treaty beer company… · web view · 2013-12-05porters five forces analysis of the beer...

Treaty Beer Company

Presented to Ed Dennehy

02/12/2013

02/12/2013

Table of ContentsIntroduction...........................................................................................................................................3

Purpose of the document..................................................................................................................3

Outline of the organisation................................................................................................................3

Environmental Scan...............................................................................................................................4

Internal Environment.........................................................................................................................4

Management/Organisational structure.........................................................................................4

Marketing......................................................................................................................................5

Operations.....................................................................................................................................6

Financial Analysis...........................................................................................................................6

External Environments......................................................................................................................8

Natural Environment.....................................................................................................................8

Porters Five Forces Analysis of the beer industry in Ireland..........................................................8

PEST Analysis...............................................................................................................................12

Bibliography.........................................................................................................................................14

2 | P a g e J u l i e a n n e O C o n n o r

02/12/2013

Introduction

Purpose of the document The purpose of this document is to analysis Treaty Beer Company (TBC) and the industry in

which it competes. To identify strengths and weaknesses within the company but also

analysis the beer industry in Ireland and identify any problems which TBC have in relation to

the industry along with their competitors. This information is for the incoming CEO of the

company as the current CEO is retiring.

Outline of the organisationTreaty Beer Company was set up in 1990 by John Murphy in Limerick city. The business

began in a warehouse in Limerick city in which they still use today, even though it is

currently run down and not up to the standards required for a brewing company.

TBC is a small family-run company with John the current CEO retiring and handing over the

running of the business to his son Cillian. The business has grown significantly since it was

first established, growing from a small three person company to now having 20 employees.

Sales within the company have increased dramatically from €20,000 in its first year in

business to €1,500,000 in sales this year. The company now produce four different bottle

formats; these include both Treaty Stout and Ale in 250ml and 500ml bottles.

There is a huge competitive market today in Ireland in comparison to when the company

first started. Competition has increased considerably from both the domestic and

international beer companies investing heavily in their brands, which means the great taste

of the beer cannot be solely relied on anymore.


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Environmental Scan

Internal Environment

Management/Organisational structure

Treaty Beer Company is a family run business, owned and run by John Murphy, the CEO of

the company, since it was first established in 1990 in Limerick City. He is retiring in the near

future and passing on the business to his son, Cillian, when he retires. Cillian is 22 and has

recently graduated from IT Carlow with a BA (HONS) in Marketing, and has worked in the

accounts office informally for the past four years.

When John Murphy first set up the business he was previously a barman and went on to

owning a pub of his own. He began to brew beer in his home selling to the local community

around his home and set up the business after he received an inheritance. Murphy is a man

set in his ways as he still manages the business in the same way today as he did when he

first started selling the beer. The company first started with only three employees and now

has 20 employees working for them. Many of the employees are family or friends of the

family with little skills and experience in the brewing industry. The accounts and

administration manager is Murphy’s wife who has no qualifications in office management or

accounting. Working with her are two part time employees, with many records including

inventory being kept manually. Murphy himself does a small amount of admin work

opening all mail and reviewing customer billing before they are sent out, he also requests

any expenditure over €100 be approved by him. The lack of experience seems to be a

regular occurrence in the business as the factory, warehouse and delivery department

manager is a friend of Murphy and although a former barman has no qualifications in

operations management or brewing. The other staff within the business are generally

unskilled and untrained. There are no specific roles given to the staff as they usually take

turns in making the beer and driving the delivery truck showing no formal organisation

amongst the staff. Although Murphy used to visit the factory and warehouse regularly to

inspect operations he no longer has the time, causing the disorganisation of the staff. The

following graph illustrates the breakdown of staff within the business:


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Marketing

Product TBC manufacture ‘traditional’ Irish beer. The beer is sold in four bottle formats:

Treaty Stout 250ml

Treaty Stout 500ml

Treaty Ale 250ml

Treaty Ale 500ml

Both products contain 5% alcohol. The products are sold on the basis it is a high quality

traditional Irish beer in which the company use all natural ingredients sourced from local

suppliers around Limerick.

