Industry Issues - the JBA 1998 Beverage Industry Survey
Importance of strategies for achievinggoals in the near future
Respondents were asked to rank theimportance of various strategies in achieving their financial business goals in 1998 andbeyond. Here we take a polarized view (first, or first and second most important factors)of the results from supplier category, turnover and country differences.
a) By supplier category
More wholesalers and suppliers to major outlets than producers ranked closerintegration with customers and suppliers as the most important strategy for achievinggoals in the near future. Adding the number of respondents who ranked this issue as thesecond most important strategy, it becomes markedly more important to wholesalers than tothe other supplier categories. This shows that supply chain issues are important to allplayers and that the further down the chain the more focus it has.
Producers ranked the ability of thebusiness to change highly, however, when the second most important strategies are added tothe mix improve product quality becomes much more important. Product quality was rankedfirst by 18% of primary producers and 16% of suppliers to major outlets while wholesalersare least concerned with this issue. More suppliers to major outlets ranked new productinnovation within their top two most important issues than other sectors. Wholesalersranked growth by mergers and acquisitions higher than other sectors. This would indicatethat product innovation is recognized as important by parts of the chain but that areas ofcore competing, for example, wholesaler distribution, still look for efficiency gainsthrough increased throughput.
b) By turnover
Closer integration with customers and suppliers is a more important strategic issue tolarge (£100m/$160m+ annual sales) and medium (£50-100m/$80-$160m) companies than tosmaller (£20-50m/$32-$80m). Nevertheless, it is still the most important issue for allcompanies. Medium sized companies ranked improve business flexibility to change as muchless important than either the smallest or largest companies. Medium sized companies aremore concerned with new product innovation (22%) than other companies.
Looking at the first and second mostimportant strategies, closer integration is still the highest rated issue across all thecompanies but improved product quality also becomes very important to smaller and mediumsized companies. New routes to market is more important to smaller companies.
Fig1. - Strategies for achieving goals
c)Country differences for beverage suppliers
Comparing each country's rankings across issues, some interesting differencesare highlighted.
Closer integration with suppliers wasconsistently high. There has already been considerable rationalization of the Beverageindustry in Europe and the US, resulting in fewer suppliers, many of them pursuing similarstrategies. Many large manufacturing companies, with broad domestic and internationalportfolios of brands, must reduce costs by all means available to them (merging,re-engineering) in order to continue to provide the returns demanded of them byshareholders. European companies, often family or privately held, have slightly differentpriorities, and will tolerate lower profitability.
New product innovation was also asignificant focus in the survey. In general terms there is over capacity at themanufacturing level, and too many products on the market causing over supply to hold downprices. Many traditional products with tired images are facing ageing consumer profiles.Younger and new consumers need convenience, style and instant fashion. Single-serve,ready-to-drink products are booming worldwide, but many will have a short life cycle.
The survey shows considerable differencesin areas such as product quality and business flexibility. Although companies arerecognizing the problems, they are not of one mind when it comes to finding solutions,except that costs must be reduced and profitability restored. Large companies may beslower to respond to change because of their layered management and organizationalstructure. Smaller companies may be hampered by shortage of cash or manpower to graspopportunities. Medium-sized companies with small flexible management teams are the mostresponsive to change.
Financial management is becomingincreasingly complex, especially for large companies and those which operate in more thanone country. Many recognize that investing in information technology and systems willimprove efficiency, but may lack the necessary skill or may not have thoroughlyinvestigated the benefits that wholly integrated systems can bring.
UK producers are increasingly working inpartnership with other suppliers and retailers to fill a gap which retailers haveidentified. This closer relationship is improving the speed of getting new products tomarket, and reduces failures.
The structure of the beverage trade in theUK means that a larger proportion goes through the off-trade (for example, supermarkets)than in many other European markets where there is a higher number of hotels, cafes,restaurants and licensed grocers.
Because of the concentration and strengthof the retailers (which is continuing to increase) they dictate the terms on whichsuppliers of both food and drink do business.
For producers and suppliers, improvingproductivity, elimination of waste, overstocks and duplicate processes, and developingproducts and systems in partnership with other suppliers (for example, glass manufacturersor label suppliers and even retailers) are an obvious route to greater efficiency andlower costs.
Consumers, particularly in the UK, arelargely apathetic about quality. They assume it is good and price is often a moreimportant consideration. However, as a number of food and drink scares have shown, thecost of failing to assure quality is very high for any company and for a small company itmay even mean extinction!
