially the difference between its revenues and costs. Therefore high profitability can be achieved through achieving the lowest costs or the highest prices vis-à-vis the competition. Porter used the terms ‘cost leadership' and ‘differentiation', wherein the latter is the way in which companies can earn a price premium.

Main aspects of Porter's Generic Strategies AnalysisCompanies can achieve competitive advantages essentially by differentiating their products and services from those of competitors and through low costs. Firms can target their products by a broad target, thereby covering most of the marketplace, or they can focus on a narrow target in the market (Lynch, 2003) (Figure 1). According to Porter, there are three generic strategies that a company can undertake to attain competitive advantage: cost leadership, differentiation, and focus.

Figure 1: Source: Porter (1985)

Cost leadershipThe companies that attempt to become the lowest-cost producers in an industry can be referred to as those following a cost leadership strategy. The company with the lowest costs would earn the highest profits in the event when the competing products are essentially undifferentiated, and selling at a standard market price. Companies following this strategy place emphasis on cost reduction in every activity in the value chain. It is important to note that a company might be a cost leader but that does not necessarily imply that the company's products would have a low price. In certain instances, the company can for instance charge an average price while following the low cost leadership strategy and reinvest the extra profits into the business (Lynch, 2003). Examples of companies following a cost leadership strategy include RyanAir, and easyJet, in airlines, and ASDA and Tesco, in superstores.

The risk of following the cost leadership strategy is that the company's focus on reducing costs, even sometimes at the expense of other vital factors, may become so dominant that the company loses vision of why it embarked on one such strategy in the first place.

Differentiation When a company differentiates its products, it is often

able to charge a premium price for its products or services in the market. Some general examples of differentiation include better service levels to customers, better product performance etc. in comparison with the existing competitors. Porter (1980) has argued that for a company employing a differentiation strategy, there would be extra costs that the company would have to incur. Such extra costs may include high advertising spending to promote a differentiated brand image for the product, which in fact can be considered as a cost and an investment. McDonalds , for example, is differentiated by its very brand name and brand images of Big Mac and Ronald McDonald.

Differentiation has many advantages for the firm which makes use of the strategy. Some problematic areas include the difficulty on part of the firm to estimate if the extra costs entailed in differentiation can actually be recovered from the customer through premium pricing. Moreover, successful differentiation strategy of a firm may attract competitors to enter the company's market segment and copy the differentiated product (Lynch, 2003).

Focus Porter initially presented focus as one of the three generic strategies, but later identified focus as a moderator of the two strategies. Companies employ this strategy by focusing on the areas in a market where there is the least amount of competition (Pearson, 1999). Organisations can make use of the focus strategy by focusing on a specific niche in the market and offering specialised products for that niche. This is why the focus strategy is also sometimes referred to as the niche strategy (Lynch, 2003). Therefore, competitive advantage can be achieved only in the company's target segments by employing the focus strategy. The company can make use of the cost leadership or differentiation approach with regard to the focus strategy. In that, a company using the cost focus approach would aim for a cost advantage in its target segment only. If a company is using the differentiation focus approach, it would aim for differentiation in its target segment only, and not the overall market.

This strategy provides the company the possibility to charge a premium price for superior quality (differentiation focus) or by offering a low price product to a small and specialised group of buyers (cost focus). Ferrari and Rolls-Royce are classic examples of niche players in the automobile industry. Both these companies have a niche of premium products available at a premium price. Moreover, they have a small percentage of the worldwide market, which is a trait characteristic of niche players. The downside of the focus strategy, however, is that the niche characteristically is small and may not be significant or large enough to justify a company's attention. The focus on costs can be difficult in industries where economies of scale play an important role. There is the evident danger that the niche may disappear over time, as the business environment and customer preferences change over time.

Stuck in the middleAccording to Porter (1980), a company's failure to make a choice between cost leadership and differentiation essentially

implies that the company is stuck in the middle. There is no competitive advantage for a company that is stuck in the middle and the result is often poor financial performance (Porter, 1980). However, there is disagreement between scholars on this aspect of the analysis. Kay (1993) and Miller (1992) have cited empirical examples of successful companies like Toyota and Benetton, which have adopted more than one generic strategy. Both these companies used the generic strategies of differentiation and low cost simultaneously, which led to the success of the companies.

How to write a Good Porter's Generic Strategies Analysis?Firms can choose from one of the three generic strategies to compete in the marketplace, regardless of the context of industry (Porter, 1980). Note that companies that are successful at making use of the cost leadership strategy are often positioned to capitalize on a value proposition which emerges from their low cost emphasis, like the classic success story of Tesco , in the UK. These companies typically focus their efforts on value-oriented customers in the market. Tesco , Value products are focused on providing value-oriented customers with products that are indeed value-for-money, relative to competitive offerings. Interestingly, an emphasis on cost leadership in this sense can act as a form of differentiation. Successful implementation of a cost leadership strategy would benefit from process engineering skills, products designed for ease of manufacture, access to inexpensive capital, tight cost control and incentives based largely on quantitative targets (www.wikipedia.org). McDonalds, restaurants, for example, achieve low costs through standardised products, and centralised buying of supplies etc. Despite the benefits that the cost leadership strategy entails, there is limited empirical evidence that supports successful implementation of cost leadership strategies.

Contrary to the cost leadership strategy, there is empirical evidence to support the differentiation strategy (Pearson, 1999). Hall (1980) investigated sixty-four American companies and the findings of the study revealed that companies following a differentiation strategy had superior performance compared to those companies that were not following the same. It is important for analysts to note that there is more than one way in which a company can make use of differentiation. Differentiation can be achieved through a differentiated product, superior quality, and customer service etc. A key question to ask is whether the customers of the company perceive the point of difference as one that is worth a price premium.

The focal point for the company pursuing a differentiation strategy should be the customer, and not per se the competitors. Note that for a differentiation strategy to be successful, the point of differentiation perceived by customers as valuable should coincide with the distinctive competence of the company (Pearson, 1999). For example, Orange succeeded by providing the most basic requirements for mobile phone communication, better than the competition, and in that the company created a differentiation in the minds of the consumers. Orange provided the customers with mobile phone communication requirements like better network coverage, network reliability, and charging customers for only what they use, instead of

features like free phone calls, which even have a higher cost for provider (Barwise et al, 2004). Therefore, a customer-focused differentiation strategy when implemented with a clear vision benefits the company in many ways including price premium, brand loyalty and sometimes even reduced costs, like the case of Orange. In order to effectively maintain a differentiation strategy, the firm should have strong skills in R&D, product engineering, change management, marketing, advertising, and HRM. Continuous innovation plays a vital role in case of differentiation, as is exemplified by companies like IBM, also referred to as the IT bluehood of the corporate world. IBM was awarded more US patents in 2003 than any other company, for the eleventh year running, which qualifies IBM as one of the most innovative and successful companies in its industry.

Notably, a number of small and medium sized companies have found that the niche strategy is the most useful strategic area to explore for them (Lynch, 2003). While most companies employ cost leadership strategy, differentiation, or a mix of these two strategies, there are relatively fewer companies that adopt a niche strategy. Perhaps one of the most important elements to consider in case of a niche strategy is whether the size of the market is appropriate from the revenue potential aspect, and if the company has the capability to provide the specialised products that the consumers in the niche market need and want.