PriceThe price of the product is based on the bottle size for both Stout and Ale. The 250ml bottle

is sold at €1.50 per bottle and the 500ml bottle is sold at €2.50 per bottle. After direct costs

and overheads the company make 50cent profit on both bottles. This results in a 33% profit

on the 250ml bottles and 20% profit of the 500ml bottle. Customers are offered 30 to 60

days credit. Although many customers see this as a great advantage they feel Murphy will

often negotiates on price and payments out of desperation to close the sale.

PlaceThe main market for Treaty Beer Company is the Limerick market. The primary market of

TBC is the ‘upmarket’ hotels and pubs in the Limerick region. They distribute the product

direct from the warehouse using the only delivery truck the company. Sales of the products

are 50/50 split between the hotel and pub industry.


CEO John Murphy

Production, Warehouse & delivery

- 1 manager- 15 full-time employees

Accounts & Administration

- 1 manager- 2 part-time employees

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PromotionTBC rely almost solely on the quality of the product for its promotion. The company

position itself as a traditional Irish beer manufacturer. There is not a huge investment in

promotion by the company as they see quality of the beer as the USP of the company.

Murphy is the only sales person within the company spending half of every day making sales

calls. The company also have a website which only gives basic information to customers.

OperationsTBC operate from a rundown warehouse in Limerick city, and have being doing so since it

first opened in 1990. The company have only one delivery truck for the products which is an

old truck and is starting to break down on a regular basis and customers do rely on TBC for

their quick delivery service. The beer is produced on the basis of sales forecasts made by

John Murphy and then stored in the warehouse awaiting delivery. Inventory records for the

company are kept manually but are highly unreliable. Treaty Beer Company has been

operating without any systematic management or financial control as Murphy believes it

would be too costly and unnecessary. Although there are many operating problems Murphy

still believes any problems the company have are due to the current economic downturn

and are only affecting the company in the short-term.

Financial AnalysisFrom the information provided the following ratios were conducted to evaluate the financial

position of Treaty Beer Company.

Current Ratio: Current Assets = 300,000 = 0.68 Current Liabilities 440,000

Current ratio for TBC is 0.68:1

Industry average is 2:1

This shows that TBC is below the industry average by 1.32. This means that the current

assets of TBC are not sufficient to cover liabilities; it doesn’t mean the company is in debt

but they will have difficulty meeting obligations.

Acid test Ratio: Current Assets – Inventory = 300,000 – 50,000 = 0.57 Current Liabilities 440,000

Acid test ratio for TBC is 0.57:1

Industry average is 1:1


02/12/2013

Acid test ratio measures the ability of the company to use its near cash or pay back it

liabilities immediately. This shows that TBC cannot fully pay back its liabilities as their

results stands at 0.57, 0.43 below industry.

Net Profit Margin: Net Profit = 25,000 = 0.017 = 1.7% Sales 1,500,000

Net profit ratio for TBC now stands at1.7%. This indicates how much of each euro earned by the company is translated into profit.

Gross Profit Margin: sales – COGS = 1,500,000 – 700,000 = 53% Sales 1,500,000

Gross profit margin for TBC is 53%. It assess the firm's financial health by showing the

proportion of money left over from sales after accounting for the cost of goods sold. Gross

profit margin serves as the source for paying additional expenses and future savings.

Overall the Treaty Beer Company have no long term debts but they do not have enough money to cover their short term debts. They also need to review the salary of both the CEO and accounts manager in order to control expenses. TBC need to review their financial structure and put in a better system.


02/12/2013

External Environments

Natural EnvironmentThe drinks industry in Ireland has always paid great attention to the environment and the

role it plays in the manufacturing process. Consumers are also more environmentally

friendly now-a-days and are more aware of issues such as carbon footprint and recycling in

their purchasing decisions. Many drinks companies in Ireland are members of Repak, which

is a government initiative to increase recycling. Many companies are always looking for

ways to increase the recycling of their products. Within on-trade, publicans can return

bottles and kegs to be refilled and reused. In one company a simple change like this,

resulted in 2,925 tonnes of glass being reused and a total annual saving of €1.03million.

