Environmental Scan: The Global Beer Industry
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Haven Harris (Group Leader) Brad Hillwig (Asst. Leader) Prakruthi Naik Atti Bhargava BA 631: Business Environment Analysis December 8, 2008
Table of Contents
Introduction…………………………………………………………………………………………………1 Growth Opportunities………………………………………………………………………………….3 Competition………………………………………………………………………………………………...9 Government Regulations……………………………………………………………………………..10 Social & Cultural Issues………………………………………………………………………………..19 Conclusion/Planning premise………………………………………………………….…………..21 Bibliography……………………………………………………………………………………….……….22
Introduction We should take a moment to recognize that the modern Beer Industry was built upon a solid foundation of industry integrity, corporate responsibility, a strong work ethic, and great foresight of industry leaders. Some of the accomplishments of the past years are clear extensions of practices and principles established in the 1930's. While the brewers of the 1930's could not have imagined the global reach of brewers in the 21st century, their values and commitment to the future were critical to the industry's success. Those qualities remain alive and strong today in the Beer Industry and in thousands of men and women working in Beer companies throughout the world. The beverage industry is extremely competitive, with private labels greatly influencing the environment. A few global “beverage giants” produce many brands, but those brands fall into self‐contained categories as well. Thus, the “beverage” market is not really one market; it is a collection of markets with many different types of products, processes and requirements. The beverage market includes several different products that can be grouped into two main categories: alcoholic (beer, wine, spirits) and non‐alcoholic (carbonated soft drinks, juice, water, sports drinks, etc.). Each category, and often each type, of beverage have its unique issues and needs. The beer industry is the biggest sector of the Alcoholic Beverage industry, with global annual sales exceeding $325 billion USD. However, market saturation has been reached in much of the developed world, which is limiting the industry’s growth potential and forcing many companies to focus on emerging markets. With so few options for growth, companies that operate in the industry face considerable competitive pressures. Consequently, they must streamline their processes in order to drive real, profitable growth – all while ensuring that they effectively meet the demands of both customers and consumers. Over the past years, there prevailed a significant litigation that advanced the industry’s self regulation of advertising and marketing practices. This enhanced the efforts to further reduce illegal underage drinking and drunk driving, extend alliances in the broader alcohol beverage industry, advocate coherent and sensible positions on important regulatory projects, and strengthened relationships with regulators, lawmakers, and law enforcement officials. In this paper we have highlighted a number of the significant achievements on the legislative, legal, and regulatory fronts. This paper also provides insights on the market trends of the beer industry and on the issues relevant primarily to beer producers or distributors. It outlines the specific challenges facing the companies operating in this arena, such as ever‐changing consumer tastes, a growing emphasis on product safety, and the increasing power of global retailers. It also explores opportunities for process improvement and cites specific solutions that can empower beer companies to meet industry challenges, both today and tomorrow, and drive towards profitability and growth. Environmental Scan
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Growth Opportunities The saturation of traditionally thriving beer markets such as North America and Europe has driven the consolidation of the industry. Major brewers have sought growth through strategic mergers and acquisitions, which has reorganized the industry and strengthened the market positions of the industry’s largest brewers. Expansion into key emerging markets has become a strategic priority for leading firms, who are now competing for market share in several important regions of the world (Hutter, pg. 1). When making strategic growth decisions firms must evaluate a new market based upon specific criteria, such as: • Economics & Demographics: o
o o o o
•
Consumer Tastes & Market Trends o o o o
•
Beverage Preferences: Do current beverage preferences pose any barrier to market entry? Health & Social Issues: Are there any health or social issues that may pose a risk to expansion into this area? Competition/Opportunity: What firms already operate in this area? What is the current makeup of the beverage marketplace? How much market share can we capture? Limiting Factors: What are the logistical or operational challenges for doing business in this area? How will our supply/distribution chains function in this region?
Governmental & Cultural Factors o o o o
•
Population/Consumer base: What is the size of the population? What is the demographic makeup of the population? What are the growth trends? Is there an emerging middle class? How is the population disbursed? Employment: Are there available jobs? What is per‐capita income? Is the job market growing? Infrastructure: Does the region have established infrastructure such as roads, utilities, energy, communications, agriculture, private sector? Business climate: Is there an established local beer industry? Is there a free‐market economy? Taxes: Is there a stable tax structure? Is it Pro or anti‐business?
Government: How much influence does the government have on the private sector? Is the government stable and ethical? What is the government’s attitude toward alcohol? Government Regulations: Has the government imposed any restraints to trade or favored certain industries? Cultural Issues & Factors: Is there any Religious or social opposition to alcohol? Societal & Ethical Norms: Is leisure time important to the culture? Is drinking a social norm? Is alcohol viewed as ethically acceptable by the culture?
Environmental Factors & Growth Strategy o o o
Agricultural Opportunity: What is the climate? Can we locally grow our ingredients? Costs of Importing/Exporting: What type of operation will the logistics of the environment permit? Dynamics of the Local Market: Are there local brewers that we can acquire or merge with? Do they have favorable market share? Do they have positive partnerships with key suppliers and distributors?
With these guidelines in mind, we have identified several emerging markets that have significant growth potential for large‐scale brewers. The following pages provide a brief analysis of the following regions: China, India, South Africa, Russia and Latin America.
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China In 2003 China eclipsed the US as the world’s largest beer market. With the world’s highest population, an exploding private sector and burgeoning urban centers that have low unemployment levels China is seen as the world’s next big consumer market. The local beer industry is firmly established and contains approximately 300 brewers (Slocum, et al. p. 35), primarily supplying the urban coastal areas. Many multinational firms have invested heavily in the Chinese beer market and although there is a threat of over‐saturation, relatively low per‐ capita consumption levels indicate that this market has room to grow. Consider the following analysis: Strengths • • •
Population: 1.3 billion (world’s highest) (CIA World Factbook) Employment: Approximately 800 million person workforce with 4% urban unemployment. Urban migration continues to be significant. Massive emerging middle class. Established Beer Industry: World’s largest beer market with steady growth in recent years. Strong consumer base with a regional network of suppliers and distributors. Many local brands with favorable market share. Low per‐capita consumption.
Weaknesses • •
High Barriers to Market Entry: Many firms competing largely on price, which tends to favor local brewers with established supply/distribution relationships. Challenging Logistics: Regionalism creates many logistical supply and distribution challenges. Inconsistent infrastructure, complex regional government regulations and communications issues make doing business in multiple regions challenging. This fragmented, regional market makes reaching economies of scale difficult and as a result multinational firms have trouble adequately diffusing fixed costs and attaining desirable profit margins.
Opportunities • •
Continued Growth Potential: Low per‐capita consumption is a sign that the market has plenty of room to grow & high population means the market could grow significantly. Acquisition Opportunities: Firms must carefully craft their growth strategy. A lot of local brewers means that the environment may lend itself to an acquisition strategy, multinationals would likely benefit from acquiring a local brewer with favorable market share and strong supply and distribution chain alliances.
Threats •
Government Control & Political Instability: China is a Communist State and, as such, can exercise complex regulatory controls favoring certain industries. Instability is always simmering beneath the surface and fast growth often means significant growing pains.
Final Analysis Tremendous long‐term growth potential outweighs short term challenges. Environment seems to favor a carefully planned acquisition strategy. The target firm should have reasonable market share, favorable brand awareness and strong supply and distribution chain relationships. Strict operational efficiency must be maintained to mitigate the costs and risks of expansion.
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India Like China, India is one of the world’s fastest growing consumer markets. A rapidly growing population, an emerging middle class with rising per‐capita incomes and blossoming urban centers make India a powerful emerging market. India has an established local beer industry and, although per‐capita consumption is low, as the country becomes more westernized younger generations have the potential to be high‐volume consumers. However, regionalism, political unrest and the potential for growing pains temper this market’s attraction. Strengths • •
•
Population: 1.1 billion (CIA World Factbook) Emerging Middle Class: India has a healthy, growing urban workforce with 7.2% unemployment. India’s emerging middle class is relatively young, 63% of the country’s population is between the ages of 15‐64 (CIA World Factbook) and a flurry of foreign investment across all sectors has broadened and westernized the tastes of this young population. Steady growth in beer market: India has an active domestic brewing industry that includes many local firms and a growing increase in foreign investment. Although per‐capita beer consumption is relatively low, beer sales in India are forecast to grow at a compound annual growth rate of 17.2% until 2011 (mindbranch.com).
Weaknesses •
•
Market Saturation: Although market saturation is only a marginal concern, it is worth noting that a rush of foreign investment, combined with a healthy domestic brewing industry, makes India a highly competitive emerging market. Not every firm that expands into India will survive and the long‐run forecast figures to see this region experience its own period of consolidation once the rush of investment has waned. Regional and logistical challenges: Like China, India is a highly regional market containing significant disparities such as regulatory issues, prices and consumer tastes. This regionalism creates a number of logistical challenges for a volume producer attempting to reach economies of scale and establish a country‐wide brand. Furthermore, regionalism, combined with inconsistent infrastructure and urban/rural socio‐economic disparities, has the potential to make establishing an extensive supply and distribution chain a capital‐intensive undertaking.
Opportunities • •
Continued Growth Potential: Despite the logistical challenges, India’s young emerging middle class offers tremendous upside growth potential in urban areas Favorable agricultural climate & network: India’s climate is favorable for the harvesting of hops and barley, the primary natural ingredients in beer. There exists potential to establish supply relationships with local commodity producers.
Threats • •
Political instability: The recent terror attacks in Mumbai have served as a reminder that political unrest is a very real threat in India. An escalating conflict or the persistent threat of terror could have significant effects on India’s development and consumer potential. Socio‐economic growing pains: The disparity between India’s thriving urban centers and impoverished rural areas creates the potential for civil unrest. India’s rapid growth will require an astute government capable of keeping peace while maintaining a free market system and an educated, employed population.
Final Analysis: Despite its challenges, India’s young emerging middle class and favorable agricultural climate make this an attractive expansion opportunity. We recommend an acquisition strategy. Environmental Scan
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South Africa South Africa is one of the fastest growing beer markets in the world. This region has an active domestic brewing industry and a population of high per‐capita beer consumers. Favorable agricultural conditions exist for harvesting beer ingredients and consumer tastes are shifting from sorghum‐based beer toward Western‐style products creating growth opportunities for light beer and specialty brewers. However, SABMiller, one of the largest brewers in the world has roots in South Africa and has a strong market position there. Opportunity still exists in this market for brewers keen on pursuing a market thirsty for western imports. Strengths •
• •
Growing Beer Market: South Africa has a relatively stable economy and is one of the fastest growing beer markets in the world. Consumers are enthusiastic beer drinkers with per‐capita consumption at approximately 60 liters, up significantly from recent years. Changing Consumer Tastes: Consumers in South Africa have begun enjoying western‐style beer as opposed to a traditional sorghum‐based product. Favorable Climate: Some beer ingredients are harvested locally in South Africa and there is an established local network of farmers; therefore, there are opportunities to establish comprehensive production chains in this region.
Weaknesses •
•
Inconsistent Infrastructure: Outdated infrastructure has constrained economic growth in recent years and in 2007 South Africa experienced an electricity shortage because of its main supplier had insufficient infrastructure (CIA World Factbook). Brewers expanding into this area may be constrained by poor infrastructure, particularly as they attempt to establish nationwide supply and distribution networks SABMiller’s Market Presence: SABMiller has roots in South Africa and is relatively entrenched in the beer market. This deep competition may pose short‐run barriers to expansion.