According to Parnell (2006), the stuck in the middle phenomenon received considerable support in the 1980s (Dess et al, 1984; Hawes et al 1984) but was later challenged by numerous scholars (Buzzell and Gale, 1987; Proff, 2000). It has been noted that a shortcoming of the low-cost-differentiation dichotomy, is that the two strategies are not opposites in entirety, and are neither always mutually exclusive (Parnell, 1997). Notably, most successful firms exhibit one or more forms of differentiation, along with forms that are directly associated with cost leadership and even the focus orientation. This is one of the trickiest areas in the analysis of generic strategies that the reality can be different and more subtle than the stark contrasts that are highlighted by Porter (1980). It is important to conduct the analysis with an open mind, and to explore the relative advantages, disadvantages, and risks that the various strategies may offer to a company vis-à-vis the competition and overall business environment.

Information Technology and the advent of the Internet have caused major changes in the business environment and have accelerated the speed of change. Kim et al (2004) have argued that Porter's generic strategies of differentiation and cost leadership will be applicable to e-business firms in a broad sense, while the focus/niche strategy will not be as viable for e-business firms, compared to their traditional counterparts. They suggest that an integration of cost leadership and differentiation strategies would be the most promising in the e-business context, but individually differentiation will show superior performance compared to cost leadership. As more and more companies are transforming their bricks-and-mortar existences to brick-and-click, it is vital for analysts to understand the role that generic strategies are playing in the digital era.

Where to find information for Porter's Generic Strategies Analysis Analysts can explore various sources to find information necessary for conducting the generic strategies analysis. Possible sources of information include company and competitor websites in order to view the existing portfolio of products or services that are being offered to customers. The annual reports of the company can used to analyse the relationships between costs and profitability, and how a particular strategy is affecting the firm's overall performance.

Marketing communications tools used by the company and competitors may also reflect the generic strategies. Advertisements can be a useful source of information to analyse the strategy that is being pursued by the company, and how that differs from that of the competition. Journal articles, trade publications and reputable magazine articles are useful sources of information to analyse industry trends, customer preferences in a given market, and the strategies that are being pursued by the companies in a particular industry.

Relationship between Porter's Generic Strategies Analysis & Industry ForcesThe three generic strategies suggested by Porter (1980, 1985) can be effectively utilised to defend against competitive forces in the business environment. The industry forces take the form of competitive rivalry, barriers to entry, threat of substitutes, buyer power, and supplier power (Lynch, 2003).

Competitive rivalryIf the competition in the industry in which the company operates is fierce, the advantage of a cost leadership strategy would be that the firm would be able to compete on price. However, cost leadership strategy is not the most desirable strategy in this event, as competitors may put intense price pressures, such that all companies would end up reducing their prices drastically. Differentiation would be a viable strategy in this case as there is a likelihood that the loyal customers would stay with the company. It would also be hard for competitors to cope with the specialised needs of customers who are part of a niche segment in the market.

Barriers to EntryA company employing any one of the three strategies would find it easy to create barriers for new entrants. The learning curve of cost leaders in an industry, along with the economies of scale through experience curve effects, would often make it impossible for potential entrants to compete on price, as the more mature firm can further lower prices without comprising its profitability. High customer loyalty towards a company's brands, which is true for the differentiation strategy, can play a vital role in discouraging potential entrants. Customers often choose to be with a niche player because of a certain core competence that only that particular player is providing in the market. Also companies that make use of the focus strategy over time often develop a thorough understanding of their customers' needs, which is a very difficult task for a potential entrant. In this way, focus can act as an entry barrier also.

Threat of substitutesIt is the differentiation and differentiation-focused strategies that effectively reduce the threat of substitutes. Threat of substitutes is reduced in case of the differentiation strategy due to customer loyalty to the unique aspects of a particular product or service, which no substitute product can offer in the customer's mind. In case of the later strategy, the very nature of the company's products and core competence of the firm reduce the threat of substitutes.

Buyer PowerThe power of buyers changes in accordance with the three generic strategies. Cost leaders have the unique ability to offer lower price options to large and powerful buyers. However, the scenario differs for companies making use of the differentiation and focus strategies. Buyers in case of these two strategies would have less power as there are few alternatives available to them.

Supplier PowerSuppliers can exercise their power primarily in case of differentiation and focus/niche strategies. Companies making use of these strategies have the ability to pass the price increases of suppliers to their final customers, through the premium pricing strategy.

Limitations of Porter's Generic Strategies AnalysisDuring the 1980s, the generic strategies were regarded as fundamental to strategy and the ideas suggested by Porter were used extensively. It became clear over time that in reality there were some shades of grey in the distinction between differentiation and cost, compared to the black and white that is projected in theory. It is very difficult for most companies to completely ignore cost, no matter how different their product offering is. Similarly, most companies will not admit that their product is essentially the same as that of others (Macmillan et al, 2000).

It is important for analysts to bear in mind that Porter's generic strategies should be considered as a part of a broader strategic analysis. The generic strategies only provide a good starting point for exploring the concepts of cost leadership and differentiation. Perhaps a major limitation of the generic strategies is that they may not provide relevant strategic routes in the case of fast growing markets (Lynch, 2003). It is important to conduct other analyses like PESTEL analysis to analyse how the generic strategy being employed by a company should change in accordance with external factors. Other useful analyses would include SWOT analysis, analysis of the key success factors etc.

ConclusionPorter's generic strategies framework suggests that a company can maximize performance by striving to be the cost leader in an industry, by differentiating its products or services from those of other companies, and by focusing on a narrow target in the market. A company that attempts to combine cost leadership and differentiation strategies would invariably be stuck in the middle, which according to Porter is not a desirable notion. It is seen that each of the generic strategies has advantages and inherent risks that should be analysed carefully with respect to the company and its competitors. It is noted that in practice, most

successful companies make use of a combination of low cost and differentiation strategies, which is true even in the context of online business.

It is seen that Porter's generic strategies can be effective in defending against competitive forces in the industry. Key sources of information for conducting a generic strategies analysis include company and competitor websites, annual reports, advertising, and journal articles, trade publications and reputable magazine articles. Porter's generic strategies have certain limitations which include shades of grey in the distinction between differentiation and cost, compared to the black and white approach suggested by Porter. Also, analysts must use the generic strategies analysis as only a part of a broader strategic analysis. Use of other strategic models and tools like PESTEL, SWOT etc. is recommended for a more holistic analysis.

Costa Coffee

Targeting Costa Coffee:• While evaluating their consumer market the conclusion was that the ideal consumer’seconomic profile will be– Upper Middle Class– Privileged Class• While the age demographics will be:– Students and Youngsters– Professionals– Families– Mature Consumers• Gender and Ethnic/Religious Background was researched to have minimal or no effect on the      choices concerning coffee made by consumers and their patronage of coffee houses.