Overall, the industry has reported a 64% recycling rate for packaging waste. Another way in

which companies are looking to reduce waste includes reducing the weight of glass, using

reusable plastic interlayers and the possibility of changes to bottle lids. These changes will

cut out the packaging sent to customers reducing waste from the start (Malmhake, 2013).

Breweries all over the country have devised some great innovative ways to prevent waste of

spent grain in the company. Spent grain constitutes for almost 85% of a breweries by-

product, this ‘waste’ is used in the agricultural sector as animal feed or compost

(Witkiewicz, 2013).

Protection of the environment is of key importance to the industry. Reductions of energy

usage, using environmentally friendly materials along with increasing awareness of recycling

are all areas in which companies are seeking to become more efficient and environmentally

flexible (Malmhake, 2013).

Porters Five Forces Analysis of the beer industry in IrelandPorters’ five forces analysis assumes there are five forces which determine competitive

power within the competitive industry of a business (Manktelow & Carlson, 2013). These

forces are:


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1. Threat of new entrantThere is always a threat of new entrants in any competitive market. In the Irish beer

industry there are many areas for new entrants in the market, from small scale

microbreweries to larger international breweries investing in the Irish market. There is

rising demand in the alcohol industry across Europe for so-called ‘real ales’ (Marketline,

2013). These real ales are marketed on high quality and assortment leading them to be sold

at higher prices. The Irish market has a number of these ‘real ales’ with numerous

microbreweries already existing across the country within specific regions. However, there

are many barriers to entry which will affect new entrants. The main barrier in this industry

being economies of scale. Porter defines economies of scale as “declines in unit costs of a

product as the absolute volume per period increase” (Porter, 1980). Therefore, the higher

the quantity of products produced the lower the cost of production per product. The larger

companies in the market tend to rely mainly on the mass-market production of

internationally renowned palatable lagers leaving the microbreweries market more open

(Marketline, 2013). The bigger breweries have this great advantage as they have a greater

ability to spend more on branding, marketing and promotions, setting them apart from their

competitors. This also helps gain larger shelf space with a retailer which is usually limited.

In addition brewing beer is hugely capital intensive, from the manufacturing process to

taxes and regulations involved leaving small scale companies at a major disadvantage. So as

we can see there is somewhat threat of new entrants but it is low to moderate as it is

dependant mainly on larger breweries (Boeing, 2008).

2. Threat of substitutes

The main threats of substitutes are of course, other alcoholic products and on smaller scale

non-alcoholic beverages, such as low/no alcohol beers. The purchase of these products is

on the increase and many factors contributing to consumers changes cannot be controlled

by the industry (Marketline, 2013). Consumers are taking better care of themselves are

therefore paying more attention to their alcohol intake. Opting for ‘less fatten’ drinks or

spirits or just sometimes simply avoiding alcoholic drinks. Pressure from sellers of substitute

products is considered to be on the increase but this is again down to consumption patterns

changing. The cost of switching to substitutes is practically non-existent, so it is only really

in the mind of the consumer that the change is costly if they are perhaps brand loyal

(Boeing, 2008). This is also the same for distributors as the per-unit volume prices for beer


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are higher than for spirits or wines leaving more room for profits if they switch (Marketline,

2013). Overall, there is a moderate threat from substitutes but this is on the increase.

3. Bargaining power of buyers

The power of buyers is significantly high when it comes to the beer industry (Marketline,

2013). There are three components of the buyer’s market; these include

distributors/wholesalers, supermarkets/restaurants and consumers (Beer Insights, 2013).

Distributors have the main influence and hold the most buying power in the industry.

Distributors are the main link with retailers and consumers from the manufacturers. This

gives distributors huge power over the manufacturers and gives them great room for

negotiations regarding price and increases promotion/incentives from the manufacturers

(Boeing, 2008). Supermarket chains are frequently able to negotiate favourable terms

regarding prices, this helps to increase their buying power immensely. Again, with buyers,

switching costs are relatively low giving them greater power, so they can use this as an

advantage to them in negotiations. Large supermarket chain tend to offer a wide variety of

beers on the shelves in order to provide for consumer tastes, and often provide their own

brand products (Marketline, 2013). With this always being a threat to the manufacturers

the supermarkets can negotiate prices so the products will be on their shelves.