Opportunities •
Favorable Long‐run Potential: South Africa’s high per‐capita consumption rates combined with its changing consumer tastes creates a market with favorable long‐run potential. In the short‐ run this market seems to lend itself to an import strategy, but long‐run opportunity exists for firms keen on establishing production centers.
Threats •
•
Health Issues: South Africa has experienced significant health issues, particularly regarding the AIDS epidemic, which has shortened life expectancies, increased infant mortality rates and slower population growth (CIA World Factbook). Any firm that seeks to introduce a product containing alcohol should also expect to enact a program of Corporate Social Responsibility in order to build relationships with local communities and governments. Socio‐economic issues: As with many emerging markets, South Africa has a significant socio‐ economic disparity between growing urban areas and impoverished rural regions. Therefore, firms must be aware that civil unrest is possible and long‐run growth could be impacted by such disruption.
Final Analysis: South Africa’s beer market provides an attractive investment opportunity for a multinational firm looking to capitalize on this region’s high per‐capita consumption and changing, westernized, tastes. We recommend an import strategy in the short‐run to establish brand loyalty and cultivate a local market amid heavy domestic competition. In the long‐run, favorable agricultural conditions offer production potential, in spite of local infrastructure risks. Environmental Scan
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Other Growth Areas: Russia & Latin America The early 2000’s saw booming beer consumption rates in Russia which spurred a flurry of foreign investment, but a subsequent slowdown and strict government regulations have driven this market’s costs up. Russia’s long‐standing preferences for spirits have waned and beer is now more ingrained in the culture, but brewers must now find opportunity in the higher‐ margin specialty markets. Latin America is an active beer market with high growth potential, largely driven by growth in key demographics, a favorable farming climate, Brazil’s developing economy and Mexico’s high levels of beer consumption.
Future Growth Strategies and Considerations Consolidation: Flattened growth in developed markets (US and Europe) will continue causing industry leaders to move into high‐growth emerging markets. Industry‐wide consolidation will likely continue as competition plays out in emerging markets. Once new growth areas are identified a flurry of investment will occur, followed by a period of consolidation and then relatively consistent, but lower, annual growth rates. This will likely be the pattern in key emerging markets such as China, India and South Africa. Mergers & Acquisitions: The chief strategy for growth in recent years has been through mergers and acquisitions, this will likely continue as the beer industry globalizes and firms compete to establish market share in high growth areas. The Price of Ingredients: A surge in commodity costs has inflated the cost of brewing and significantly impacted the craft brewing sector of the industry. Large companies have a distinct advantage because of their larger buying power; however increased brewing costs will have an impact on the market price of beer and require increased operational efficiency and execution. Firms that have strong strategic partnerships with commodity producers will have a substantial advantage in the event of any commodity shortage. Micro‐breweries will struggle the most with an unstable commodities market Consumer Demands: Varied consumer tastes will require firms to carry a more diversified portfolio of products. As the industry consolidates firms will be challenged to react quickly to changing consumer tastes. Reaction time will be important and firms that are able to accurately anticipate consumer tastes will have distinct advantages. Maintaining a broad portfolio of products will put pressure on operational costs and further stress the need for efficiency and execution (SABMiller Annual Report, 2007). Strong Branding & Marketing: As developed markets are fragmented by varied consumer tastes and emerging markets evolve effective branding and marketing will be important to facilitating brand loyalty and developing a customer base. Environmental Scan
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Supporting Data Figure 1.1 shows that China surpassed the US as the world’s larges beer market in 2003. However, as Figure 1.2 demonstrates, the country has relatively low per‐capita consumption rates suggesting that China’s growth has been driven by its massive population. Whether this unique dynamic limits growth or represents significant room for growth will be a key factor in China’s future strength as a beer market. Figure 1.3 demonstrates recent general population growth trends for the key growth demographic of 15‐34 year‐olds. Asia and Latin America have shown significant growth while the US and Western Europe have demonstrated flat or negative growth rates. This is further evidence that the key growth opportunities in the brewing industry are primarily in emerging markets, rather than traditional established markets Figure 1.1
Seema International, 2005
Figure 1.3
Figure 1.2
Seema International, 2005
Competition Beer was part of the blue collar social fabric for generations in developed countries but in recent times it has seen its market share reduce by the introduction of other beverages such as wine and distilled spirits. However beer is gaining popularity in third world countries such as China, India, Russia and Latin America where the middle class is open and willing to experiment with new products is turning to beer as a form of recreation. Beer that was popular in markets like United State and Europe is reaching a point of decline as the use of beer has reduced from 56% in 1999 to 53% in 2004 as more and more people are turning to drinking other beverages. In United States the change started with the baby boomer generation who for years drank beer but are now moving towards wine due to published studies regarding the health benefits of wine and the baby boomers desire to maintain a healthy lifestyle. The generations after the baby boomers have further increased their preference beyond beer and wine by choosing drinks such as distilled spirits. The depth of the dilemma was highlighted in a recent survey by Morgan Stanley that found spirits is the most popular drink of choice among 21‐to‐27‐year‐olds as these young adults are getting bored with beer. Among that group, 40% said spirits were their favorite drink compared to less than 30% in 2003. This is the young generation that thinks beer has lost its “sexiness” and they like the taste, quality and sophistication of spirits. As the markets in the US and UK are becoming stagnant the beer companies have started moving to countries that are developing such as China, India, Russia, and South Africa. In these countries the beer market has seen a big jump due to increasing middle class. To benefit from increasing middle class the beer industry has formed mergers with local companies. Even though they have formed mergers they still face competition from big local brewers, such as in India when SAB Miller enters the market they would face competition form Kingfisher beer and Taj Mahal Beer who have big market share in India and locals might prefer their taste to beer that is imported. Country
YTD Oct YTD Oct Volume Percent 2005 2006 Change Change
Canada Mexico United Kingdom
2,566 2,759 194 10,216 11,725 1,509
7.5% 14.8%
859
841
‐18
‐2.1%
Ireland
707
678
‐29
‐4.1%
Netherlands
5,013
5,878
865
17.3%
Germany
1,051
1,047
‐4
‐0.4%
Figure 1.5 US beverage preferences based upon income Total Imports 21,685 24,386 2,701 12.5% Figure 1.4: Represents the competitive growth of imports. All Other
1,274
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1,457
184
14.4%
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Government Regulations and Issues The brewing industry is subject to extensive government regulations at both the federal and state levels, as well as regulation by a variety of local bodies. Some of the regulations imposed at the federal and state level involve production, distribution, labeling, advertising, trade and pricing practices, credit, container characteristics, and alcoholic content. Federal, state and local governmental entities also levy various taxes, license fees, and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Specific alcohol taxation (as opposed to more general sales taxes) is primarily a federal and state right although some states permit some additional local taxation. The brewing industry must also comply with numerous federal, state, and local environmental protection laws. Federal Beer Regulations Until recently, nearly all federal regulations involving alcohol were issued by the Treasury Department Bureau of Alcohol, Tobacco, and Firearms (BATF), established by the Federal Alcohol Administration Act of 1935 and the 1968 Gun Control Act. However, in 2002, under the Homeland Security Act, the Bureau was divided. The part remaining in the Department of the Treasury was renamed the Alcohol and Tobacco Tax and Trade Bureau (TTB). A new Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) was formed in the Department of Justice. The TTB is responsible for administering and regulating the operations of distilleries, wineries, and breweries, as well as importers and wholesalers in the industry. Some of the specific functions TTB is responsible for as related to beer brewing include: Brewery Application Approval To qualify as a brewer one must complete and submit to TTB the appropriate forms along with any other required documentation. TTB will usually complete screening and processing within sixty days of receipt of a completed Brewers Notice packet. Excise Tax Collection U.S. Government involvement in the beer industry also includes taxation. The current federal excise tax on beer, in effect since January 1, 1991, is $18 per barrel for 31 gallons. However, a reduced tax rate applies, at a rate of $7 per barrel, to the first 60,000 barrels of beer removed for consumption or sale by brewing companies that do not produce more than 2,000,000 barrels of beer per calendar year. The federal excise tax regulations also include other rules, including removals without tax payment and inter‐brewery purchases. Labeling and Advertising Approval The TTB implements and enforces a broad range of statutory and compliance provisions to ensure that alcohol products are created, labeled, and advertised in accordance with Federal laws and regulations. Brewers must follow the labeling and advertising requirements found at 27 (Code of Federal Regulations) CFR Part 7, Labeling and Advertising of Malt Beverages and 27 CFR Part 16, Alcoholic Beverage Health Warning Statement. Home brewing Any adult may produce beer, without payment of tax, for personal or family use and not for sale. An adult is any individual who is 18 years of age or older. If the locality in which the household is located requires a greater minimum age for the sale of beer to individuals, the
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adult shall be that age before commencing the production of beer. This exemption does not authorize the production of beer for use contrary to state or local law.
State Beer Regulations In addition to meeting federal regulations, individuals and businesses must comply with state regulations too. These state regulations, which vary widely from state to state, may be more restrictive than federal regulations and must be met in addition to federal requirements unless the federal law pre‐empts the state law wherein they desire to do business. Alcoholic Beverage Control Boards Following national prohibition, the 21st Amendment to the constitution provides states with broad powers and authority to regulate the production, importation, distribution, retail sale, and consumption of alcohol beverages inside their borders. (This is in addition to Federal requirements.) Each state has created its own unique system of alcohol beverage control. There are two general classifications‐open and control states. Open States The larger group (now referred to as "license" states) license all aspects of private production, distribution, and sales. Control States The smaller group (now referred to as "monopoly" states) opted to become wholesalers and retailers themselves for wine and spirits. Licenses On the state and local level, the license process varies widely. In some areas, the state is the lead agency for all licenses (manufacturer's and retailer's licenses), and local approval is not necessary except to confirm proper zoning. Retailer Licenses Some states may control the number and type of beer retailers by issuing retail licenses and by determining to which retailer's credit can be extended. Some also determine permissible locations for the sale of beer for example: on‐premise, in restaurants and bars, off‐premise, in grocery stores, gas stations, liquor stores, and drug stores. Taxation Every state imposes an excise tax on beer that is levied as a dollar amount on a specified volume (in liquid measure‐ex., gallons). On January 1, 2008, state excise taxes ranged from $0.02 per gallon in Wyoming to $1.07 per gallon in Alaska. Container Deposit Laws Certain states, including California, Connecticut, Delaware, Iowa, Maine, Massachusetts, Michigan, New York, Oregon, and Vermont, and a small number of local jurisdictions, have adopted beverage packaging laws and regulations that require deposits on beverage containers.
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Local Beer Regulations Many states permit local jurisdictions to regulate and separately tax beer sales, and even to prohibit the sale of beer within their jurisdiction. Jurisdictions in which the sale of alcoholic beverages is prohibited are called "dry" states. Over half of all states have dry cities or counties, and about 4.3% of the U.S. population lives in dry counties. Many cities and counties that are not dry regulate operations and/or impose taxes on the sale of beer. In addition to the federal and state excise taxes, some states have local taxes, on‐premise taxes, wholesale taxes, and private club taxes. Georgia, Illinois, Louisiana, Maryland, New York, and Ohio have cities or counties that impose local beer taxes. As might be expected, taxes can potentially represent the largest single‐cost item in a glass of beer.