“THE PERFECT CUP” IN FOUR “M”1. MiscelaBlend: Costa has a unique blend we call the Mocha Italia2. Macinatura:Grind: Every cup of Costa is made from freshly ground beans; ground to theexact consistency to ensuring perfect extraction of flavors & aroma. We usethe Ferrari of grinders-the Mazzer–to ensure the “Perfect Cup”3. Macchina:Machine: Costa shops use specially designed Italian espresso machines. Theyhave been tuned & perfected over the last twenty years to achieve highvolumes of perfect espresso [the heart of every coffee drink]4. Manna:Hand: the skill of the Barista influences the “Perfect Cup” So they undergo

extensive & intensive training at our Coffee Academy to reach the excellence      that’s Costa

      The marketing communication strategy for its products

      Raisingawareness of your product in your target market is where sales begin, and this is where marketing communications activities begin the selling process.

      With today's multiple channels for content to reach potential customers, the art and science of marketing communications has become increasingly important.

      However, no company can be sure they are using the most efficient media mix without creating a marcom strategy that is aligned with their overall strategic marketing direction.

      Target market strategy:

      To maximise on brand name (signature) Costa signifies luxury, excellence in Coffee, all over the world, along with the theme of Costa which insinuates relaxing colors and chilling tones along with service which is excellent as is the coffee (reach, frequency, continuity)

      Most awareness will be through word of mouth , reputation is everything

      New Metropolitan stores: fulfil specific needs of city customers “something a little different from Costa” (new slogan)

      New look stores rivalling retro starbucks

      Wifi

      Special express queues

      Costa says it is opening the new-look stores following consumer research, which found city customers wanted high speed of service, express till areas for customers in a hurry,and a more relaxed atmosphere with zoned seating areas.

The coffee-shop chain is increasing the pressure on rivals Starbucks and Caffè Nero with the launch of a nationwide points-based programme. (sales promotion)The Coffee Club loyalty card, which Costa is launching tomorrow (Thursday), gives customers five points for every £1 spent in its stores, with every point worth 1p.The company will also offer extra ‘reward opportunities' throughout the year via ‘bonus-point' promotions.Costa claims it is the first points-based loyalty scheme in the coffee industry. It allows consumers to collect and redeem points on all its food, drink and other merchandise.The scheme replaces Costa's prepay Store Value Card, which had been in use for the past three years.To support the launch, Costa's lead agency, Meteorite, has created a recruitment campaign that spans direct mail, online and in-store activity. Using the headline ‘Love free coffee? Join the club', it aims to encourage consumers to pick up a card in stores.Meteorite will also be respon-sible for handling the CRM strategy for the scheme. Cardholders will receive tactical communications throughout the year, in support of Costa's overall positioning ‘We make it better'.Kevin Hydes, head of marketing UK at Costa Coffee, said: ‘In a competitivemarket, it is vital that we show our coffee-lovers just how much we value their custom.'Rival Starbucks runs a card-based customer loyalty programme, which allows users to load amounts onto it of between £5 to £150 to spend in participating stores globally.

It has also begun providing free wi-fi access to cardholders. The decision is the latest in aseries of strategic changes intended to reinforce the coffee chain's loyalty offering.Jeffrey Young, managing director of Allegra Strategies, said: ‘This signals the increasing maturity of the industry, which has become so significant these tools have become vital to ongoing success. Electronic loyalty cards also provide an opportunity to engage in rich dialogue with customers and track their behaviour.'

However, certain points have to be taken into consideration by Costa Coffee regardingknowledge management tools. Since their income is relatively higher than most coffeebrewing companies, the time for implementation of their chosen knowledgemanagement tools would take longer than usual, aside from being expensive. But sincethe goal of Costa Coffee is towards a long-term dominance and stability in the brewingindustry, then the pursuit of these promotional campaigns will be beneficial for the      company in the long run.

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns.A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:

Porter's Generic Strategies

|Target Scope                           |Advantage                                     ||                                       |Low Cost                               |Product Uniqueness                     ||                                       |Cost Leadership                       |Differentiation                       ||Broad                                   |Strategy                               |Strategy                               ||(Industry Wide)                         |                                       |           ||                                       |Focus                                 |Focus           ||Narrow                                 |Strategy                               |Strategy                               ||(Market Segment)                       |(low cost)                             |(differentiation)                    |

Cost Leadership StrategyThis generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market.Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership.Firms that succeed in cost leadership often have the following internal strengths:    • Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.    • Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.    • High level of expertise in manufacturing process engineering.    • Efficient distribution channels.Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms following

a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share.

Differentiation StrategyA differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily.Firms that succeed in a differentiation strategy often have the following internal strengths:    • Access to leading scientific research.    • Highly skilled and creative product development team.    • Strong sales team with the ability to successfully communicate the perceived strengths of the product.    • Corporate reputation for quality and innovation.The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.

Focus StrategyThe focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing

directly.Becauseof their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist.Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well.Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other focusers may be able to carve out sub-segments that they can serve even better.

A Combination of Generic Strategies- Stuck in the Middle?These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy. By separating the strategies into different units having different policies and even different cultures, a corporation is less likely to become "stuck in the middle."However, thereexists a viewpoint that a single generic strategy is not always

best because within the same product customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price. There have been cases in which high quality producers faithfully followed a single strategy and then suffered greatly when another firm entered the market with a lower-quality product that better met the overall needs of the customers.

Generic Strategies and Industry ForcesThese generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces.

Generic Strategies and Industry Forces

|Industry         |Generic Strategies                                                   ||Force             |                                                                                 ||                 |Cost Leadership             |Differentiation                     |Focus                                       ||Entry             |Ability to cut price in     |Customer loyalty can discourage       |Focusing develops core competencies that can||Barriers         |retaliation deters         |potential entrants.               |act as an entry barrier.                     ||                 |potential entrants.         |                                       |       ||Buyer             |Ability to offer lower     |Large buyers have less power to       |Large buyers have less power to negotiate   ||Power             |price to powerful buyers.   |negotiate because of few close         |because of few alternatives.                 ||                 |                          |alternatives.                         |                                           |

|Supplier         |Better insulated from       |Better able to pass on supplier price |Suppliers have power because of low volumes,||Power             |powerful suppliers.         |increases to customers. |but a differentiation-focused firm is better||                 |                           |                                       |able to pass on supplier price increases.   ||Threat of         |Can use low price to defend|Customer's become attached to         |Specialized products & core competency       ||Substitutes       |against substitutes.       |differentiating attributes, reducing   |protect against substitutes.                 ||                 |                           |threat of substitutes.                 |       ||Rivalry           |Better able to compete on   |Brand loyalty to keep customers from   |Rivals cannot meet differentiation-focused   ||                 |price.                     |rivals.                               |customer needs.                             |

Recommended ReadingPorter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and CompetitorsCompetitive Strategy is the basis for much of modern business strategy. In this classic work, Michael Porter presents his five forces and generic strategies, then discusses how to recognize and act on market signals and how to forecast the evolution of industry structure. He then discusses competitive strategy for emerging, mature, declining, and fragmented industries. The last part of the book covers strategic decisions related to vertical integration, capacity expansion, and entry into an industry. The book concludes with an appendix on how to conduct an industry analysis.

Premier Inn Benchmarks its Brand Reputation in Social Media

Background

    • Premier Inn was aware, through industry research, that 70% of customers have either booked online or used online web sources in their selection of hotel.   A significant proportion of customers have used the comments of fellow consumers on social media sites to guide their choice.

