Beer Industry & Porter’s Five Forces Model

Michael Porter’s five forces model is a useful tool for industry and competitive analysis. De Kluyver and Pearce (2005) signified this model suggests that an industry’s profit potential is largely determined by the intensity of the competitive rivalry within that industry, and that rivalry. Explained in terms of five forces, any company could base their organizational strategy by considering each one. The five forces include: the threat of new entrants, buyer power (the bargaining power of customers), the bargaining power of suppliers, the threat of substitute products or services, and the rivalry among existing competitors.

A. Buyer power

– In the Five Forces Model, buyer power will be favorable when buyers have many choices of whom to buy from and low when their choices are few. To reduce buyer power and create a competitive advantage, an organization must make it more attractive for customers to buy from them than from their competition. As the UK beer market generally remained challenging with ale volumes declining by 6. 4%, WB&D outperformed the market by 11.6%, which is a consequence of ale being the focus of the W&DB Brands business as they continued their strenuous marketing support, dedication to beer quality and widening their brand choices (W&BD Annual Report 2005, p. 17)

B. Supplier power

– In the Five Forces Model, supplier power is high when buyers have few choices of whom to buy from and low when their choices are many. Supplier power is the opposite of buyer power: A supplier organization in a market will want buyer power to be low.

A supply chain consists of all parties involved, directly or indirectly, in the procurement of a product or raw material. Since there is a decline in beer prices over the years, W&BD obtain their products at lower prices too. The decline was made worse by heavy price discounting in the off-trade. However, in 2004 breweries like W&BD did not see such excessive discounting, as in previous years, due mainly to being unable to further squeeze prices and achieve greater savings from suppliers or from their own costs.

C. Threat of substitute products or services

– In the Five Forces Model, Threat for Substitutes is high when there are many alternatives to a product or service and low when there are few alternatives from which to choose. Ideally, an organization would like to be in a market. As the beer industry is facing cannibalisation from alternative alcoholic drinks, flavoured alcoholic beverages (FABs) continue to show strong growth in a number of developed markets, especially amongst younger consumers, detracting from beer consumption. Health conscious people also prefer wine to beer because of its high calorie content.

This is why W&BD should strategise on developing a product for the increasing segment of “health-conscious” individuals.

D. Threat of new entrants

– In the Five Forces Model, the threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market. An entry barrier is a product or service feature that customers have come to expect from organizations in a particular industry and must be offered by an entering organization to compete and survive in which there are few substitutes for the products or services it offers.

In relation to W&BD, a bigger competitor Scottish & Newcastle launched a new premium variant of Kronenbourg, Kronenbourg Blanc, in February 2004. The brand was designed to compete head-to-head with InBev’s successful wheat beer, Hoegaarden, and was only made available in on-trade establishments. As the leading brewery, Anheuser-Busch did not fail to come up with a launch of its Michelob Ultra, which was specifically launched as a healthy beer, emphasising its lack of calories and in particular its low carbohydrate content to take advantage of the Atkins diet fad.

In addition, it has been promoted around fitness events, most notably being the sponsor of the London Triathlon (See Table 4. 2).

E. Rivalry among existing competitors

– In the Five Forces Model. , rivalry among existing competitors is high when competition is fierce in a market and low when competition is more complacent. Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in just about every industry. You may also be interested in PESTEL Analysis beer industry

W&BD placed 8th among the breweries in the UK in terms percentage of volume produced, although their trend is decreasing (See Table 4. 1). However, underlying operating profits and operating margins increased in all three of W&BD’s business divisions. Underlying profit before taxation increased by 6. 3% to ? 77. 7m (after goodwill and exceptional items up17. 8% to ? 70. 2m), and underlying earnings per share increased by 10% to 75. 8 pence per share (2003: 68. 9 pence).