Self‐Regulation An important element of public policy is developing standards regarding how the private sector communicates information about their products. HOW DOES SELF‐REGULATION WORK? Self‐regulation is the process whereby industry actively participates in and is responsible for its own regulation. Ideally, advertising is meant to inform the public so that they can be aware of products and make informed choices among different products or brands. Advertising is, of course, also of benefit to businesses in assisting them to sell their products, which in most countries is a commercial right. While this process varies widely from country to country, the foundation for advertising self‐regulation is based on the principles embodied in the International Code of Advertising, issued by the International Chamber of Commerce. The Code states in its introduction that advertising should be legal, decent, honest and truthful, prepared with a sense of social responsibility to the consumer and society and with proper respect for the rules of fair competition. This is accomplished through rules and principles of best practice to which advertisers and the advertising industry agree to be bound. The basic elements of self‐regulation are two‐fold: • A code of practice or set of guiding principles governing the content of advertisements. • A process for the establishment, review, and application of the code or principles. Impartiality is seen to be the key to an effective code and public trust in it. The European Advertising Standards Alliance (EASA) recommends that the body responsible for the practical application of the code should ideally be independent of the industry body responsible for its initial establishment and subsequent review. In reality, there may be several self‐regulatory bodies to which a given alcohol beverage company must adhere regarding commercial communications. For example, in Australia there is a code that covers advertising generally, and another code for alcohol which is set separately by the Australian Association of National Advertisers, the Distilled Spirits Industry Council of Australia and the Australian Associated Brewers. Environmental Scan
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In addition to self‐regulatory bodies, most of the major alcohol beverage companies have their own internal advertising codes. Self‐regulation often exists in tandem with a broad legal framework, and, indeed, according to European Advertising Standards Alliance (EASA), this is the preferred way. In many cases, these laws address such general topics as misleading advertising, unfair competition and consumer issues, but less restrictive countries tend not to address product specific issues such as alcohol. In more restrictive countries, such as France, statutory authorities and national legislation control advertising content and placement. POLICY OVERVIEW Policies regarding advertising restrictions are divided into six categories. The category assigned to each country was derived by reviewing the restrictions that were in place regarding alcohol advertising on television, radio, cinema, print media, outdoors, and sponsorship. The policy categories are (1) self‐regulation, (2) statutory legislation, (3) a combination [of self‐regulation and statutory legislation], (4) [advertising of alcohol] is banned, (5) some controls and (6) no controls.‐ Statutory Combination Banned Some Controls No Controls The alcohol beverage industry recognizes that the advertising and promotion of beverage alcohol may need more careful regulation than that for some other products. In addition, individual companies often have their own codes of conduct. The self‐regulatory codes that industry organizations sponsor generally address placement and content of advertisements and in many cases, like the Netherlands and South Africa, packaging. Other topics covered by the codes include issues concerned with minors, abuse of product strength, social/sexual/medical aspects, physical performance, and driving under the influence. Table 2 on the following page provides information on self‐regulation and rules relating to alcohol.
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EEFFECTIVENESS OF SELF‐REGULATION The effectiveness of self‐regulation on alcohol advertising has rarely been studied systematically, although the issue is often hotly debated in alcohol policy circles. Apparently, the objective of such evaluations is to determine whether the alcohol beverage industry is effective in policing itself when it comes to commercial communication. How one would measure such effectiveness in practice, especially in a country that has both statutory and self‐ regulatory mechanisms, has not been adequately explored. Environmental Scan
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Recently, the Advertising Association in the U.K. recommended that an analysis be carried out on the statutory and self‐regulatory status of the advertising of alcoholic beverages in the member nations of the European Union. The Association’s recommendations to the Commission included a series of analyses, such as a pan‐European study on alcohol abuse and consumption among young people in relation to alcohol beverage advertising. AUSTRALIA Australia has minimal legislation and few mandatory requirements concerning the advertising of alcohol beverages. In the 1980s and early 1990s, concern was mounting about the perceived harmful effects of alcohol beverage advertising. Blakeney & Barnes noted a lack of sanctions in Australia for offending parties, the variable nature of adjudication, the protracted delays in determining complaints which run counter to the industry’s interest, and the lack of health and welfare representation on adjudicating bodies. Saunders and Yap, who studied the system of self‐regulation of alcohol beverages advertising based on 16 advertisements, concluded: “…the system of self‐regulation of alcohol advertising does not serve the public interest.” Hawks editorialized that unless the industry demonstrates that it could regulate its members, “the public have a right to demand that government exercise more control of the industry.” The Australian Association of National Advertisers was established in 1928 but a self‐regulatory Alcohol Beverages Advertising Code and Complaints Management System (ABAC) was organized in 1998. Members committed to abide by the decisions of the independent Complaints Adjudication Panel. All key alcohol beverage sectors — marketing, advertising, media, and consumer associations as well as government ministers and departments — were involved in its design. In addition, an Alcohol Advertising Pre‐vetting system was established by the Australian Associated Brewers and the Distilled Spirits Industry Council of Australia. Its prime function is to ensure that beer and spirits advertisements are consistent with the ABAC code. The Commonwealth Minister for Health endorsed and launched the code, noting that he will be “monitoring advertising closely to ensure that the spirit of the code is upheld so that all alcohol advertising is responsible and reflects community expectations.” The National Alcohol Beverage Industries Council launched new self‐regulatory guidelines for the name, packaging, and promotion of alcohol beverages. Although the code was voluntary, each of the four members was asked to sign a legally binding agreement to adhere to the code and the complaint panel’s decision. NETHERLANDS The Dutch Advertising Code, established in 1978, governs general advertising with no special provisions for alcohol beverages. In 1987, the Dutch parliament averted a proposed ban on alcohol advertising on radio and television by adopting a motion granting the alcohol beverage industry an opportunity to exercise self‐regulation. In 1990, the Code for Alcohol Beverages was implemented with rules for alcohol advertising and for sales behavior. Environmental Scan
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In February 1999, the Dutch Health Minister warned the alcohol beverage industry that it must amend its code of conduct on advertising and sponsorship or face tough new legislation. The Minister believed that government efforts to encourage moderate alcohol consumption were being frustrated by the growing visibility of leading beer brands at major sporting and music events. The alcohol beverage industry rejected the Minister’s complaint and the head of the industry commented: “There has been no criticism of the code in the past seven years – in fact, only last year the government praised the industry’s system of self‐regulation.” In April 2000, agreement was reached between the industry and government that led to revisions in the Code for Alcohol Beverages. The main amendment of the Code relates to the ban on advertisements for alcohol beverages. Advertisements will not be allowed to feature anyone below the age of 25. Cocktail drinks must be clearly portrayed as alcohol, rather than fizzy drinks. A stipulation has also been included in the new Code banning the advertisement of alcohol beverages from pillars and billboards along motorways and roads outside built‐up areas. Fines for contravening the code have been doubled. UNITED KINGDOM Responsibility for self‐regulation in the United Kingdom is split between non‐broadcast media and broadcast media. The Advertising Standards Authority (ASA) was established in 1962 to ensure that all non‐broadcast media adhered to the basic principles contained in the International Code of Advertising. The ASA code contains specific rules on alcohol beverages. The Portman Group, an industry‐funded social aspects organization, introduced its voluntary Code of Practice on the naming, packaging, and merchandising of alcohol beverages in April 1996. This was chiefly in response to public and government concern regarding the introduction of alcoholic lemonade and other so called “alcopops”, which some argued were targeted at young people under the legal drinking age of 18. The code was welcomed, but was also criticized for its lack of independence in monitoring its members. In September 1997, a second edition of the Code was released which included strict criteria, including bolder statements of alcohol content and a focus on more adult labeling. It also included an independent review panel, chaired by the former banking Ombudsman (an official appointed by the government or by the parliament). The results of the review were published along with a pre‐vetting component which allowed manufacturers to submit relevant new products to the Portman Group for pre‐launch clearance. The Chairman of the Ministerial Group on under‐age drinking welcomed the revised Code and also indicated that there would be no need for government intervention on alcopops. It appears that these revisions have won government approval as well as industry compliance, as is clear from the remarks made recently in the House of Commons by the Secretary of State for the Home Office. He stated that “the numbers of complaints and upheld complaints have both fallen; the finding of the independent panel…have enjoyed a high degree of compliance Environmental Scan
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and the [Portman] Group’s Retailer Alert Bulletins, advising retailers not to stock offending products in their original packaging, has reduced their availability to the public.” SOUTH AFRICA In South Africa, advertising is permitted on television, radio, in the cinema, in print, and outdoors. This is, however, subject to the code of the Industry Association for Responsible Alcohol Use (ARA), an association of most of the major alcohol producers in South Africa. The code, for example, specifies that advertisements may not be transmitted in the commercial breaks immediately before, during or immediately after children’s programs. The ARA set up a self‐regulatory code in 1989 which regulates advertising, packaging and promotional activity. Since 1989, the code has been amended twice. In addressing advertising issues, the code prohibits a range of activities, including appeal to young people, inclusion of youth under‐25 drinking alcohol, special promotion of higher alcohol content beverages, and promotion of aggressive or anti‐social behavior. The packaging requirements include using packaging of the “highest practical quality and attractiveness,” and not promoting the alcohol strength of the beverage as the principal subject of the label. In 1996, the Advertising Standards Authority of South Africa accepted the advertising clauses of the code as their own code, thus making the ARA code applicable to non‐members of the ARA as well. With the addition of the packaging and promotional clauses, the ARA code in fact is more stringent than the Code of the Standards Authority of South Africa. An external Ombudsman settles code disputes within the ARA. Generally, it is believed that these guidelines and codes are being followed. UNITED STATES The alcohol beverage industry in the United States has established separate voluntary advertising codes initiated by trade associations from each of the three sectors that make up the industry – beer, wine and distilled spirits. At the same time, the Federal Trade Commission (FTC) is responsible for enforcing efforts to stop “unfair or deceptive acts of practice” and recently was asked to review industry efforts to avoid promoting alcohol to underage consumers. Generally, the codes provide that alcohol advertising and marketing efforts should not be directed at or appeal to an audience that is primarily underage. In conducting their review, the FTC looked at issues such as advertising placement, advertising content, product placement, online advertising and college marketing, how each of these were implemented, and what best practices emerged. The FTC report concluded that “for the most part, members of the industry comply with the current standards set by the voluntary advertising codes, which prohibit obvious appeals to young audiences and advertising in venues where most of the audience is under the legal
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drinking age.” The report also noted that many individual companies had their own internal standards that exceed code requirements. Third‐party review that would provide for an independent assessment of complaints was one recommendation cited by the FTC to improve the codes still further. Several beverage alcohol companies support this recommendation in one form or another, but opinion about the need for this enhancement is divided. The best practices cited by the FTC include prohibiting ads with substantial underage appeal even if they also appeal to adults and curbing on‐campus and spring break sponsorships and advertising. The codes operated by the Beer Institute, the Distilled Spirits Council of the United States (DISCUS) have generally strengthened its provisions over the years. The self‐regulation is not simply incumbent upon the alcohol beverage industry to police itself. It acts in concert with the agencies responsible for advertising form and content as well as the media that carry the advertising. INDIA India has 28 states and 3 union territories. A tangled web of tax and regulations across Indian states remains a major barrier to beer market growth in the country. Differing regulations on pricing and distribution, as well as fluctuating excise charges, foster inefficiency in the beer sector and make it harder for brewers to attract consumers. One could easily produce the amount of beer drunk in India with two to four breweries. The reason there are so many is the legislation. Transporting beer is expensive, so you need breweries in the different states. Duty tax on beer in India is an average US $13 per unit of alcohol. Each state levies taxation on alcohol at its own determined rates and excise duties, and controls distribution channels in its own way. It is a state‐by‐state market and not a national market. Taxes are levied, often at higher rates in relation to world prices, on all alcoholic products crossing the state borders. This makes it essential to have production centers in different states. The distribution system is same for Beer as for Spirits and Wine. Operators of outlets like wholesalers, retailers, bars and restaurants, and bonded warehouse operators must be licensed and should pay the varying state license fees. Based on the current trend of consumption it is expected that Beer may shortly be permitted to sell in more outlets in near future. South India is the largest consumer of Beer. Beer is declining in the west due to high taxes, and the consumption in North is increasing in Country Liquor and Beer in particular. Environmental Scan
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Social & Cultural Issues Throughout history there has consistently been opposition to the sale and use of alcohol. This opposition to the use of alcohol traditionally stemmed from a moral or religious opposition to the consumption of alcohol. Today however, increasingly it isn’t a moral or religious reason that prompts this opposition; it’s the negative medical effects that abuse of alcohol has been shown to have on the human body. Society is also feeling the effects of alcohol abuse; it is because of this that Sin Taxes have been levied on alcohol, as an attempt for government to find a ways and means to profit from the sale and consumption of alcohol. Below, we will examine some of the issues that are challenges to the beer industry.