Problem    • Premier Inn objectives were to benchmark its brand reputation in the social media and to ascertain the patterns of choice in hotel bookings by consumer contributors.   It also sought to identify the online sources where discussion was most intense in order to focus its online communications and marketing programs and to spot consumer "brand ambassadors" with whom to engage.

SWOT ANALYSIS

Strength:          -The company will be able to identify the sites that featured the brand most prominently and can set arrangements needed to these sites so that their brand will be close to the social market. They can also monitor the evaluation and with that the company will know if their communication programs are still aligned with the issues that consumers see significant.

Weakness:      -

Opportunities:      -The persistent positive and negative messaging was isolated to identify the criteria used in making a choiceof hotel and these criteria would be applied to the coverage to identify opportunities for Premier Inn to engage with the audience through press and promotional activities.

Threats:

Solution    • Due to the immense number of blogs, forums and other social media a two pronged strategy was developed by Durrants (supplier).

  1. An online social media monitoring dashboard was developed to conduct an initial automated review of coverage and to identify topics of discussion around which user posts were clustering.

  2. This work was supplemented by human analysis of coverage by Durrants to eliminate “noise” (filtering out the spurious and mundane topics) and apply human judgment to the topics that were substantive and significant.

CONCLUSION:    • By the use of these media monitoring and planning service they will be able to understand what the consumer says about the company it also enables them to engage, inspire and influence the conversation for the benefit of their company

RECOMMENDATION:    • Other companies may also use this kind of device in order for them to have fast, accurate and reliable information and to be backed up by exceptional consumer support. The service is most effective solution available offering a combination of automated monitoring, human analysis and authored reporting.

Costa CoffeeBy 555joe, Jan 2011 | 2 Pages (443 Words) | 645 Views|

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Whitbread is the UK’s largest hospitality company. It started life in the 18th century as a brewer but has redefined itself in the current century by focusing on budget hotels, pub-restaurants and restaurants, and coffee shops.

Its operates the biggest budget hotel chain in the UK, Premier Inn, and the vast majority of its pub-restaurants and restaurants (Beefeater, Brewers Fayre, Table Table and Taybarns) are co-located with the hotels.

Its Costa Coffee business is the UK's largest coffee shop chain.

TIMELINE

    • 1742: Samuel Whitbread starts brewing beer in London. The group grows into a national brand by 1868 and moves its operations to Chiswell Street in 1750 but ceases brewing there in 1976. The venue becomes a conference and banqueting centre

but is sold in 2005.    • 1889: Whitbread becomes a limited company    • 1948: Whitbread becomes a public company under Colonel Bill Whitbread.    • 1962: The group acquires the Thresher off-licence business.    • 1974: The first Beefeater restaurant opens.    • 1979: Whitbread opens its first Brewers Fayre pub-restaurant.    • 1982: Whitbread opens Pizza Hut in a joint venture with PepsiCo of the USA. PepsiCo spins off its restaurants in 1997 to create Tricon Global Restaurants which is renamed Yum! Brands in 2002.    • 1985: Whitbread signs a franchise agreement with Carlson Hospitality of the USA to developthe TGI Friday’s restaurant brand in the UK.    • 1987: Whitbread opens its first Travel Inn.    • 1990: The group buys Berni Inns from Grand Metropolitan.    • 1994: The group buys the Maredo chain of Argentinean steakhouses in Germany.    • 1995: Whitbread buys Scott’s Hotels for £183m from its Canadian parent, gaining the UK Marriott franchise along with 12 Marriott and four Courtyard by Marriott hotels to become the UK’s third largest hotel group after Forte and Thistle/Mount Charlotte. It rebrands much of its estate under the Marriott flag and its Country Club Hotels and Resorts division is renamed Whitbread Hotel Company.The group also buys David Lloyd Leisure (for £201m), Curzons fitness clubs and CB Costa Brothers (paying £12.3m for 41 owned and franchised coffee shops). Disposals include 137 pubs to Pubmaster for £12.3m and 70 freeholds to United Breweries for £6.9m.    • 1996: Whitbread buys two restaurant groups - the Pelican Group for £133m in June and BrightReasons for £46m in November. The deal nets it almost 300 restaurants.    • 1997: Whitbread sells its three-star unbranded hotels and other non-core businesses.    • 1999: The group buys Racquets and the Healthtrack Group

    • January 2000: Whitbread buys the Swallow Group for £578m in a deal that includes 38 Swallow hotels and 183 pubs which its sells in June to Enterprise Inns for £118m.

            In the last five years, the coffee brewing industry has

seen so much activity in terms of massive changes in the landscape of coffee brewing companies. These changes range from mergers and acquisitions to changingconsumer tastes and finally, to different branding strategies. These activities are expected to continue over the course of the next ten years.

Costa Coffee is one of the leading companies in UK's coffee brewing industry in terms of the volume of sales and profitability. It has also one of the widest connections among other UK coffee brewers made possible through a network of distributors and breweries.

The Costa Coffee brand already has a premium status in all its markets. It is practically the main profit provider of the company in the broad markets of UK. Also, because of its market strength, the Costa Coffee brand has already obtained significant profitable segments on its own. Costa Coffee uses the name of both the company and its mainstream coffee label, and this strategy has allowed the company to pursue an integrated marketing approach directly related to the company name.

However, the main questions remain. Does this strategy produce more effective results than the others in terms of gaining company name recognition? Do the adopted strategies allow differentiation in the culture of the corporation to influence consumer choices?

PEST ANALYSIS (United Kingdom)

Political Trends

The United Kingdom has experienced electoral and political

transitions and crises in the last 12 months.   There have been at least four political trends that have emanated from these political events. These are: (a) the cry for democracy and reforms; (b) increased popular and local-level assertiveness; (c)greater public accountability; (d) re-definition of the concepts of power and politics. Also, the forms of political economies have slowly shifted from a bipolar (big government-big business) to a tri-polar structure (authorities - private sector – civil society).

            The implementation of the Free Trade Area, or FTA, which laid out a comprehensive program of regional tariff reduction, will be continuously implemented in phases through the year 2008. Over the course of the next several years, the programs in tariff reductions were made broader. Efforts to eliminate non-tariff barriers and develop common product certification standards were initiated. In addition, the United Kingdom also was able to formulate framework agreements for the intra-regional liberalization of trade in services. Industrial complementation schemes meant to encourage intra-regional investment were also approved.

Economic Trends

Despite the adverse economic trends in the first half of the year, the United Kingdom as a whole experienced relatively robust economic growth. It is estimated that the United Kingdom, taken together, posted a better-than-expected GDP growth of 4.5% last year, slightly higher than the 4.1% growth that they achieved in 2002.

Many English provinces have also seen the risk-weighted capital

adequacy ratios of their banking systems improve due to government-sponsored bank recapitalization programs, continued progress in financial restructuring, and improvements in financial risk management.The capital adequacy ratio of commercial banks in these countries is now far higher than the 8% Basle norm.

Social/Cultural Trends

With the rise in the middle to upper-middle class households in certain provinces within the United Kingdom, there exists a strategy mismatch for not considering the potential for consumer market.

