Rapid Response in a Changing Beverage Market : Part 1
|Part 1 Contents|
Part 2 will examine:
- And what about the consumer?
- Changing markets, new shopping
- New business solutions
- Lower prices need to be matched with lower costs
- Servicing customers better and cheaper
The beverage industry which includes beers, wines, spirits, minerals and soft drinks, is seeing fundamental changes in its products, its markets and its customers. In this complex and constantly shifting market, companies have to provide quality, innovation and variety, as well as fast and efficient delivery; all at an acceptable price. Many companies are, by nature, traditional and resistant to change, but beverages are becoming fast moving businesses and they require new business solutions.
Successful strategies will be aimed at improving thequality of earnings, building portfolios of brands relevant to modern consumers, improvingdistribution, servicing customers better and cheaper, reducing costs and strengtheningfinancial planning and controls.
Companies can no longer ignore the profound influence andonward progress of technology. Management needs to address the fundamental andcomprehensive changes in the marketplace and assess the cost and value of integratedinformation systems to help implement these strategic issues.
The purpose of this Briefcase Guide is to consider some ofthe major strategic issues facing senior management in the beverage industry, and to lookat the steps some companies are taking to deal with them. If the link between buildingbrands and obtaining price rises is now recognised, the demand for brands must also bematched with the ability to supply efficiently.
Context and recent history
The beverage industry includes family companies producing fine cognacs where time spent maturing the spirit is the very essence of its quality; as well as companies setting out into markets with new age products. It includes family brewing companies, which may have been established for two or three hundred years, and major industrial companies keen to exploit the shift to beer consumption in developing markets. It includes multi-national companies with broad portfolios and global businesses, and retailing companies which supply a single domestic market.
For most companies, the eighties was a period of expansion.Many were achieving growth rates in double digits. Company cultures wereproduction-driven, traditional, hospitable - and still profitable. Inflation alloweddecent price increases in most markets every year. Although domestic markets were maturingin the west, the opening of new markets in Eastern Europe, Asia and Latin America keptdemand high, and fuelled expectations of profitable growth to an unrealistic level.
The multi-nationals led the trend to owning theirdistribution networks which gave them better control of their brands and the benefit ofthe downstream margin. Portfolios were reviewed and gaps filled, often at considerableexpense. Growth was as much through this route as organic, but acquisition accountingconcealed the true cost of some of these deals. Margins on traditional premium productswere high and the need to drive through change was not apparent. Moreover, the ceaselessactivity in the industry, the constantly moving targets, the consolidation and integrationof businesses, the opening of new markets all helped to distract attention from the realpurpose of the operation - to sell brands.
In fact, in order to fund these other activities, manybrands were starved of vital advertising and promotional support, but not until economiesstarted to contract, consumer spending tightened and brand volumes declined, did thedamage become apparent.
However, the long period of recession in a number ofmarkets meant that for many years no price rises were obtained, but raw materials andother costs continued to increase. This has brought lasting change to the industry and ledto a fundamental reappraisal of the way companies do business. Although the traditionaldrinks industry is somewhat resistant to change, the effects are staring it in the face interms of loss of business and wafer-thin margins as trading conditions become increasinglycompetitive. The costs of supporting their geographical expansion without a highthroughput of profitable brands can no longer be sustained. Downsizing, retraction,restructuring, call it what you will, most companies are now in the process ofrationalising the sprawling empires of brands and companies built up in the previousdecade. Over capacity in the brewing and soft drinks industry has led to closure of manybreweries and contracting out of manufacturing. The result has been retrenchment andreappraisal and further consolidation of the industry.
Growth & survival
Beverage companies' expectations today are to live within a very different trading environment. Many are adapting to the rapidly changing marketplace with structures and strategies which enable their response to be swift and flexible. To do this they need a clear vision of where they are going, accurate knowledge of the consumers' changing needs, proper financial planning and controls, and efficiency right the way through the system to provide the right product to the right customer at the right price and the right time.
Most beverage companies have strategies based upon thefollowing aims:
To improve the quality of earnings
This requires the detailed examination of every product, every distributor and every market to establish the true costs. It needs financial targets or benchmarks to be set and elimination, rationalisation or reorganisation of those which are not meeting them. It requires the company to concentrate on its core activities and dispose of peripheral, less profitable businesses. The brand is the heart of the business. The link between advertising investment and the ability to implement price rises is clear. Beverage companies should be investing heavily behind leading brands by diverting funds from less effective brands or markets.
To build and develop portfolios of brands
This means adding value by extending the range with aged or premium products or market specials. Mature brands can be rejuvenated to make them more modern or relevant by innovation, such as new flavours, new packs or new styles of drinking. Companies can cater for new consumer lifestyles with convenience packs, single serve, screw cap, pre-mix or hand-held drinks. Although becoming less frequent, opportunities may occur to acquire leading brands, either locally dominant or international.