Sin Taxes Sin taxes is a term used to describe taxes that are place on items, usually alcohol and tobacco products. Most often these sin taxes are similar to a sales tax and are added to the price of the item by the retail agency selling the product. Sin taxes are used by governments for a number of different reasons. Sin taxes are often used to by governments to help pay for the damage that society faces due to the perceived effects that long term use of these products can have on people. When it comes to the alcohol industry advocates of sin taxes on alcohol often like to point out that the negative effects of drunk driving, need for increased policing to protect society from criminal activity possibly associated with drinking, and for the medical costs that governments face from the treatment of alcohol related conditions. Typical use of sin tax funds include: • Funding of efforts to educate the public about the effects of use of these products. •
Funding of health agencies
•
Promotional materials
•
Funding of facilities for health purposes
•
General assistance in balancing of budgets.
Sin taxes are not seen as universally good even with their potentially positive effect on a government’s ability to provide services, improve infrastructure, or balance a budget. Many see sin taxes as a regressive form of taxation because it has a much larger effect on those that are of a lower income level. In this case a person who makes $100,000 per year will pay the same amount of tax on a 12 pack of beer as someone who makes $35,000 per year. To many this seems to be wholly unfair. In addition to this many feel that the choice to drink alcohol is a personal choice and society should not have to pay for peoples choices.
Religion Society has long had people who because of their beliefs feel that the consumption of alcohol was immoral and should be outlawed. Very few faiths have come out and made the blanket statement that the consumption of alcohol is not permitted however. In light of that statement, one of the few religions that has come out and stated that alcohol consumption is forbidden is Islam. “Intoxicants were forbidden in the Qur'an through several separate verses revealed at different times over a period of years. At first, it was forbidden for Muslims to Environmental Scan
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attend to prayers while intoxicated (4:43). Then a later verse was revealed which said that alcohol contains some good and some evil, but the evil is greater than the good (2:219). This was the next step in turning people away from consumption of it. Finally, "intoxicants and games of chance" were called "abominations of Satan's handiwork," intended to turn people away from God and forget about prayer, and Muslims were ordered to abstain (5:90‐91).” (About.com, 2008) This is very significant because the Middle East and a large part of the population of India, one the fastest growing beer markets in the world practices Islam. In Middle East the beer industry and alcohol as a whole will always have a very insignificant market. However in India, with a growing population and growing emphasis on incorporating more of western society into a very diverse society there is great opportunity for expansion into that market. However any company that looks to expand in India and other countries in that region needs to understand and be prepared for significant resistance from the Islamic communities. In addition to Islam here in America there are factions and groups that are still advocating against the sale or consumption of alcohol. As recently as 2006 the Southern Baptist Convention came out and didn’t just rally against the use of alcohol, but went as far as to amend their governing constitution to state that anyone who consumes alcohol can no longer be on their board of directors. It was this kind of religious fervor that caused the United States to pass the eighteenth amendment or the “Volstead Act” on January 20, 1920. Women’s groups and religious groups were the main proponents of passing the amendment. Today the chances of passing such a act in most major markets is slim to none, however it should be noted that religion is a driving factor in the decisions making process of many countries and maintaining awareness of the direction that these groups are moving towards is very important.
Science and Medicine Long term alcohol use has been linked to a number of medical conditions including cancer, heart disease, diabetes, and liver failure. As long as people continue to abuse alcohol and use it to excessive amounts there will be continued efforts by the medical and scientific community to encourage people to decrease their consumption or to quit using alcohol overall. The effect on a body when extensive use of alcohol is discontinued is well documented and it is these efforts that persuade science and medicine to continue to educating/pushing for people to discontinue the use of alcohol. Environmental Scan
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Conclusion & Planning Premise As beer consumption in developed markets has flattened due to changing beverage preferences and relatively slow population growth among key demographics, the brewers must seek growth in developing countries such as India, China, South Africa and others, where global middle class is rapidly emerging. Meanwhile brewers in developed markets must look for ways to reinvent themselves by attracting younger generations with strong branding and marketing and by maintaining a diverse portfolio of products in response to varied tastes. The following planning premise provides an overview of the brewing industry, with specific focus on the primary areas of concern for any firm pursuing success in the global beer industry.
Planning Premise Natural/Geographic Dimension Trend or Driving Force: Unpredictable commodity prices • Fluctuating commodity prices can affect the cost of beer production and drive a need for process efficiency. • Threats in this arena are related to global weather patterns and their ability to affect commodity supplies and the cost of production. This can be sudden and difficult to predict. • Multinational producers have a distinct advantage because of larger commodity buying power and established relationships with key suppliers. • Firms should seek to improve process efficiency and establish strategic partnerships with key suppliers in established and growth markets. Demographic Dimension Trend or Driving Force: Changing tastes of young and old generations • Statistics show that baby boomers are beginning to prefer wine or spirits, possibly due to health studies or, in the US, low‐carbohydrate diet trends. • Younger generations in established markets have demonstrated a preference for distilled spirits instead of beer. This poses an obstacle to growth and challenges firms to find ways to establish a young consumer base. • Opportunities have increased in emerging markets due to the growth of a worldwide middle class. Economic Dimension Trend or Driving Force: The saturation of traditional markets is driving consolidation through mergers and acquisitions in emerging markets, resulting in a highly competitive marketplace. • Primary growth opportunities are in emerging markets such as China, India, South Africa, Russia and Latin America. • Threat: A growth strategy in emerging markets can be a risky venture due to domestic and multinational competition and high barriers to market entry. Such a strategy tends to favor large‐scale producers with large amounts of capital on hand. • Opportunity: Large growth opportunities in strategic locations Social/Cultural Dimension Trend or Driving Force: The beer industry is confined to areas of the world in which alcohol consumption is socially/culturally acceptable.
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• • •
Evaluation of growth areas must include a consideration of the social/cultural make‐up of the region. Threats: Growth in emerging markets could be constrained by the cultural/social/religious make‐up of a population Opportunity: Emerging growth markets provide an opportunity to introduce beer to a new society and ingrain this beverage into the culture of a region.
Political/Legal/Regulatory Dimension: Firms must effectively manage the needs of governments and interest groups to mitigate regulatory backlash. • Self‐regulation is necessary for firms to effectively manage stakeholder relationships and establish an attitude of ethical development and social responsibility as it relates to alcohol and society. • Threats: Improper self‐regulation or exploitation of certain demographics such as young populations may create a social backlash. Firms must identify and manage the social and cultural differences in emerging markets and tailor their approach to each specific area to avoid social backlash. • Opportunity: Building relationships with governments and interest groups around the world to ensure continued growth. Technological Dimension: New harvesting and production technologies must be identified to increase process efficiency and ensure continued growth. Business Practices/Expectations Dimension Trend or Driving Force: Industry‐wide consolidation continues to occur as global competition plays out in emerging markets. • As firms grow larger, varied consumer tastes force multinationals to maintain a more diverse portfolio of products. Despite their size, firms must remain agile enough to quickly respond to consumer tastes or risk losing ground in key markets. • Threats: Reconciling size with changing consumer tastes. Firms must work to adequately anticipate changing tastes in a various worldwide markets and operate with careful efficiency to minimize costs and risks. • Opportunities: Global consolidation provides opportunities in emerging markets through mergers and acquisitions and targeted import strategies. Environmental Scan
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Bibliography Arndofer, James B. THE DEATH OF BEER Advertising Age; 5/2/2005, Vol. 76 Issue 18, Preceding p1‐59, 2p, Hutter, Lawrence. “Profitable growth and value creation in the beer industry‐A view from Deloitte and SAP”. 2005. Sankrusme, Sinee. “A Study of the Beer Market Leader, Challenges and Niche Market Strategies.” Proceedings of the World Academy of Science, Engineering and Technology. Volume 33, 2008. Slocum, John; Foster, Roy; Mcguire, Mike; Conder, Wendy; Frazer, Robyn; Ross, John; Corradini, Elthon; Lei, David; Scott, Stan. “Fermentation in the Beer Industry”. Organizational Dynamics, Volume 35, No. 1, Pg. 32‐48, 2006. Elsevier Inc. "China drives growth in global beer industry". Food & Drink Weekly. . FindArticles.com. 07 Dec. 2008. http://findarticles.com/p/articles/mi_m0EUY/is_27_13/ai_n19396600 CIA World Factbook: https://www.cia.gov/library/publications/the‐world‐factbook/ China: https://www.cia.gov/library/publications/the‐world‐factbook/ India: https://www.cia.gov/library/publications/the‐world‐factbook/geos/in.html South Africa: https://www.cia.gov/library/publications/the‐world‐ factbook/geos/sf.html Russia: https://www.cia.gov/library/publications/the‐world‐factbook/geos/rs.html about.com (2008) Why is alcohol forbidden in Islam, November 30, 2008, http:// islam.about.com/od/healthy/f/alcohol.htm Brewery Magazine http://www.breweryage.com/industry/ http://www.indianmba.com/Faculty_Column/FC519/fc519.html http://www.marketresearch.com/browse.asp?categoryid=469 http://markets.chron.com/chron?GUID=6871331&Page=MediaViewer&ChannelID=3191 http://www.allbusiness.com/services/business‐services/4553785‐1.html http://www.pr‐inside.com/global‐beer‐manufacturing‐http‐www‐companiesandmar‐ r865704.htm http://www.flex‐news‐food.com/pages/19744/Beer/Latvia/beer‐market‐not‐developing‐latvia‐ says‐aldaris.html Environmental Scan
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http://www.beerinstitute.org/statistics.asp?sid=2 http://www.asq.org/media‐room/press‐releases/2005/20051118‐quarterly‐report.html Other Resources 2007 Anheuser‐Busch Annual Report 2007 InBev Annual Report 2008 SAB Miller Annual Report Beer in India. http://en.wikipedia.org/wiki/Indian_beer
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Table of Contents
Introduction…………………………………………………………………………………………………1 Growth Opportunities………………………………………………………………………………….3 Competition………………………………………………………………………………………………...9 Government Regulations……………………………………………………………………………..10 Social & Cultural Issues………………………………………………………………………………..19 Conclusion/Planning premise………………………………………………………….…………..21 Bibliography……………………………………………………………………………………….……….22