There have also been social and cultural trends that have been evident over the last 12 months. These include: (a) the irreversible rise of civil society among English provinces; (b) the rise of civil society blends perfectly with a tri-polar structure of political economy; (c) the increase in the roles of intellectuals; and (d) the beginning of a period of introspection.

Technological Trends

It is a common knowledge that the coffee brewing industry in the Untied Kingdom is still a relatively new industry and is still in its early stages of development. However, it has shown signs of rapid growth and it is being estimated that there will be more than a million consumers that will be encouraged within the year. And it is further being expected that within the next years the tremendous growth and technological advancements will continue in the coffee brewing world. Mobile commerce and multimedia terminals are just some of the technological advancements already being expected. Therefore, the continued growth and development will also make it imperative for localization to occur in the coffee brewing industry in the years

to come.

Costa Coffee SWOT Analysis

Strengths:

has products that boast of a very powerful retail. This includes a reputation for value of money, convenience and a wide variety of products has grown significantly over the years, and has experienced global expansion.main competence lies on the use of information technology (IT) to fully support its international logistics system. Therefore, Costa Coffee can see how their individual products perform within the United Kingdom, or even at stores at a glance. IT also supports the company’s efficient procurement. is able to deliver good customer care, as the limited amount of work would mean plenty of time to devote to customers.lead consultants have established a strong reputation within the market.can afford to change direction quickly if its management finds that the company’s marketing strategy is not effective.has little deficits and overheads. Therefore the company can offer good value to customers on a consistent basis.

Weaknesses:is one of UK's largest company in coffee brewing and but has a weak control of its empire, despite its IT advantages. This could lead to a decrease in productivity in some areas where they have the least control of.Since Costa Coffee sells products across many sectors, the company may lack the flexibility that some of its more focused competitors possess.operates globally, but its presence is located in only relatively few countries worldwide.Some of the company’s weaker branches lack market presence or reputation

Some of the company’s personnel stilllack the essential skills base in many areas.The company is still vulnerable to the temporary losses of its vital staff (e.g. being sick, leaving).The company’s cash flow is unreliable especially in the early stages of a new product development.

Opportunities:Taking over, merging, or forming strategic alliances with other coffee companies while focusing on strong markets like Europe or the Greater China Region. The branches of Costa Coffee operate only on trade in a relatively small number of countries all over the world. Thus, this would open the opportunities for future businesses in expanding various consumer markets, such as those in China and India. The opening of new locations and branches offer Costa Coffee the opportunities to exploit market development. This could lead to the diversification of the company’s branches from large super centers to local-based sites. Opportunities exist for Costa Coffee to continue with its current strategy of establishing large branches worldwide.is continuously expanding, with plenty of future opportunities to exploit for success.The local councils of Palm, Inc. are in the process of encouraging local businesses with work whenever possible.The competitors of Costa Coffee may be slow to adapt to new technologies especially the ones that it releases.

Threats:Being number one means that Costa Coffee is the target of competition, the company to beat, both locally and globally. Being a global retailer means that Costa Coffee might be exposed to politicalproblems in the countries where the company has operations.The production costs of most consumer products have the tendency to fall because of lower manufacturing costs.

Manufacturing costs fall because of outsourcing to low-cost regions around the globe. This phenomenon could lead to competition in prices, which in turn would result in the deflation of prices in various ranges. Intense price competition must definitely be considered a threat. The latest developments in information technology which could possibly change the markets might challenge the company’s ability to adapt to these changes A slight shift in focus of a large competitor might wipe out any market position that Costa Coffee has achieved over the years. This could force the company to specialize in rapid response but good value services to local businesses. This would put so much pressure on the company’s consultancy staff to keep informed with the latest changes in technology where possible.

PROJECT: Implementation of Knowledge Management Programs for Holistic Improvement of Costa Coffee

In this project, Costa Coffee needs to implement these specific knowledge management programs in order to improve their business operations.  

A. Coffee Costa Transaction Processing System

This knowledge management program will be tasked to collect and organize operational data of the company’s activities ( 1992). For example, a typical banking operation by Costa Coffee involves transferring $500 from the account of their clientto the company’s checking account. This would seem like a single operation to the company, but in reality this transaction consists of two steps: debiting the clients account by $500, and crediting the company’s checking account by $500. If the debit

operation succeeded and the credit did not, then the $500 would disappear.

The Costa Coffee Transaction processing system will combine these two operations and group them into a single transaction. This will be done through the production of copies of the data in question, and these copies are then made to run the operations on the copied data. When both commands have successfully completed, the changed data is written back to the system in a single operation. If one of the operations fails, the copied data is simply discarded, and an error is reported.

For many years transaction processing was the domain of knowledge management programs, especially since they these information systems were able to guarantee that any changes to the database would be completed. This worked well for most companies, and they could all even run on top of a database with a single client-server.

However, in recent years this model has also become more difficult to maintain. As the number of transactions grew in response to various online services, a single database proved to be very inefficient. Also, most online systems consist of a whole suite of programs operating together, as opposed to a strict client-server model where the single server could handle the transaction processing.Nevertheless, this type of knowledge management program will significantly bolster the business operations of Costa Coffee when successfully implemented.

-B. Costa Coffee Knowledge Management Support Systems

1) Decision Support System

This information system goes beyond one-way presentations and sharing of applications to enable a focused exchange of ideas over the Internet or an Intranet. Researches have proved

that electronic brainstorming is able to generate more and better ideas (Oblinger, 1994). This is brought about by the combination of parallel idea generation and the utilization of focus group discussions and tools for the organization of ideas. Therefore, decision-making is done with a higher degree of consensus and a higher likelihood of implementation success. Meetings within Costa Coffee would only take less than a fraction of time as expected. But more importantly, the employees walk away with the minutes of the meeting in hand, regardless of where they are.

Also, because the tools are web-based, the Costa Coffee management can choose the proper setting for the meetings, whether to place the clients in a conference room, set up a distributed meeting or a mixture of both. The management can decide whether the meeting should be done in real-time or whether the clients can participate and contribute their ideas only when their schedule allows them to. Either way, the Costa Coffee company can be assured of getting the same focus and productivity while at the same time having a significantlygreater flexibility in terms of scheduling.

2) Costa Coffee Executive Information System (EIS)

The Costa Coffee Executive Information System begins with the identification of problems. These include the gaps between the desired and actual states that cannot be easily closed easily because of the new knowledge that needs to be produced to support the decisions and actions needed to close them (1994). There are generally three (3) classes of such problems:

•         problems occurring in Costa Coffee business processes;

•         problems occurring in Costa Coffee knowledge processes; and

•         problems occurring in Costa Coffee Knowledge

management processes.

Problems occurring in the Costa Coffee business processes cannot be resolved through the use of Knowledge management solutions, but through knowledge processing solutions. The other two classes of problems, however, can be solved through the use of Costa Coffee Executive Information System services. This Information System will identify, formulate, and evaluate the knowledge processing and knowledge management problems

This is the most important service that the Costa Coffee EIS could provide.   Failure to solve a business process problem within Costa Coffee Company, for instance, may not be caused by a problem in the organization and structure of its organizational knowledge processes. Instead, it may be possibly caused by a failure in solving an extremely difficult business process problem, even though available knowledgeprocesses are working just fine.