Of course, consumers are always part of the buyer’s power. Buying power is not directly

linked to consumers but consumer trends and preferences are channelled through

distributors and retailers as they are the final user (Boeing, 2008). As consumer trends

change this will change what is being purchased. For example, consumers in Ireland are

currently moving towards craft beers, prompting a greater supply to retailers.

4. Bargaining power of suppliers Suppliers in the beer industry have very little bargaining power. The main inputs include

malted grain, hops and bottles or barrels. Generally ingredients for the beer are purchased

from independent suppliers, usually local farmers close to the breweries or sometimes

malted barley would be bought from a third-party producer. Beer, when produced is always

packaged on site, weakening supplier power (Beer Insights, 2013). There are numerous

independent hop growers, which are usually small operations, which further weaken

supplier power as manufacturers do not need to depend on a single supplier. Barley

producers do have some power however within the industry. Barely producers do not


02/12/2013

solely rely on the beer market as barely can be used for other products such as animal feed,

but this is not enough to influence their power greatly. Therefore, there is low buyer power

within the beer industry (Marketline, 2013).

5. Intensity of rivalry Competition within the beer industry is moderate but is also on the increase (Boeing, 2008).

Competition for many years has being based primarily on brand and quality with price not a

major influence on peoples decisions. Brands fought hard to become the top brand in the

industry. The market in Ireland is severely consolidated, being dominated by three large

players, holding 82.4% of the total market volume combined (Marketline, 2013). In order to

become more identifiable to the public, some of the larger brands within the industry have

introduced brand management. With the increase of substitute products within the

industry and consumer patterns changing, the industry is being greatly affected resulting in

rivalry increasing. Companies want to be the brand chosen and always want to be in the

consumers mind (Marketline, 2013). Some of the major players offer premium beers in

order to increase intensity of the market. With these factors in mind we can see rivalry is

quiet high in the beer industry.


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PEST Analysis

PoliticalThe drinks industry is one of the most competitive in Ireland (Malmhake, 2013). Open

market competition promotes efficiency, innovation and output resulting in value

innovation and excellence in the products that are produced. Therefore, competition policy

is crucial to support, promote and sustain competitiveness within the industry. The drinks

industry subscribes to 10 core principles which are incorporated into regulatory policies.

These include: clarity of purpose, economic & cost benefit analysis, consultation,

transparency, proportionality, consistency, simplification, consolidation, coordination, and

accountability.

The Irish government have strict regulations in order to moderate the consumption of

alcohol in Ireland. For instance, persons must be over the age of 18 to purchase or consume

alcohol in Ireland. The government are trying to remove the bad name the Irish have in

relation to drinking habits. The drink driving regulations within Ireland has being reduced

greatly to just 50mg of alcohol per 100ml of blood, resulting in one pub measure of spirits

being over the limit. Also the introduction of the smoking ban in public places has had an

indirect effect on the alcohol industry as a large proportion of the brewing industry sales

come from these establishments (Foley, 2013). People tend to stay at home now reducing

the amount of drinking in compared to the years before this was enforced.

Economical

The Irish alcohol sector generates around €2 billion in revenue for the state annually, and

supports 62,000 jobs around the country (Malmhake, 2013). The total consumption of

alcohol has increased by 10.8% since 2004; however, domestically produced alcohol has

declined by 21.8%. Irish spend almost €3billion each year on beer in pubs, clubs and

restaurants (IBEC, 2013). The volume of imported alcohol products has also increased

dramatically, growing by almost 90% since 2000. There are concerns for the sustainability of

small rural pubs due to the changed economic environment. Many of the rural pubs have

found ways around this with the provision of food, now 58% of tourists choose pubs for

food in comparison to 28% opting for restaurants. One of Ireland’s main tourist attractions

is the Guinness storehouse. The industry is, however a highly substantial contributor to the


02/12/2013

exchequer in terms of excise and VAT, generating total tax revenue of €2.151 billion in 2012

(Foley, 2013). Ireland has the fourth highest excise levels on beer in Europe (IBEC, 2013).