Introduction We should take a moment to recognize that the modern Beer Industry was built upon a solid foundation of industry integrity, corporate responsibility, a strong work ethic, and great foresight of industry leaders. Some of the accomplishments of the past years are clear extensions of practices and principles established in the 1930's. While the brewers of the 1930's could not have imagined the global reach of brewers in the 21st century, their values and commitment to the future were critical to the industry's success. Those qualities remain alive and strong today in the Beer Industry and in thousands of men and women working in Beer companies throughout the world. The beverage industry is extremely competitive, with private labels greatly influencing the environment. A few global “beverage giants” produce many brands, but those brands fall into self‐contained categories as well. Thus, the “beverage” market is not really one market; it is a collection of markets with many different types of products, processes and requirements. The beverage market includes several different products that can be grouped into two main categories: alcoholic (beer, wine, spirits) and non‐alcoholic (carbonated soft drinks, juice, water, sports drinks, etc.). Each category, and often each type, of beverage have its unique issues and needs. The beer industry is the biggest sector of the Alcoholic Beverage industry, with global annual sales exceeding $325 billion USD. However, market saturation has been reached in much of the developed world, which is limiting the industry’s growth potential and forcing many companies to focus on emerging markets. With so few options for growth, companies that operate in the industry face considerable competitive pressures. Consequently, they must streamline their processes in order to drive real, profitable growth – all while ensuring that they effectively meet the demands of both customers and consumers. Over the past years, there prevailed a significant litigation that advanced the industry’s self regulation of advertising and marketing practices. This enhanced the efforts to further reduce illegal underage drinking and drunk driving, extend alliances in the broader alcohol beverage industry, advocate coherent and sensible positions on important regulatory projects, and strengthened relationships with regulators, lawmakers, and law enforcement officials. In this paper we have highlighted a number of the significant achievements on the legislative, legal, and regulatory fronts. This paper also provides insights on the market trends of the beer industry and on the issues relevant primarily to beer producers or distributors. It outlines the specific challenges facing the companies operating in this arena, such as ever‐changing consumer tastes, a growing emphasis on product safety, and the increasing power of global retailers. It also explores opportunities for process improvement and cites specific solutions that can empower beer companies to meet industry challenges, both today and tomorrow, and drive towards profitability and growth. Environmental Scan
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Growth Opportunities The saturation of traditionally thriving beer markets such as North America and Europe has driven the consolidation of the industry. Major brewers have sought growth through strategic mergers and acquisitions, which has reorganized the industry and strengthened the market positions of the industry’s largest brewers. Expansion into key emerging markets has become a strategic priority for leading firms, who are now competing for market share in several important regions of the world (Hutter, pg. 1). When making strategic growth decisions firms must evaluate a new market based upon specific criteria, such as: • Economics & Demographics: o
o o o o
•
Consumer Tastes & Market Trends o o o o
•
Beverage Preferences: Do current beverage preferences pose any barrier to market entry? Health & Social Issues: Are there any health or social issues that may pose a risk to expansion into this area? Competition/Opportunity: What firms already operate in this area? What is the current makeup of the beverage marketplace? How much market share can we capture? Limiting Factors: What are the logistical or operational challenges for doing business in this area? How will our supply/distribution chains function in this region?
Governmental & Cultural Factors o o o o
•
Population/Consumer base: What is the size of the population? What is the demographic makeup of the population? What are the growth trends? Is there an emerging middle class? How is the population disbursed? Employment: Are there available jobs? What is per‐capita income? Is the job market growing? Infrastructure: Does the region have established infrastructure such as roads, utilities, energy, communications, agriculture, private sector? Business climate: Is there an established local beer industry? Is there a free‐market economy? Taxes: Is there a stable tax structure? Is it Pro or anti‐business?
Government: How much influence does the government have on the private sector? Is the government stable and ethical? What is the government’s attitude toward alcohol? Government Regulations: Has the government imposed any restraints to trade or favored certain industries? Cultural Issues & Factors: Is there any Religious or social opposition to alcohol? Societal & Ethical Norms: Is leisure time important to the culture? Is drinking a social norm? Is alcohol viewed as ethically acceptable by the culture?
Environmental Factors & Growth Strategy o o o
Agricultural Opportunity: What is the climate? Can we locally grow our ingredients? Costs of Importing/Exporting: What type of operation will the logistics of the environment permit? Dynamics of the Local Market: Are there local brewers that we can acquire or merge with? Do they have favorable market share? Do they have positive partnerships with key suppliers and distributors?
With these guidelines in mind, we have identified several emerging markets that have significant growth potential for large‐scale brewers. The following pages provide a brief analysis of the following regions: China, India, South Africa, Russia and Latin America.
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China In 2003 China eclipsed the US as the world’s largest beer market. With the world’s highest population, an exploding private sector and burgeoning urban centers that have low unemployment levels China is seen as the world’s next big consumer market. The local beer industry is firmly established and contains approximately 300 brewers (Slocum, et al. p. 35), primarily supplying the urban coastal areas. Many multinational firms have invested heavily in the Chinese beer market and although there is a threat of over‐saturation, relatively low per‐ capita consumption levels indicate that this market has room to grow. Consider the following analysis: Strengths • • •
Population: 1.3 billion (world’s highest) (CIA World Factbook) Employment: Approximately 800 million person workforce with 4% urban unemployment. Urban migration continues to be significant. Massive emerging middle class. Established Beer Industry: World’s largest beer market with steady growth in recent years. Strong consumer base with a regional network of suppliers and distributors. Many local brands with favorable market share. Low per‐capita consumption.
Weaknesses • •
High Barriers to Market Entry: Many firms competing largely on price, which tends to favor local brewers with established supply/distribution relationships. Challenging Logistics: Regionalism creates many logistical supply and distribution challenges. Inconsistent infrastructure, complex regional government regulations and communications issues make doing business in multiple regions challenging. This fragmented, regional market makes reaching economies of scale difficult and as a result multinational firms have trouble adequately diffusing fixed costs and attaining desirable profit margins.
Opportunities • •
Continued Growth Potential: Low per‐capita consumption is a sign that the market has plenty of room to grow & high population means the market could grow significantly. Acquisition Opportunities: Firms must carefully craft their growth strategy. A lot of local brewers means that the environment may lend itself to an acquisition strategy, multinationals would likely benefit from acquiring a local brewer with favorable market share and strong supply and distribution chain alliances.
Threats •
Government Control & Political Instability: China is a Communist State and, as such, can exercise complex regulatory controls favoring certain industries. Instability is always simmering beneath the surface and fast growth often means significant growing pains.
Final Analysis Tremendous long‐term growth potential outweighs short term challenges. Environment seems to favor a carefully planned acquisition strategy. The target firm should have reasonable market share, favorable brand awareness and strong supply and distribution chain relationships. Strict operational efficiency must be maintained to mitigate the costs and risks of expansion.
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India Like China, India is one of the world’s fastest growing consumer markets. A rapidly growing population, an emerging middle class with rising per‐capita incomes and blossoming urban centers make India a powerful emerging market. India has an established local beer industry and, although per‐capita consumption is low, as the country becomes more westernized younger generations have the potential to be high‐volume consumers. However, regionalism, political unrest and the potential for growing pains temper this market’s attraction. Strengths • •
•
Population: 1.1 billion (CIA World Factbook) Emerging Middle Class: India has a healthy, growing urban workforce with 7.2% unemployment. India’s emerging middle class is relatively young, 63% of the country’s population is between the ages of 15‐64 (CIA World Factbook) and a flurry of foreign investment across all sectors has broadened and westernized the tastes of this young population. Steady growth in beer market: India has an active domestic brewing industry that includes many local firms and a growing increase in foreign investment. Although per‐capita beer consumption is relatively low, beer sales in India are forecast to grow at a compound annual growth rate of 17.2% until 2011 (mindbranch.com).
Weaknesses •
•
Market Saturation: Although market saturation is only a marginal concern, it is worth noting that a rush of foreign investment, combined with a healthy domestic brewing industry, makes India a highly competitive emerging market. Not every firm that expands into India will survive and the long‐run forecast figures to see this region experience its own period of consolidation once the rush of investment has waned. Regional and logistical challenges: Like China, India is a highly regional market containing significant disparities such as regulatory issues, prices and consumer tastes. This regionalism creates a number of logistical challenges for a volume producer attempting to reach economies of scale and establish a country‐wide brand. Furthermore, regionalism, combined with inconsistent infrastructure and urban/rural socio‐economic disparities, has the potential to make establishing an extensive supply and distribution chain a capital‐intensive undertaking.
Opportunities • •
Continued Growth Potential: Despite the logistical challenges, India’s young emerging middle class offers tremendous upside growth potential in urban areas Favorable agricultural climate & network: India’s climate is favorable for the harvesting of hops and barley, the primary natural ingredients in beer. There exists potential to establish supply relationships with local commodity producers.
Threats • •
Political instability: The recent terror attacks in Mumbai have served as a reminder that political unrest is a very real threat in India. An escalating conflict or the persistent threat of terror could have significant effects on India’s development and consumer potential. Socio‐economic growing pains: The disparity between India’s thriving urban centers and impoverished rural areas creates the potential for civil unrest. India’s rapid growth will require an astute government capable of keeping peace while maintaining a free market system and an educated, employed population.
Final Analysis: Despite its challenges, India’s young emerging middle class and favorable agricultural climate make this an attractive expansion opportunity. We recommend an acquisition strategy. Environmental Scan
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South Africa South Africa is one of the fastest growing beer markets in the world. This region has an active domestic brewing industry and a population of high per‐capita beer consumers. Favorable agricultural conditions exist for harvesting beer ingredients and consumer tastes are shifting from sorghum‐based beer toward Western‐style products creating growth opportunities for light beer and specialty brewers. However, SABMiller, one of the largest brewers in the world has roots in South Africa and has a strong market position there. Opportunity still exists in this market for brewers keen on pursuing a market thirsty for western imports. Strengths •
• •
Growing Beer Market: South Africa has a relatively stable economy and is one of the fastest growing beer markets in the world. Consumers are enthusiastic beer drinkers with per‐capita consumption at approximately 60 liters, up significantly from recent years. Changing Consumer Tastes: Consumers in South Africa have begun enjoying western‐style beer as opposed to a traditional sorghum‐based product. Favorable Climate: Some beer ingredients are harvested locally in South Africa and there is an established local network of farmers; therefore, there are opportunities to establish comprehensive production chains in this region.
Weaknesses •
•
Inconsistent Infrastructure: Outdated infrastructure has constrained economic growth in recent years and in 2007 South Africa experienced an electricity shortage because of its main supplier had insufficient infrastructure (CIA World Factbook). Brewers expanding into this area may be constrained by poor infrastructure, particularly as they attempt to establish nationwide supply and distribution networks SABMiller’s Market Presence: SABMiller has roots in South Africa and is relatively entrenched in the beer market. This deep competition may pose short‐run barriers to expansion.