There are certain instances, however, that it is not always very clear what the nature of the problem is, even if a knowledge processing problem exists. For example, the fact that the knowledge needed to support a particular decision is not there may be possibly caused by the fact that the knowledge exists, but is currently unavailable because of a poorly operating knowledge sharing process. Another possible explanation is that it could be caused by the fact that the process of the development of new knowledge claims is not open to most organizational participants.

The bottom line is the process on how the problem is formulated and diagnosed. Because of its experience in the development of the underlying conceptual foundations of Knowledge Management, the Costa Coffee Executive Information System will be able to identify, formulate and evaluate knowledge processing and knowledge management problems within the

company.

C. Costa Coffee Office Automation System

The Costa Coffee Office Automation System would provide the incorporation of important company documents of all types through the integration of images into the Automation System ( 1995). The Costa Coffee Office System would include applications such as word processing, database, and mail, all of which are able to access image documents. The storage of document images is made possible through the utilization of a variety of storage media such as microfilms and optical disks. An image access subsystem, on the otherhand, provides to each of the Costa Coffee Office Automation applications the uniform access to images stored on all of the media. The image access subsystem can then be used as a hardware controller to handle some of the complex events in the retrieval of images from the image storage devices. A relational database system must be used in order to organize the stored images so as to provide flexible access to the images and to isolate any effects of reconfiguration of the image storage system.

CONCLUSION

Costa Coffee has been able to remain one of UK's leading coffee brewing companies for more than a century now primarily because of the execution of the company’s branding and positioning strategies to perfection. Add to the mix the company’s dedication to high quality of service and the formula for success is at hand.

Moreover, the utilization of the appropriate knowledge management tools is necessary for their products to reach out to people even in different cultures.

However, certain points have to be taken into consideration by Costa Coffee regarding knowledge management tools. Since their income is relatively higher than most coffee brewing companies, the time for implementation of their chosen knowledge management tools would take longer than usual, aside from being expensive. But since the goal of Costa Coffee is towards a long-term dominance and stability in the brewing industry, then the pursuit of these promotional campaigns will be beneficial for the company in the long run.

Marketing Premier InnBy 04048388, Apr 2011 | 13 Pages (3,090 Words) | 493 Views|

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Introduction The British Chartered Institute of Marketing defines marketing as ‘The management process responsible for identifying, anticipating and satisfying costumers requirements profitably, to meet organisational objectives.’ Middleton V T C, at el, Marketing in Travel and Tourism, 2001: 23. The objective of this report is to demonstrate how Marketing strategies ought to attract customers, consequently increase the hotel’s income. Marketing is a crucial feature for hotels, making all the difference to overcome every challenge caused by the actual market competition. The increasing costumer’s requirements for satisfaction and tough competition will make every company to invest more and more in order to succeed and stand out.Whitbread is the name of the major company with integrated brands that include Premier Inn, Beefeater Grill, Brewers Fayre, Table Table, Taybarns and Costa Coffee.In this report Premier Inn is going to be the principal case study used, mainly because of its noticeable growth, using clever marketing strategies, such as introduction of different programmes and aiming its chain of hotels to be present at the most important cities around the world, increasing profitability and at the same time satisfying costumer’s needs. According to their website, Premier Inn is today the UK largest hotel brand with over than 40,000 rooms in more than 580 hotels. Moreover, they are determinate to increase those numbers.

As shown at the figure below (1.1), to achieve success and be ahead of competitors at the same sector, using customer satisfaction,a patterned cycle should be followed, integrating acknowledgement of costumer’s expectations, effectiveness by staff and confidence to assume that is the correct way.

Marketing ConceptThe achievement of corporate goals through meeting and exceeding customer needs and expectations better than the competition

Customer OrientationCorporate activities are focused upon providing customer satisfaction Integrated EffortAll staff accept the responsibility for creating customer satisfaction Goal AchievementThe belief that corporate goals can be achieved through customer satisfactionFigure 1.1 Source: Principle and Practices of Marketing, 2007: 5

Costumer needs and byer behaviourBecause of the hotel’s nature, a place to accommodate people of not only different backgrounds or beliefs but also temper, objectives and interests, the task of dealing with so many distinct people, needs to be executed in a way to excel. The location, possibly considered the main point to the hotel’s success in which accessibility is the main pull factor and in this case there are one Premier Inn hotel in the most important cities in the UK. In the same way, facilities that are placed in an appropriate way as to function accordingly for the good execution of services and fulfilment of costumer’s needs, with the objective of keeping current costumers and attracting new ones.As sourced from the company’s website, the company found a way to collect such information from their costumers and persuade loyalty. It is a scorecard called Wincard used tomeasure the company’s performance against customers, shareholders and community satisfaction resulted from the services the company executed.They also have a programme called ‘Good Together’, from

which they get feedback from guests related to service provided, as per example, how could they be more environmental friendly. This program resulted in a plan to make better usage of natural power, recycled materials, collecting rainwater whenever possible, etc.According to Premier Inn website, their objective is to become the most customer-focused organisation. They do not only want to be the UK largest hospitality company but also the largest in the world. Whitbread’s core values: (Source: website)1.   Genuine – caring about customers; 2.   Confident f– striving to be the best at what we do;3.   Committed – working hard for each other. Marketing purpose is to satisfy and accomplish consumer’s demands and necessities. The consumer behaviour studies, analyses how individuals, groups or organisations select, buy and use services, ideas or experiences to satisfy these demands and necessities. The characteristics of consumption have four main factors: cultural, social, personal and psychological. Cultural factors exercises the most wide and deep influence to the byer behaviour. It includes basic values, perception and preferences, that are learned from families and others important institutions. Marketing professionals are always looking to detect cultural changes that might suggest news ways to serve the consumer.Sub-cultures are ‘culture withincultures’ that have different values and lifestyle.   The members have similar social prestige based on occupation, salary, education amongst other characteristics.   People with different cultural, subcultural, and social features develop different preferences to products and trademarks. Therefore, marketing professionals ought to concentrate their strategies at specific necessities of specific groups. Certain people’s status could determine tastes and preferences.   Buyer’s decisions could also be determinate due to age, life cycle, economic situation, lifestyle, personality, and self-esteem. Young people necessities differ from older people, as well as the

needs of young couple differ from retired couple. Consumers with higher power expenditure have a different buying style from people with less money. The acknowledgment of the consumer’s lifestyle plays an important part when choosing a marketing segment, reaching targeted costumers with more precision.Psychological or motivational factors can also influence the buyer’s choices. They could expose their desires and necessities but act in another way, might not have noticed their most deep motivation but respond only to immediate influences.With the internet development, came this indirect selling, in which organisations lost that face-to-face communication, for that reason, market research is the solution.Understanding the power forces that interfere at buyer’s behaviour is a crucial part to adopt new strategies of marketing. There is a considerable variation in costumer’s age, expenditure power,level of education, tastes within others, so these features are making the marketing people to assume that this behaviour needs to be separated in equal consumption’s segmentation.According to Premier Inn website, their kept way to maintain loyal customers, and attract new ones, through efficient service execution will ensure their future growth. Another point they strongly consider is feedback. On their 2009/10 report, was mentioned: “Premier Inn guest satisfaction programme: Key to delivering the Whitbread vision of being the most customer-focused hospitality company in the world is ensuring that we accurately and robustly measure customer feedback. It is important that we always focus on what is important to the customer at both a brand and outlet level.” http://annualreport.whitbread.co.uk/our-businesses/our-customers.aspx.