Spain has a huge number of wine and spiritproducers and integration with other producers may improve both quality and productivity.Considerable merger and acquisition activity, much of it by foreign investors, has alreadybrought greater concentration to the industry. Total consumption appears to be levelingoff and pricing is becoming more and more competitive. This is hitting all sectors of thebeverage business, and profitability can only be improved through greater efficiency.
The growth of supermarkets in terms ofturnover seems to have stalled as, despite additional store openings, recent figures showno increase in total turnover. To a great extent this is due to the strength of the'voluntary' sector with groups such as Spar and Vivo supplying independentretailers spread across the country, and allowing them to sell at competitive prices.These goods are supplied either from regional warehouses of the buying group, or directfrom the manufacturer (where volume justifies it). Those retailers which are members ofthese groups are technically advanced. There is also a major Horeca (hotels, restaurantsand cafes) sector which is either supplied by a very few major operators in the brewingand soft drink business, or by independent wholesalers capable of offering a full service.
At the moment, this sector is moretraditional with orders being taken by sales personnel or by telesales operations.Electronic ordering would improve operational efficiencies throughout all categories.
Promotional activity is strenuous, and themarket is highly flexible. Companies which are able to exploit this are at a distinctadvantage.
French wine and spirit companies have along heritage of producing quality products which were sold regionally. There are a numberof powerful suppliers, but smaller companies see quality as the way to get their productsonto (and off) the shelves.
Retailer-power is less concentrated inFrance and Italy. There are far more independent grocers, and a greater proportion of foodand drink is sold in the on-trade Horeca. Suppliers have built up relationships withnumerous outlets over many years, based on this perception of quality. However, with arelatively stagnant domestic market, suppliers have long been active in export markets.
However, as in Britain, the large hyper andsupermarkets are gaining an ever-increasing share of the total retail business, andaggressively introducing their own labels.
The French drinks market is highlyregulated, limiting strategic initiatives by suppliers. The Loi Evin restricts theadvertising of beers, wines and spirits, thereby slowing down the introduction of newproducts. Promotional material at point of sale must be directly concerned with theproduct (for example a free glass), and all visual material must contain a health warning.The Loi Galland, introduced in 1997, is aimed primarily at promoting fair trading practicebetween producers and distributors.
The reunification of Germany created anexceedingly difficult economic situation and although consumer prices have risen by around20% over the last five years, consumer spending on food has remained almost static andexpenditure on alcoholic drink has risen by only 3%.
Germany is characterized by havingthousands of regional producers and suppliers, many of whom are family or privatelycontrolled, and who have close working relationships with their customers. Improvingprofitability is hard because the German food and drink market is totally dominated byprice which is controlled by the strength of the major supermarket chains (for exampleAldi). New product innovation was the highest ranked by Germany. This is an extremelyimportant technique to gain a price rise until a competitive product is introduced andforces the price down again making new product innovation key to the German market.
Access to Eastern Germany and CentralEurope, while creating its own difficulties, is regarded as important and companies areresponding extensively. There has been considerable merger activity in recent years as ameans to gain economies of scale and cut production and distribution costs.
Retailers are considerably less powerful inFrance and Italy. The Italian market has a number of major supermarket groups which aretechnologically advanced; smaller franchised operations which are also'on-line', and a large number of smaller traditional outlets, hotels,restaurants and cafes which aspire to be.
Merger activity and foreign investment isthreatening producers and their traditional distribution patterns. It is forcing theindustry to adapt quickly, to respond to change, and to have more extensive control overall business systems. Many primary producers of wines and spirits have turned to exportmarkets with considerable success, but competition from 'New World' wines, aswell as those from Eastern Europe, are also making these markets more difficult.
As with the French, style and quality areimportant and regarded as inherent, although, in fact, this is not always so. Pricesremain extremely low and producers now are paying for earlier failures to market thequality image of their products in the past, particularly in export markets. The USbeverage business is still fairly closely regulated, and it is perhaps a fundamental ethicof US business to get 'closer to your customer'. As in the UK, concentration ofsuppliers has taken place over the past decade and strengthened their position, makingthis element of strategy vital. This strategic merger activity is continuing as a way ofexpanding business.
As well as the federal tax on alcohol, all50 States and Washington DC have their own state tax, sales tax, mark-up, and differentregulations regarding the distribution and sale of alcohol, making the US in effect 51different markets.
25% of wines and spirits sales are madethrough state liquor control boards which strictly limit the flexibility of suppliers.Individual states regulate the availability of, for example, tastings, promotions andadvertising. Thereby necessitating state by state rollout of new products and increasingthe cost. There are also restrictions affecting the shipment of goods across stateboundaries. Seeking greater flexibility and finding new routes to market is thereforeimportant, but difficult, and companies with internet sites and mail order facilities musttake care not to infringe the regulations.
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