Opportunities •
Favorable Long‐run Potential: South Africa’s high per‐capita consumption rates combined with its changing consumer tastes creates a market with favorable long‐run potential. In the short‐ run this market seems to lend itself to an import strategy, but long‐run opportunity exists for firms keen on establishing production centers.
Threats •
•
Health Issues: South Africa has experienced significant health issues, particularly regarding the AIDS epidemic, which has shortened life expectancies, increased infant mortality rates and slower population growth (CIA World Factbook). Any firm that seeks to introduce a product containing alcohol should also expect to enact a program of Corporate Social Responsibility in order to build relationships with local communities and governments. Socio‐economic issues: As with many emerging markets, South Africa has a significant socio‐ economic disparity between growing urban areas and impoverished rural regions. Therefore, firms must be aware that civil unrest is possible and long‐run growth could be impacted by such disruption.
Final Analysis: South Africa’s beer market provides an attractive investment opportunity for a multinational firm looking to capitalize on this region’s high per‐capita consumption and changing, westernized, tastes. We recommend an import strategy in the short‐run to establish brand loyalty and cultivate a local market amid heavy domestic competition. In the long‐run, favorable agricultural conditions offer production potential, in spite of local infrastructure risks. Environmental Scan
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Other Growth Areas: Russia & Latin America The early 2000’s saw booming beer consumption rates in Russia which spurred a flurry of foreign investment, but a subsequent slowdown and strict government regulations have driven this market’s costs up. Russia’s long‐standing preferences for spirits have waned and beer is now more ingrained in the culture, but brewers must now find opportunity in the higher‐ margin specialty markets. Latin America is an active beer market with high growth potential, largely driven by growth in key demographics, a favorable farming climate, Brazil’s developing economy and Mexico’s high levels of beer consumption.
Future Growth Strategies and Considerations Consolidation: Flattened growth in developed markets (US and Europe) will continue causing industry leaders to move into high‐growth emerging markets. Industry‐wide consolidation will likely continue as competition plays out in emerging markets. Once new growth areas are identified a flurry of investment will occur, followed by a period of consolidation and then relatively consistent, but lower, annual growth rates. This will likely be the pattern in key emerging markets such as China, India and South Africa. Mergers & Acquisitions: The chief strategy for growth in recent years has been through mergers and acquisitions, this will likely continue as the beer industry globalizes and firms compete to establish market share in high growth areas. The Price of Ingredients: A surge in commodity costs has inflated the cost of brewing and significantly impacted the craft brewing sector of the industry. Large companies have a distinct advantage because of their larger buying power; however increased brewing costs will have an impact on the market price of beer and require increased operational efficiency and execution. Firms that have strong strategic partnerships with commodity producers will have a substantial advantage in the event of any commodity shortage. Micro‐breweries will struggle the most with an unstable commodities market Consumer Demands: Varied consumer tastes will require firms to carry a more diversified portfolio of products. As the industry consolidates firms will be challenged to react quickly to changing consumer tastes. Reaction time will be important and firms that are able to accurately anticipate consumer tastes will have distinct advantages. Maintaining a broad portfolio of products will put pressure on operational costs and further stress the need for efficiency and execution (SABMiller Annual Report, 2007). Strong Branding & Marketing: As developed markets are fragmented by varied consumer tastes and emerging markets evolve effective branding and marketing will be important to facilitating brand loyalty and developing a customer base. Environmental Scan
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Supporting Data Figure 1.1 shows that China surpassed the US as the world’s larges beer market in 2003. However, as Figure 1.2 demonstrates, the country has relatively low per‐capita consumption rates suggesting that China’s growth has been driven by its massive population. Whether this unique dynamic limits growth or represents significant room for growth will be a key factor in China’s future strength as a beer market. Figure 1.3 demonstrates recent general population growth trends for the key growth demographic of 15‐34 year‐olds. Asia and Latin America have shown significant growth while the US and Western Europe have demonstrated flat or negative growth rates. This is further evidence that the key growth opportunities in the brewing industry are primarily in emerging markets, rather than traditional established markets Figure 1.1
Seema International, 2005
Figure 1.3
Figure 1.2
Seema International, 2005
Competition Beer was part of the blue collar social fabric for generations in developed countries but in recent times it has seen its market share reduce by the introduction of other beverages such as wine and distilled spirits. However beer is gaining popularity in third world countries such as China, India, Russia and Latin America where the middle class is open and willing to experiment with new products is turning to beer as a form of recreation. Beer that was popular in markets like United State and Europe is reaching a point of decline as the use of beer has reduced from 56% in 1999 to 53% in 2004 as more and more people are turning to drinking other beverages. In United States the change started with the baby boomer generation who for years drank beer but are now moving towards wine due to published studies regarding the health benefits of wine and the baby boomers desire to maintain a healthy lifestyle. The generations after the baby boomers have further increased their preference beyond beer and wine by choosing drinks such as distilled spirits. The depth of the dilemma was highlighted in a recent survey by Morgan Stanley that found spirits is the most popular drink of choice among 21‐to‐27‐year‐olds as these young adults are getting bored with beer. Among that group, 40% said spirits were their favorite drink compared to less than 30% in 2003. This is the young generation that thinks beer has lost its “sexiness” and they like the taste, quality and sophistication of spirits. As the markets in the US and UK are becoming stagnant the beer companies have started moving to countries that are developing such as China, India, Russia, and South Africa. In these countries the beer market has seen a big jump due to increasing middle class. To benefit from increasing middle class the beer industry has formed mergers with local companies. Even though they have formed mergers they still face competition from big local brewers, such as in India when SAB Miller enters the market they would face competition form Kingfisher beer and Taj Mahal Beer who have big market share in India and locals might prefer their taste to beer that is imported. Country
YTD Oct YTD Oct Volume Percent 2005 2006 Change Change
Canada Mexico United Kingdom
2,566 2,759 194 10,216 11,725 1,509
7.5% 14.8%
859
841
‐18
‐2.1%
Ireland
707
678
‐29
‐4.1%
Netherlands
5,013
5,878
865
17.3%
Germany
1,051
1,047
‐4
‐0.4%
Figure 1.5 US beverage preferences based upon income Total Imports 21,685 24,386 2,701 12.5% Figure 1.4: Represents the competitive growth of imports. All Other
1,274
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1,457
184
14.4%
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Government Regulations and Issues The brewing industry is subject to extensive government regulations at both the federal and state levels, as well as regulation by a variety of local bodies. Some of the regulations imposed at the federal and state level involve production, distribution, labeling, advertising, trade and pricing practices, credit, container characteristics, and alcoholic content. Federal, state and local governmental entities also levy various taxes, license fees, and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Specific alcohol taxation (as opposed to more general sales taxes) is primarily a federal and state right although some states permit some additional local taxation. The brewing industry must also comply with numerous federal, state, and local environmental protection laws. Federal Beer Regulations Until recently, nearly all federal regulations involving alcohol were issued by the Treasury Department Bureau of Alcohol, Tobacco, and Firearms (BATF), established by the Federal Alcohol Administration Act of 1935 and the 1968 Gun Control Act. However, in 2002, under the Homeland Security Act, the Bureau was divided. The part remaining in the Department of the Treasury was renamed the Alcohol and Tobacco Tax and Trade Bureau (TTB). A new Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) was formed in the Department of Justice. The TTB is responsible for administering and regulating the operations of distilleries, wineries, and breweries, as well as importers and wholesalers in the industry. Some of the specific functions TTB is responsible for as related to beer brewing include: Brewery Application Approval To qualify as a brewer one must complete and submit to TTB the appropriate forms along with any other required documentation. TTB will usually complete screening and processing within sixty days of receipt of a completed Brewers Notice packet. Excise Tax Collection U.S. Government involvement in the beer industry also includes taxation. The current federal excise tax on beer, in effect since January 1, 1991, is $18 per barrel for 31 gallons. However, a reduced tax rate applies, at a rate of $7 per barrel, to the first 60,000 barrels of beer removed for consumption or sale by brewing companies that do not produce more than 2,000,000 barrels of beer per calendar year. The federal excise tax regulations also include other rules, including removals without tax payment and inter‐brewery purchases. Labeling and Advertising Approval The TTB implements and enforces a broad range of statutory and compliance provisions to ensure that alcohol products are created, labeled, and advertised in accordance with Federal laws and regulations. Brewers must follow the labeling and advertising requirements found at 27 (Code of Federal Regulations) CFR Part 7, Labeling and Advertising of Malt Beverages and 27 CFR Part 16, Alcoholic Beverage Health Warning Statement. Home brewing Any adult may produce beer, without payment of tax, for personal or family use and not for sale. An adult is any individual who is 18 years of age or older. If the locality in which the household is located requires a greater minimum age for the sale of beer to individuals, the
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adult shall be that age before commencing the production of beer. This exemption does not authorize the production of beer for use contrary to state or local law.
State Beer Regulations In addition to meeting federal regulations, individuals and businesses must comply with state regulations too. These state regulations, which vary widely from state to state, may be more restrictive than federal regulations and must be met in addition to federal requirements unless the federal law pre‐empts the state law wherein they desire to do business. Alcoholic Beverage Control Boards Following national prohibition, the 21st Amendment to the constitution provides states with broad powers and authority to regulate the production, importation, distribution, retail sale, and consumption of alcohol beverages inside their borders. (This is in addition to Federal requirements.) Each state has created its own unique system of alcohol beverage control. There are two general classifications‐open and control states. Open States The larger group (now referred to as "license" states) license all aspects of private production, distribution, and sales. Control States The smaller group (now referred to as "monopoly" states) opted to become wholesalers and retailers themselves for wine and spirits. Licenses On the state and local level, the license process varies widely. In some areas, the state is the lead agency for all licenses (manufacturer's and retailer's licenses), and local approval is not necessary except to confirm proper zoning. Retailer Licenses Some states may control the number and type of beer retailers by issuing retail licenses and by determining to which retailer's credit can be extended. Some also determine permissible locations for the sale of beer for example: on‐premise, in restaurants and bars, off‐premise, in grocery stores, gas stations, liquor stores, and drug stores. Taxation Every state imposes an excise tax on beer that is levied as a dollar amount on a specified volume (in liquid measure‐ex., gallons). On January 1, 2008, state excise taxes ranged from $0.02 per gallon in Wyoming to $1.07 per gallon in Alaska. Container Deposit Laws Certain states, including California, Connecticut, Delaware, Iowa, Maine, Massachusetts, Michigan, New York, Oregon, and Vermont, and a small number of local jurisdictions, have adopted beverage packaging laws and regulations that require deposits on beverage containers.
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Local Beer Regulations Many states permit local jurisdictions to regulate and separately tax beer sales, and even to prohibit the sale of beer within their jurisdiction. Jurisdictions in which the sale of alcoholic beverages is prohibited are called "dry" states. Over half of all states have dry cities or counties, and about 4.3% of the U.S. population lives in dry counties. Many cities and counties that are not dry regulate operations and/or impose taxes on the sale of beer. In addition to the federal and state excise taxes, some states have local taxes, on‐premise taxes, wholesale taxes, and private club taxes. Georgia, Illinois, Louisiana, Maryland, New York, and Ohio have cities or counties that impose local beer taxes. As might be expected, taxes can potentially represent the largest single‐cost item in a glass of beer.