Segmentation, targeting and positioningSegmentation:“Market segmentation consists of dividing a diverse market into a number of smaller, more similar, sub-markets. The objective is

to identify groups of customers with similar requirements so that they can be served effectively while being of a sufficient size for the product or service to be supplied effectively” Jobber, D, Principles and Practices of Marketing, 2007:275.According to David Jobber, marketing segmentation is particularly useful to identify opportunities and threats on the market, which is always in search of innovation. Companies that firstly identify deficiencies and are able to direct to the correct path will be creating new business segments, thereforeattracting those more affluent customers to their favour. A basic line a company could follow is whether to target at customers, which are more budget driven, or at those who would prefer a good quality service, independently of final price.While the tourist desires and necessities are becoming each day more difficult to satisfy, we occasionally note that costumers are looking for specific products, therefore the necessity of market segmentation arise.   This segmentation means to identify costumers with same behaviour and taste and it will be possible to identify also, geographical areas, demographic characteristics, expending power and lifestyle of those customers.At Premier Inn, customer’s feedback and thoughts are always taken very seriously, assuring that every necessary step has been taken to satisfy the guest but mostly importantly, every necessary procedure has been made to please a dissatisfied one. At their website, they suggest that they also monitor competitor’s offers to try learning from them.   After accessing and matching that information, they apply measures to improve their services even further.   Targeting Segmentation is an effort to maximise the target market of a company. Companies will adequate structure, objective and resources, after evaluation of the segmentation to follow.   After this evaluating of the market for all possible segments, it is time to choose which ones the company will target. As D Jobber (2007) suggested, there are four target-marketing strategies to choose: undifferentiated marketing, differentiated marketing,focused marketing, and customised marketing.

Undifferentiated marketing: it is a broader kind of marketing, with little knowledge by the company about the customer interest or necessity of a product; Differentiated marketing: more tailored marketing mix to target one specific segment;Examples of this segmentation are the airlines that promote their services to economy and first class passengers in opposite direction, when providing food, facilities inside the airplane and at the airports (waiting areas and boarding priority) according to the ticket price paid;Focused marketing: the companies target selected consumers with similar interests, therefore research, and expenditure within this segmentation is more specific, which Customised marketing: it is the personalised marketing, according to each costumer need and companies will tailor the service accordingly. Examples of the kind are lawyers, engineers, architects, and state agencies.The supposed segmentation applied at Premier Inn, within the above mentioned is Differentiated, as they call themselves ‘budget hotel’, directed to people with smaller expending power, although the quality of rooms and service provided give them a good reputation.

PositioningAs soon as the company has defined market targeting, then comes the product positioning, what means getting that the product have a clear, distinct and desired place on the market. “A positioning strategy takes a psychological approach to marketing. It focuses on getting customers or prospects to see your product in a favourablelight. The positioning goal you articulate for this kind of strategy is the position your product holds in the customer’s mind.” Hiam, A, Marketing for Dummies, 2004: 39.The position defined, then is time to define the ways of marketing communication towards the consumer, from which the detailed message about the product will persuade the buyer.Advantages upon competitors will involve some physical

attributes, service provided by personnel, accessibility, or means of getting the product, or service to the client and the image attraction, indeed that extra feature to the client’s final decision.The offer’s positioning is composed of a group of complexes perceptions, impressions and feelings, such as product performance, design, and style aggregated with customer service and even the company’s image. However, it worth identify what made the product attractive to the consumer in order to be ahead of companies at the same sector.The related hotel of this report has clearly defined that positioning around the UK, attracting guests using good rate prices, with efficient provision of service of a high standard. Furthermore, the strategy of being environmentally conscious is another advantage against competitors.

Marketing 4P’s  Figure 1.2 Source:NetMBA.comAs shown on the figure (1.2) above, the also called ‘Marketing Mix’, has the 4P’s as a set of tools to achieve objectives in the target market, in order to achieve success. The Marketing Mix refers to the four prior areas of the deciding process:1. Product2. Price3. Place4. PromotionAlthoughit seems very simple, every ‘P’ has its own characteristics and to reach the desired result, many phases of each one have to be properly analysed and taken into consideration. Product: according to the lessons, there are four levels to it: core product – the product bought is a printer, but what is need is a letter. Facilitating product – is the reception of a clinic or company, for example. Supporting product – different software for a computer and finally augmented product – it is the after buying support such as warranty, customer service, and maintenance of a product. This last one could define the company’s image e/or reputation on the market. Appropriate

accessibility such as opening hours, ways of communication (internet, telephone, and post) is of a great importance. The atmosphere that technically includes all senses: visual, oral, tactile, taste and hearing, will contribute to the buyers first impression. In addition, the customer participation, feedback and suggestions, would contribute to the company’s quality improvement. At the same time, costumer interaction with each other could build a positive or negative image of a product.Price: it is the only one that could be defined as reward, whereas the other three P’s are costs. The company decision about it, having its base on the fairness of the actual value of the related product, charging too much might repel possible buyers or charging too little could put the company into potential loss.Place: Distribution is about getting the products to the customer. Some examples ofdistribution decisions includes (Source: NetMBA- 2002/2010)• Distribution channels • Market coverage (inclusive, selective, or exclusive distribution)• Specific channel members• Inventory management• Warehousing• Distribution centres• Order processing• TransportationHere, the strategies co-relate with distribution’s channels through which companies make it possible that the product reaches the consumer. It can also be, the ways the products are transferred from where manufactured to the final selling location. Promotion: is the public relations and sales promotion. For instance, the ways in which the knowledge of the product is going to reach the buyer using TV, Radio, Ad’s, Websites, Posters, plus the ‘add on’s’ to make the product even more attractive, like reward cards, vouchers, reduction or samples.Premier Inn hotels clearly directed their products to all four P’s mentioned above. Despite of hotels having an intangible nature,

the product come in good execution of service, with good online reviews from people that actually stayed at the hotel, describing the staff as very caring and friendly. Again relating to those reviews, people found the prices of a great value for money, using the slogan: ‘Everything is premier but the price’. Place aspect is unarguably a strong feature of the hotel, with More than 75% of the UK population living within five miles of a Premier Inn (Whitbread website). Finally promotion, for which they use every possible channel of communication to their favour: website, TV and radio ads, posters at airports,and of course, mouth to mouth simply because of majority of customer being satisfied, recommending the accommodation to friends and family and whenever possible writing reviews about their experiences.“The new image was the subject of a major advertising campaign launched in January 2000. A total of £20 million above the line expenditure was committed over a four-year period as essential to support the growth plans and communicate a strong market leader image in the face of extensive activity by competitors” Middleton V T C, at el, Marketing in Travel and Tourism, 2001: 434. ConclusionBeing tourism a sector of a promising perspective of growth and hotels an important aspect of it, marketing is without any shadow of doubt a tool to conduct any company to the right direction.The hospitality sector is always in search of innovation to assure they provide a high standard of service, in order to survive against the fierce competition. Many companies demonstrate they recognise the importance of marketing strategies in order to constantly review, reformulate, and improve provision of their activities. As being the customer the true target of a company, the first good strategy is to have his expectations met. Many aspects will contribute to decision to firstly buying, then returning in future and later or simultaneously recommending to other potential customers with similar interests.