Social The Irish drinks industry is one of the greatest national assets to the country (Malmhake,

2013). Beer is Ireland’s favourite alcoholic drink. Irish people drink 91 litres of beer per

head annually, resulting in almost 275 million pints of beer consumed every year. Irish

brands are of high quality and internationally recognised brands (IBEC, 2013). Many of the

companies within the Irish drinks industry support the Irish culture and the Irish people.

Throughout the country many companies support local activities, through sponsorship of

events such as sporting, cultural and artistic endeavours; from ‘The Gathering’ which took

place all across the country to the sponsorship of local GAA clubs (Malmhake, 2013).

Drinking is a major part of the social culture in Ireland. The Irish base many events or

occasions such as weddings, birthdays, etc around the pub and alcohol. Binge drinking is a

major problem in Ireland. Binge drinking is considered to consume more than 5 units of

alcohol at any time (DrinkAware, 2013). The youth culture is considered to be major binge

drinkers, particularly students as they tend to consume more than the recommended

allowance numerous times a week (DrinkAware, 2013).

Technological The Brewing of beer is a very old art which started in the late 1700’s (IBEC, 2013). Few

technological changes have come about in the brewing process but changes by the macro

environment have forced technology to change the industry. New technologies such as

refrigeration and motorised transportation have allowed for the integration of worldwide

brewing industries (Reader, 2013).

Other than these factors there have been very few advances that have affected the actual

brewing process. The only major advance was the introduction of hops in the 19th century

(McGreevy, 2013). Today, there are millions of breweries worldwide still using the same

technique (McGreevy, 2013).


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BibliographyBeer Insights, 2013. Beer marketers insight. [Online] Available at: http://www.beerinsights.com/index.php?option=com_content&view=article&id=1&Itemid=9[Accessed 30 11 2013].

Boeing, L., 2008. Beer Breweries industry analysis, s.l.: dr. Matt Ford.

DrinkAware, 2013. Drinking in Ireland-the facts. [Online] Available at: http://drinkaware.ie/index.php?sid=11&pid=522[Accessed 25 11 2013].

Foley, A., 2013. The Economic Contribution of the drinks industry of Ireland, Dublin: Drinks Industry Group of Ireland.

IBEC, 2013. the irish beer industry and its importance to the Irish economy, Dublin: ABFI.

Malmhake, A., 2013. ABFI Policy. [Online] Available at: http://www.abfi.ie/Sectors/ABFI/ABFI.nsf/vPages/ABFI_Policy~abfi-policy?OpenDocument[Accessed 01 12 2013].

Malmhake, A., 2013. Environment. [Online] Available at: http://www.abfi.ie/Sectors/ABFI/ABFI.nsf/vPages/ABFI_Policy~environment?OpenDocument[Accessed 28 11 2013].

Manktelow, J. & Carlson, A., 2013. Porters five forces. [Online] Available at: http://www.mindtools.com/pages/article/newTMC_08.htm[Accessed 20 11 2013].

Marketline, 2013. Alcoholic Drink in Ireland, Dublin: Marketline.

Marketline, 2013. Beer in Ireland, Dublin: Marketline.

McGreevy, R., 2013. Brewing up a storm: crafty new Irish beers going down nicely. [Online] Available at: http://www.irishtimes.com/news/consumer/brewing-up-a-storm-crafty-new-irish-beers-going-down-nicely-1.1510880[Accessed 26 11 2013].

Porter, M. E., 1980. Competitive Strategy, New York: Free Press.

Reader, C., 2013. Macroenvironmental factors that affect the beer industry. [Online] Available at: http://www.ehow.co.uk/list_7392420_macroenvironmental-forces-affect-beer-industry.html[Accessed 29 11 2013].

Witkiewicz, K., 2013. Sustainable Uses of Spent Grain. [Online] Available at: http://www.craftbeer.com/craft-beer-muses/sustainable-uses-of-spent-grain[Accessed 25 11 2013].


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