Self‐Regulation An important element of public policy is developing standards regarding how the private sector communicates information about their products. HOW DOES SELF‐REGULATION WORK? Self‐regulation is the process whereby industry actively participates in and is responsible for its own regulation. Ideally, advertising is meant to inform the public so that they can be aware of products and make informed choices among different products or brands. Advertising is, of course, also of benefit to businesses in assisting them to sell their products, which in most countries is a commercial right. While this process varies widely from country to country, the foundation for advertising self‐regulation is based on the principles embodied in the International Code of Advertising, issued by the International Chamber of Commerce. The Code states in its introduction that advertising should be legal, decent, honest and truthful, prepared with a sense of social responsibility to the consumer and society and with proper respect for the rules of fair competition. This is accomplished through rules and principles of best practice to which advertisers and the advertising industry agree to be bound. The basic elements of self‐regulation are two‐fold: • A code of practice or set of guiding principles governing the content of advertisements. • A process for the establishment, review, and application of the code or principles. Impartiality is seen to be the key to an effective code and public trust in it. The European Advertising Standards Alliance (EASA) recommends that the body responsible for the practical application of the code should ideally be independent of the industry body responsible for its initial establishment and subsequent review. In reality, there may be several self‐regulatory bodies to which a given alcohol beverage company must adhere regarding commercial communications. For example, in Australia there is a code that covers advertising generally, and another code for alcohol which is set separately by the Australian Association of National Advertisers, the Distilled Spirits Industry Council of Australia and the Australian Associated Brewers. Environmental Scan
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In addition to self‐regulatory bodies, most of the major alcohol beverage companies have their own internal advertising codes. Self‐regulation often exists in tandem with a broad legal framework, and, indeed, according to European Advertising Standards Alliance (EASA), this is the preferred way. In many cases, these laws address such general topics as misleading advertising, unfair competition and consumer issues, but less restrictive countries tend not to address product specific issues such as alcohol. In more restrictive countries, such as France, statutory authorities and national legislation control advertising content and placement. POLICY OVERVIEW Policies regarding advertising restrictions are divided into six categories. The category assigned to each country was derived by reviewing the restrictions that were in place regarding alcohol advertising on television, radio, cinema, print media, outdoors, and sponsorship. The policy categories are (1) self‐regulation, (2) statutory legislation, (3) a combination [of self‐regulation and statutory legislation], (4) [advertising of alcohol] is banned, (5) some controls and (6) no controls.‐ Statutory Combination Banned Some Controls No Controls The alcohol beverage industry recognizes that the advertising and promotion of beverage alcohol may need more careful regulation than that for some other products. In addition, individual companies often have their own codes of conduct. The self‐regulatory codes that industry organizations sponsor generally address placement and content of advertisements and in many cases, like the Netherlands and South Africa, packaging. Other topics covered by the codes include issues concerned with minors, abuse of product strength, social/sexual/medical aspects, physical performance, and driving under the influence. Table 2 on the following page provides information on self‐regulation and rules relating to alcohol.
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EEFFECTIVENESS OF SELF‐REGULATION The effectiveness of self‐regulation on alcohol advertising has rarely been studied systematically, although the issue is often hotly debated in alcohol policy circles. Apparently, the objective of such evaluations is to determine whether the alcohol beverage industry is effective in policing itself when it comes to commercial communication. How one would measure such effectiveness in practice, especially in a country that has both statutory and self‐ regulatory mechanisms, has not been adequately explored. Environmental Scan
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Recently, the Advertising Association in the U.K. recommended that an analysis be carried out on the statutory and self‐regulatory status of the advertising of alcoholic beverages in the member nations of the European Union. The Association’s recommendations to the Commission included a series of analyses, such as a pan‐European study on alcohol abuse and consumption among young people in relation to alcohol beverage advertising. AUSTRALIA Australia has minimal legislation and few mandatory requirements concerning the advertising of alcohol beverages. In the 1980s and early 1990s, concern was mounting about the perceived harmful effects of alcohol beverage advertising. Blakeney & Barnes noted a lack of sanctions in Australia for offending parties, the variable nature of adjudication, the protracted delays in determining complaints which run counter to the industry’s interest, and the lack of health and welfare representation on adjudicating bodies. Saunders and Yap, who studied the system of self‐regulation of alcohol beverages advertising based on 16 advertisements, concluded: “…the system of self‐regulation of alcohol advertising does not serve the public interest.” Hawks editorialized that unless the industry demonstrates that it could regulate its members, “the public have a right to demand that government exercise more control of the industry.” The Australian Association of National Advertisers was established in 1928 but a self‐regulatory Alcohol Beverages Advertising Code and Complaints Management System (ABAC) was organized in 1998. Members committed to abide by the decisions of the independent Complaints Adjudication Panel. All key alcohol beverage sectors — marketing, advertising, media, and consumer associations as well as government ministers and departments — were involved in its design. In addition, an Alcohol Advertising Pre‐vetting system was established by the Australian Associated Brewers and the Distilled Spirits Industry Council of Australia. Its prime function is to ensure that beer and spirits advertisements are consistent with the ABAC code. The Commonwealth Minister for Health endorsed and launched the code, noting that he will be “monitoring advertising closely to ensure that the spirit of the code is upheld so that all alcohol advertising is responsible and reflects community expectations.” The National Alcohol Beverage Industries Council launched new self‐regulatory guidelines for the name, packaging, and promotion of alcohol beverages. Although the code was voluntary, each of the four members was asked to sign a legally binding agreement to adhere to the code and the complaint panel’s decision. NETHERLANDS The Dutch Advertising Code, established in 1978, governs general advertising with no special provisions for alcohol beverages. In 1987, the Dutch parliament averted a proposed ban on alcohol advertising on radio and television by adopting a motion granting the alcohol beverage industry an opportunity to exercise self‐regulation. In 1990, the Code for Alcohol Beverages was implemented with rules for alcohol advertising and for sales behavior. Environmental Scan
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In February 1999, the Dutch Health Minister warned the alcohol beverage industry that it must amend its code of conduct on advertising and sponsorship or face tough new legislation. The Minister believed that government efforts to encourage moderate alcohol consumption were being frustrated by the growing visibility of leading beer brands at major sporting and music events. The alcohol beverage industry rejected the Minister’s complaint and the head of the industry commented: “There has been no criticism of the code in the past seven years – in fact, only last year the government praised the industry’s system of self‐regulation.” In April 2000, agreement was reached between the industry and government that led to revisions in the Code for Alcohol Beverages. The main amendment of the Code relates to the ban on advertisements for alcohol beverages. Advertisements will not be allowed to feature anyone below the age of 25. Cocktail drinks must be clearly portrayed as alcohol, rather than fizzy drinks. A stipulation has also been included in the new Code banning the advertisement of alcohol beverages from pillars and billboards along motorways and roads outside built‐up areas. Fines for contravening the code have been doubled. UNITED KINGDOM Responsibility for self‐regulation in the United Kingdom is split between non‐broadcast media and broadcast media. The Advertising Standards Authority (ASA) was established in 1962 to ensure that all non‐broadcast media adhered to the basic principles contained in the International Code of Advertising. The ASA code contains specific rules on alcohol beverages. The Portman Group, an industry‐funded social aspects organization, introduced its voluntary Code of Practice on the naming, packaging, and merchandising of alcohol beverages in April 1996. This was chiefly in response to public and government concern regarding the introduction of alcoholic lemonade and other so called “alcopops”, which some argued were targeted at young people under the legal drinking age of 18. The code was welcomed, but was also criticized for its lack of independence in monitoring its members. In September 1997, a second edition of the Code was released which included strict criteria, including bolder statements of alcohol content and a focus on more adult labeling. It also included an independent review panel, chaired by the former banking Ombudsman (an official appointed by the government or by the parliament). The results of the review were published along with a pre‐vetting component which allowed manufacturers to submit relevant new products to the Portman Group for pre‐launch clearance. The Chairman of the Ministerial Group on under‐age drinking welcomed the revised Code and also indicated that there would be no need for government intervention on alcopops. It appears that these revisions have won government approval as well as industry compliance, as is clear from the remarks made recently in the House of Commons by the Secretary of State for the Home Office. He stated that “the numbers of complaints and upheld complaints have both fallen; the finding of the independent panel…have enjoyed a high degree of compliance Environmental Scan
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and the [Portman] Group’s Retailer Alert Bulletins, advising retailers not to stock offending products in their original packaging, has reduced their availability to the public.” SOUTH AFRICA In South Africa, advertising is permitted on television, radio, in the cinema, in print, and outdoors. This is, however, subject to the code of the Industry Association for Responsible Alcohol Use (ARA), an association of most of the major alcohol producers in South Africa. The code, for example, specifies that advertisements may not be transmitted in the commercial breaks immediately before, during or immediately after children’s programs. The ARA set up a self‐regulatory code in 1989 which regulates advertising, packaging and promotional activity. Since 1989, the code has been amended twice. In addressing advertising issues, the code prohibits a range of activities, including appeal to young people, inclusion of youth under‐25 drinking alcohol, special promotion of higher alcohol content beverages, and promotion of aggressive or anti‐social behavior. The packaging requirements include using packaging of the “highest practical quality and attractiveness,” and not promoting the alcohol strength of the beverage as the principal subject of the label. In 1996, the Advertising Standards Authority of South Africa accepted the advertising clauses of the code as their own code, thus making the ARA code applicable to non‐members of the ARA as well. With the addition of the packaging and promotional clauses, the ARA code in fact is more stringent than the Code of the Standards Authority of South Africa. An external Ombudsman settles code disputes within the ARA. Generally, it is believed that these guidelines and codes are being followed. UNITED STATES The alcohol beverage industry in the United States has established separate voluntary advertising codes initiated by trade associations from each of the three sectors that make up the industry – beer, wine and distilled spirits. At the same time, the Federal Trade Commission (FTC) is responsible for enforcing efforts to stop “unfair or deceptive acts of practice” and recently was asked to review industry efforts to avoid promoting alcohol to underage consumers. Generally, the codes provide that alcohol advertising and marketing efforts should not be directed at or appeal to an audience that is primarily underage. In conducting their review, the FTC looked at issues such as advertising placement, advertising content, product placement, online advertising and college marketing, how each of these were implemented, and what best practices emerged. The FTC report concluded that “for the most part, members of the industry comply with the current standards set by the voluntary advertising codes, which prohibit obvious appeals to young audiences and advertising in venues where most of the audience is under the legal
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drinking age.” The report also noted that many individual companies had their own internal standards that exceed code requirements. Third‐party review that would provide for an independent assessment of complaints was one recommendation cited by the FTC to improve the codes still further. Several beverage alcohol companies support this recommendation in one form or another, but opinion about the need for this enhancement is divided. The best practices cited by the FTC include prohibiting ads with substantial underage appeal even if they also appeal to adults and curbing on‐campus and spring break sponsorships and advertising. The codes operated by the Beer Institute, the Distilled Spirits Council of the United States (DISCUS) have generally strengthened its provisions over the years. The self‐regulation is not simply incumbent upon the alcohol beverage industry to police itself. It acts in concert with the agencies responsible for advertising form and content as well as the media that carry the advertising. INDIA India has 28 states and 3 union territories. A tangled web of tax and regulations across Indian states remains a major barrier to beer market growth in the country. Differing regulations on pricing and distribution, as well as fluctuating excise charges, foster inefficiency in the beer sector and make it harder for brewers to attract consumers. One could easily produce the amount of beer drunk in India with two to four breweries. The reason there are so many is the legislation. Transporting beer is expensive, so you need breweries in the different states. Duty tax on beer in India is an average US $13 per unit of alcohol. Each state levies taxation on alcohol at its own determined rates and excise duties, and controls distribution channels in its own way. It is a state‐by‐state market and not a national market. Taxes are levied, often at higher rates in relation to world prices, on all alcoholic products crossing the state borders. This makes it essential to have production centers in different states. The distribution system is same for Beer as for Spirits and Wine. Operators of outlets like wholesalers, retailers, bars and restaurants, and bonded warehouse operators must be licensed and should pay the varying state license fees. Based on the current trend of consumption it is expected that Beer may shortly be permitted to sell in more outlets in near future. South India is the largest consumer of Beer. Beer is declining in the west due to high taxes, and the consumption in North is increasing in Country Liquor and Beer in particular. Environmental Scan
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Social & Cultural Issues Throughout history there has consistently been opposition to the sale and use of alcohol. This opposition to the use of alcohol traditionally stemmed from a moral or religious opposition to the consumption of alcohol. Today however, increasingly it isn’t a moral or religious reason that prompts this opposition; it’s the negative medical effects that abuse of alcohol has been shown to have on the human body. Society is also feeling the effects of alcohol abuse; it is because of this that Sin Taxes have been levied on alcohol, as an attempt for government to find a ways and means to profit from the sale and consumption of alcohol. Below, we will examine some of the issues that are challenges to the beer industry.