As mentioned before, consumer’s consciousness about environment, concerns about community and social issues is each day increasing, consequently playing an importantpart for customer’s decisions and companies following that criteria will have advantages towards competition.Many companies demonstrate how important the customer is and strive to maximum to keep him satisfied and loyal, being a font of recommendation of quality and good service received. To conclude, the result of success or failure of a company is determined by the choice of the most appropriate marketing strategy, segmentation, and service provided to customer.

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objectIVES

As a person with knowledge of knowledge management, the author has always brought up to his superiors the viability of strategy formation regarding the analysis of this topic and at times fails to understand the reasons or logic behind certain strategic implementations imposed on it.

By delving into this project paper, the author intends to have better insights into how knowledge management is thought up, formulated and then imparted down into the subsidiaries of the company. The author hopes to have an in-depth understanding as to how the knowledge management enables companies and organizations to compete effectively and profitably in this era of internationalization where competition is extremely intense.

In order to reinforce the learning objectives, two key focal issues were focused upon i.e. innovation and diversity. Innovation was discussed with regard to knowledge management where it was renowned for its developmental capabilities to constantly innovate. Diversity came under strategic thinking and formation as the author considered the diverse culture, political climate, economic surroundings, social environment, technological settings, government policies and legal systems in order to better understand the issues being discussed.

QUESTION 3

The Transformation of TGI FridaysDavid McCaskey Lecturer Colchester Institute Ruth Hutchison Director Human Resources TGI Fridays

At the beginning of the New Millennium Whitbread PLC embarked on a radical programme of corporate reform; in late 2000, it divested its core brewing business to Belgian brewer

Interbrew; in May 2001, it sold its pubs to Morgan Grenfell Private Equity for £1.6bn thus, it shed the businesses of brewing and retailing beer which had sustained it for over 250 years. Whitbread declared that its future lay in leisure, food and hotels.

Since then, significant change has been wrought in its hotels division with the £536.2ml acquisition of Premier Lodge, now successfully integrated as Premier Travel Inn. Evidence of this may be found in Whitbread results FY to 3 March 2005 released 26.04.05 where an excellent ROCE was recorded alongside a 47% increase in operating profit. The disposal of its 11 Marriott Courtyard and remaining Swallow hotels was completed. A fundamental change was announced by CEO Alan Parker when he stated “In Marriott, where we have been unable to generate successful returns, we made the decision to crystallise the value for shareholders.” Whitbread expect to realise £1.3bn through the sale of Marriott Hotels and other assets that are not core to their strategy.

Their sights are now set on ambitious and fast-paced growth with plans to open at 1,000 new sites by 2010; currently employing 40,000, this could rise to over 60,000 by the end of the decade. For the TGI Friday brand (which Whitbread franchise from Carlson Restaurants Worldwide) the mission is to double its number of guests to 12 million p.a. and to treble its profits to well over £20 million over the next three years. This to be achieved through maximising covers on its current operations and to double its outlets; the new outlets to be a mix of current ‘Big Box’ 250 cover units along with a newly developed scaled-down version, ‘The Manhattan’, a new footprint model, with 150 covers. Unit size is dependent on such factors as drive times (Isochrones) and finding geodemographic clusters which match its three main current customer profiles or segments as established through research. (For a full explanation of this process, please see ‘Drinking by Number’ 1998)

TGI have to convince Whitbread main board of the financial feasibility of their plans and to demonstrate year on year growth

in PBIT achieved through covers growth, improved value for money offerings to the customer, via menu reengineering and cost reduction and thus securing the necessary capital to fuel their growth and to ensure their presence in the parent company’s drive to become a high performance, high commitment company.

TGI’s revised brand mission is:-

To be THE entertaining restaurant experience in every major UK town and city

Based on the Promise – Escape the Ordinary

All strategies must demonstrate compliance with Whitbread WINCARD measures and fit with The Whitbread Way.

The aim of this paper is to consider the brand audit and research from which this growth proposal has emerged and to analyse its implementation through examination and evaluation of the proposed 5 strategic thrusts –

1. Improve operational efficiency and introduce cost reduction methods.

2. Share the magic, simplify and rejuvenate the menu including lighter options, increase the impact of consumer communications.

3. Improve the quality of the Big Box estate, open new sites, review weakest performing stores.

4. Pilot and roll out project Manhattan, identify and secure sites for these as well ‘Big Box’ outlets to meet our objective of presence in every major UK town and city.

5. Develop people resources to grow. For example to meet this growth, we will need 250 more managers we need a recruitment and training strategy to foster their talent and ensure that this is recognised and rewarded. Over the years, TGIs have always

achieved high ratings in Best Employer and Best Place to Work national surveys, essential we maintain this esprit de corps which lends so much to our customer’s experience.

In developing its corporate strategy, Whitbread have often sought external advisers to help explain or advance a philosophy to underpin a particular approach. E.g. Harvard Guru of Guarantees, Professor Christopher Hart was called in to advise on and assist with their path-breaking strategy of offering 100% satisfaction guarantees at Travel Inn. McCaskey and Symes (2003). Throughout this period of radical change or revolution, the whole of Whitbread’s management cadre has been inculcated into the approach propounded by Harvard Professors Michael Beer and Russell A. Eisenstat in ‘How to Have an Honest Conversation About Your Business Strategy’ who suggest that,

Despite widespread rhetoric about the need for organisational agility, an astonishing number of businesses stay stuck in neutral, when they need to implement a new strategy.

They are convinced that the most powerful way for leaders to realign their organisation is to publicly confront the unvarnished truth about the barriers blocking strategic implementation. Typically, this involves looking at the roles and the decision rights of various parts of the business as well as changing the behaviour of people at every

level...such fundamental issues are difficult and likely to be painful but, pain contributes to the species survival by triggering learning and adaptation.

They conclude: Surprisingly, few corporate leaders make a serious attempt to engage their organisation in honest conversations about the strategic and organisational issues they face. As a consequence, they forfeit the benefits of transparency...the kind of frank public dialogue is needed to build the collective commitment that drives the rapid change, improved performance, and organisational vitality.

There can be no doubt that by adopting the approach advocated here, that Whitbread has and will continue to reap the rewards suggested both at corporate level and in their strategic business units. The full paper will analyse and evaluate the effect on one such business, TGI Fridays.

References

McCaskey D. and Symes S. ( 2003) ‘Travel Inn: Everything You Want for a Good Nights Sleep – 100% Satisfaction Guaranteed or Your Money Back’ originally CHME paper presented at Sheffield Hallam April 2003 the re-edited version appeared in the International Journal of Contemporary Hospitality Management September 2003 Vol.16 No.3 Emerald Publishing pp166-174

Whitbread PLC Results FY 3 March 2005 available on www.whitbread.co.uk visited 26.4.05.

‘Drinking by Number’ New Scientist (April 1998)

Beer M. and Eisenstat R.A.(2004) ‘How to Have an Honest Conversation About Your Business Strategy’ Harvard Business Review On Point Collection, February 2004.