To enhance geographic spread and profitable growth
The purpose of extending a group's geographic spread is to increase and improve access to brands in both core and emerging markets. Traditionally, this has been by setting up its own distribution company, which needs a high volume throughput of brands to support it; an alliance or joint venture with a local partner, which must be a non-competitive arrangement or it is bound to fail; or acquiring a local company with a leading position, which should ideally offer synergies with existing activities in manufacturing, distribution or marketing. Brewing and soft drinks companies are more likely to license production, bottling and distribution to a local producer.
A continual review of geographical operations is required because a country which has offered opportunities historically, may not do so in the future and it may be best to divert financial resources from one country to another with greater potential and where they may be used more effectively. Companies should not be afraid to exit from highly competitive markets where profit margins are low and targets cannot be met.
To service customers better and cheaper
The supply chain has to be managed much more efficiently. This is one instance where investment in technology to track and speed up processes, reduce inventory and free up cash, can be most effective. Manufacturing, distribution and service systems can be totally integrated with financial and management systems to provide senior personnel with a much better overall view of trends and anomalies critical to the success of the business.
To be low cost and efficient
This is closely linked with the previous strategy and requires rigorous review of all production, purchasing and supply decisions. Although many traditional drinks companies are bound up in their heritage, there should be few sacred cows. A flexible response means that a change to buying in goods, or contracting out production should be considered if it would be more cost effective.
To improve management skills
Companies need to adapt constantly to change to stay ahead of the competition. Managers need to be competent and multi-skilled, to establish the momentum for change and to operate within an open, flexible and responsive business environment. Whilst it is not the whole answer, implementation of new systems may force through beneficial changes in structure or culture.
To strengthen financial planning and controls
The ability to link financial and strategic planning enables investments to be made where they will provide the highest return. The improved flow of information across departments through fully integrated systems linking finance, distribution and manufacturing gives greater visibility throughout the business, tighter budget control and will enable better planning and forecasting.
A golden opportunity
Integrated information systems can help implement anumber of these strategic aims, offering management the chance to transform the business.Indeed, if they don't, they will have missed a golden opportunity. A secondindustrial revolution is occurring and companies have to harness modern technology torespond to today's fast moving events.
Considerable sums are being put aside for this purpose andto return companies to profitable growth. The major companies have mostly chosen to makethis provision as a one-off cost, setting aside amounts which would bankrupt smallercompanies. The smaller companies find it necessary to make the investment over a period ofyears, which inevitably means little or no profit growth, but allows them to emerge at theend strong and healthy, and well able to compete in the changed trading environment.
Beverages for a new age
So what are the changes facing the world'sdrinks companies? They could hardly be more comprehensive. In short they are the products,the consumers and the markets. While national and international brands will remain thelong-term profit earners for most companies, innovation, variety and price are thecontemporary dress. After a period of relative inactivity, companies are looking for waysto make their brands more interesting and relevant to the modern consumer. This should notbe seen as a separate and isolated activity, but a continuous process of reviewing andresearching to identify consumers' needs and to fulfil them in a creative way thatsatisfies and pleases them.
Although it is relatively rare, this may result in afundamentally different product - such as the alcoholic soft drinks (the so-calledalcopops) which have made such an impact on the Australian and the UK markets, andincreasingly throughout Europe and America; or a new and original way of presenting anexisting product. For example, new ways of drinking or new packaging, such as Bourbon andCola in cans, or Scotch whisky infused with herbs, spices and red chilli peppers in silkscreened bottles.
The links between advertising and brand building andobtaining price rises is recognised to be strong and companies need to find funds toinvest in marketing support. To do this successfully, beverage companies need tounderstand the consumer and the entire experience of drinking the beverage which willeffect the buying decision. They need to understand why some brands are more successfulthan others, what gives them style and personality, why they make a statement to consumerswhich is beyond other brands. For example, Coca-Cola, Marlboro cigarettes, Levi jeans, orSmirnoff vodka. Successful products may extend their consumer franchise by premiumadditions, dark or light versions, low-calorie, low alcohol, etc.
The shift in drinking patterns also means more intensecompetition from not only other products of a similar nature, but the whole spectrum ofbeverages. Wines and spirits are competing with beers, ciders, soft drinks and new agebeverages. To help them track these trends, companies need an immense amount of data. Theyneed to know what is going on, which brands are being pulled off the shelf, and why. Theyneed to be able to analyse the data and have the information to make decisions.
They also need to know which brands and products arescarcely moving; those for which there is no genuine franchise. Indeed, every product soldshould be subject to this most detailed scrutiny. But are their costs fully known? Arethey making an acceptable return? If not they should be dumped. This may mean selling ordisposing of a secondary brand, which is costing time and money, or it may mean slashingthe proliferation of flavours, styles, packs and sizes which have been developed for apopular brand, but which are no longer relevant to today's consumer. This is anessential exercise for a healthy business which will have the side-effect of cost-savings.
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