Sin Taxes Sin taxes is a term used to describe taxes that are place on items, usually alcohol and tobacco products. Most often these sin taxes are similar to a sales tax and are added to the price of the item by the retail agency selling the product. Sin taxes are used by governments for a number of different reasons. Sin taxes are often used to by governments to help pay for the damage that society faces due to the perceived effects that long term use of these products can have on people. When it comes to the alcohol industry advocates of sin taxes on alcohol often like to point out that the negative effects of drunk driving, need for increased policing to protect society from criminal activity possibly associated with drinking, and for the medical costs that governments face from the treatment of alcohol related conditions. Typical use of sin tax funds include: • Funding of efforts to educate the public about the effects of use of these products. •
Funding of health agencies
•
Promotional materials
•
Funding of facilities for health purposes
•
General assistance in balancing of budgets.
Sin taxes are not seen as universally good even with their potentially positive effect on a government’s ability to provide services, improve infrastructure, or balance a budget. Many see sin taxes as a regressive form of taxation because it has a much larger effect on those that are of a lower income level. In this case a person who makes $100,000 per year will pay the same amount of tax on a 12 pack of beer as someone who makes $35,000 per year. To many this seems to be wholly unfair. In addition to this many feel that the choice to drink alcohol is a personal choice and society should not have to pay for peoples choices.
Religion Society has long had people who because of their beliefs feel that the consumption of alcohol was immoral and should be outlawed. Very few faiths have come out and made the blanket statement that the consumption of alcohol is not permitted however. In light of that statement, one of the few religions that has come out and stated that alcohol consumption is forbidden is Islam. “Intoxicants were forbidden in the Qur'an through several separate verses revealed at different times over a period of years. At first, it was forbidden for Muslims to Environmental Scan
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attend to prayers while intoxicated (4:43). Then a later verse was revealed which said that alcohol contains some good and some evil, but the evil is greater than the good (2:219). This was the next step in turning people away from consumption of it. Finally, "intoxicants and games of chance" were called "abominations of Satan's handiwork," intended to turn people away from God and forget about prayer, and Muslims were ordered to abstain (5:90‐91).” (About.com, 2008) This is very significant because the Middle East and a large part of the population of India, one the fastest growing beer markets in the world practices Islam. In Middle East the beer industry and alcohol as a whole will always have a very insignificant market. However in India, with a growing population and growing emphasis on incorporating more of western society into a very diverse society there is great opportunity for expansion into that market. However any company that looks to expand in India and other countries in that region needs to understand and be prepared for significant resistance from the Islamic communities. In addition to Islam here in America there are factions and groups that are still advocating against the sale or consumption of alcohol. As recently as 2006 the Southern Baptist Convention came out and didn’t just rally against the use of alcohol, but went as far as to amend their governing constitution to state that anyone who consumes alcohol can no longer be on their board of directors. It was this kind of religious fervor that caused the United States to pass the eighteenth amendment or the “Volstead Act” on January 20, 1920. Women’s groups and religious groups were the main proponents of passing the amendment. Today the chances of passing such a act in most major markets is slim to none, however it should be noted that religion is a driving factor in the decisions making process of many countries and maintaining awareness of the direction that these groups are moving towards is very important.
Science and Medicine Long term alcohol use has been linked to a number of medical conditions including cancer, heart disease, diabetes, and liver failure. As long as people continue to abuse alcohol and use it to excessive amounts there will be continued efforts by the medical and scientific community to encourage people to decrease their consumption or to quit using alcohol overall. The effect on a body when extensive use of alcohol is discontinued is well documented and it is these efforts that persuade science and medicine to continue to educating/pushing for people to discontinue the use of alcohol. Environmental Scan
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Conclusion & Planning Premise As beer consumption in developed markets has flattened due to changing beverage preferences and relatively slow population growth among key demographics, the brewers must seek growth in developing countries such as India, China, South Africa and others, where global middle class is rapidly emerging. Meanwhile brewers in developed markets must look for ways to reinvent themselves by attracting younger generations with strong branding and marketing and by maintaining a diverse portfolio of products in response to varied tastes. The following planning premise provides an overview of the brewing industry, with specific focus on the primary areas of concern for any firm pursuing success in the global beer industry.
Planning Premise Natural/Geographic Dimension Trend or Driving Force: Unpredictable commodity prices • Fluctuating commodity prices can affect the cost of beer production and drive a need for process efficiency. • Threats in this arena are related to global weather patterns and their ability to affect commodity supplies and the cost of production. This can be sudden and difficult to predict. • Multinational producers have a distinct advantage because of larger commodity buying power and established relationships with key suppliers. • Firms should seek to improve process efficiency and establish strategic partnerships with key suppliers in established and growth markets. Demographic Dimension Trend or Driving Force: Changing tastes of young and old generations • Statistics show that baby boomers are beginning to prefer wine or spirits, possibly due to health studies or, in the US, low‐carbohydrate diet trends. • Younger generations in established markets have demonstrated a preference for distilled spirits instead of beer. This poses an obstacle to growth and challenges firms to find ways to establish a young consumer base. • Opportunities have increased in emerging markets due to the growth of a worldwide middle class. Economic Dimension Trend or Driving Force: The saturation of traditional markets is driving consolidation through mergers and acquisitions in emerging markets, resulting in a highly competitive marketplace. • Primary growth opportunities are in emerging markets such as China, India, South Africa, Russia and Latin America. • Threat: A growth strategy in emerging markets can be a risky venture due to domestic and multinational competition and high barriers to market entry. Such a strategy tends to favor large‐scale producers with large amounts of capital on hand. • Opportunity: Large growth opportunities in strategic locations Social/Cultural Dimension Trend or Driving Force: The beer industry is confined to areas of the world in which alcohol consumption is socially/culturally acceptable.
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• • •
Evaluation of growth areas must include a consideration of the social/cultural make‐up of the region. Threats: Growth in emerging markets could be constrained by the cultural/social/religious make‐up of a population Opportunity: Emerging growth markets provide an opportunity to introduce beer to a new society and ingrain this beverage into the culture of a region.
Political/Legal/Regulatory Dimension: Firms must effectively manage the needs of governments and interest groups to mitigate regulatory backlash. • Self‐regulation is necessary for firms to effectively manage stakeholder relationships and establish an attitude of ethical development and social responsibility as it relates to alcohol and society. • Threats: Improper self‐regulation or exploitation of certain demographics such as young populations may create a social backlash. Firms must identify and manage the social and cultural differences in emerging markets and tailor their approach to each specific area to avoid social backlash. • Opportunity: Building relationships with governments and interest groups around the world to ensure continued growth. Technological Dimension: New harvesting and production technologies must be identified to increase process efficiency and ensure continued growth. Business Practices/Expectations Dimension Trend or Driving Force: Industry‐wide consolidation continues to occur as global competition plays out in emerging markets. • As firms grow larger, varied consumer tastes force multinationals to maintain a more diverse portfolio of products. Despite their size, firms must remain agile enough to quickly respond to consumer tastes or risk losing ground in key markets. • Threats: Reconciling size with changing consumer tastes. Firms must work to adequately anticipate changing tastes in a various worldwide markets and operate with careful efficiency to minimize costs and risks. • Opportunities: Global consolidation provides opportunities in emerging markets through mergers and acquisitions and targeted import strategies. Environmental Scan
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Bibliography Arndofer, James B. THE DEATH OF BEER Advertising Age; 5/2/2005, Vol. 76 Issue 18, Preceding p1‐59, 2p, Hutter, Lawrence. “Profitable growth and value creation in the beer industry‐A view from Deloitte and SAP”. 2005. Sankrusme, Sinee. “A Study of the Beer Market Leader, Challenges and Niche Market Strategies.” Proceedings of the World Academy of Science, Engineering and Technology. Volume 33, 2008. Slocum, John; Foster, Roy; Mcguire, Mike; Conder, Wendy; Frazer, Robyn; Ross, John; Corradini, Elthon; Lei, David; Scott, Stan. “Fermentation in the Beer Industry”. Organizational Dynamics, Volume 35, No. 1, Pg. 32‐48, 2006. Elsevier Inc. "China drives growth in global beer industry". Food & Drink Weekly. . FindArticles.com. 07 Dec. 2008. http://findarticles.com/p/articles/mi_m0EUY/is_27_13/ai_n19396600 CIA World Factbook: https://www.cia.gov/library/publications/the‐world‐factbook/ China: https://www.cia.gov/library/publications/the‐world‐factbook/ India: https://www.cia.gov/library/publications/the‐world‐factbook/geos/in.html South Africa: https://www.cia.gov/library/publications/the‐world‐ factbook/geos/sf.html Russia: https://www.cia.gov/library/publications/the‐world‐factbook/geos/rs.html about.com (2008) Why is alcohol forbidden in Islam, November 30, 2008, http:// islam.about.com/od/healthy/f/alcohol.htm Brewery Magazine http://www.breweryage.com/industry/ http://www.indianmba.com/Faculty_Column/FC519/fc519.html http://www.marketresearch.com/browse.asp?categoryid=469 http://markets.chron.com/chron?GUID=6871331&Page=MediaViewer&ChannelID=3191 http://www.allbusiness.com/services/business‐services/4553785‐1.html http://www.pr‐inside.com/global‐beer‐manufacturing‐http‐www‐companiesandmar‐ r865704.htm http://www.flex‐news‐food.com/pages/19744/Beer/Latvia/beer‐market‐not‐developing‐latvia‐ says‐aldaris.html Environmental Scan
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http://www.beerinstitute.org/statistics.asp?sid=2 http://www.asq.org/media‐room/press‐releases/2005/20051118‐quarterly‐report.html Other Resources 2007 Anheuser‐Busch Annual Report 2007 InBev Annual Report 2008 SAB Miller Annual Report Beer in India. http://en.wikipedia.org/wiki/Indian_beer
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