2/12/2013

Strategic analysis of Treaty Beer Company

Presented by Rebecca Brown

c00143943 CW838

Rebecca Brown C00143943

ContentsIntroduction...........................................................................................................................................2

Internal Environment............................................................................................................................3

SWOT Analysis...................................................................................................................................3

Human Resource...............................................................................................................................3

Management / Organisational Structure...........................................................................................4

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

Product:.........................................................................................................................................5

Price:.............................................................................................................................................5

Place:.............................................................................................................................................5

Promotion:....................................................................................................................................6

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

Liquidity Ratio’s.............................................................................................................................6

Profitability Ratio’s........................................................................................................................6

Activity...........................................................................................................................................7

Leverage........................................................................................................................................7

External Environment............................................................................................................................7

Natural Environment.........................................................................................................................7

PEST Analysis.....................................................................................................................................8

Political Factors.............................................................................................................................8

Economic Factors..........................................................................................................................9

Social Factors..............................................................................................................................10

Technological Factors..................................................................................................................11

Porters 5 forces...............................................................................................................................11

Degree of rivalry..........................................................................................................................11

Supplier power............................................................................................................................11

New Entrants...............................................................................................................................12

Substitute Products.....................................................................................................................12

Buyer Power................................................................................................................................12

Bibliography.........................................................................................................................................13

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IntroductionThe goal of this paper is to measure Treaty Beer Companies performance in terms of the

internal environment and external environment and to provide a strategic report on the

business to the CEO John Murphy’s son Cillian who will take over the company when his

father goes into retirement.

Treaty Beer Company is a small family run company that makes traditional Irish beer for the

local Limerick market. It was established in 1990 by John Murphy when he seen a niche in

the market after realising that tourists demands were not being met due to a lack of locally

produced beverages in the market. Mr Murphy came into inheritance and decided to set up

Treaty Beer Company, the company has expanded from a small three-person company with

sales of €20,000, to employing 20 employees and sales of €1,500,000. The company sells

two different products Treaty Stout and Treaty Ale both in 250ml and 500ml bottles both 5%

alcohol content. The companies target market is the more upmarket hotels and pub sector.

The company differentiates from competitors on the bases of its two unique selling points

built on having high quality products and quick delivery.

The beer industry in Ireland is a multi-billion euro industry providing Ireland with a number

of benefits. Employment levels are at consistent rate with over 2,000 people directly

employed in the brewing industry. Beer generates roughly one billion euro in tax revenue

every year in Ireland and approximately 40% of the beer brewed is exported (Ibec, 2013).

With beer consumption in Ireland now approaching the average level of most Northern

European countries, the IBA members work together to ensure all are aware of their

industry's great contribution to Irish social and economic life. (Ibec, 2013)

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Internal Environment SWOT AnalysisSWOT analysis of Treaty Beer Company, the strengths and weaknesses internally and the

opportunities and threats externally.

Strengths Weaknesses Opportunities Threats-Won numerous international quality awards in the 80’s and 90’s-Products made from natural ingredients-All ingredients sourced locally-Good reputation-Mr Murphy’s expertise in the brewing industry-High quality suppliers

-Unreliable inventory records-No I.T department within the company. They only have one computer-Company only has one unreliable delivery truck-Sales prices can vary depending on cash flows of the business-Poor promotions in place-Unreliable stock keeping

-Sell product on draft, two thirds of Irish beer is sold on draft.- The opportunities to add a new variety of flavours to the product range-Sell to other retailers such as off licences-Potential for new technology in the firm such as introduction of a web site or mobile app-Expand outside of Limerick to near counties such as Clare or Tipperary

-Changes in rates and taxes-The introduction of the new water charges-Potential of the legal drinking age to change-Insurance charges

Human Resource The company employs 20 employees, including 2 managers, 2 part-time employees, 15 full-

time employees and the position of the CEO John Murphy. Recruitment of the company is

carried out in an informal way, as it is a small family run business. Mr Murphy initially

recruited family members to work in the organisation. The accounts office is managed by

Murphy’s wife who has no qualifications in either office management or accounting. The

factory, warehouse and delivery department is managed by a former barman who worked

with Mr Murphy in the past. Both of these management rolls show no implication of further

development in the company.

There seems to be no strategic approach to managing the firm’s human resources, the

production employees are also generally unskilled and take turns in making the beer and

driving the delivery truck, this issue could lead to conflict and confusion within the

organisation as there is no organised structure in place to inform the employees of their

roles. The employee turnover seems to be low as most of the employees in the company are

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friends of the family and have been employed in Treaty Beer Company for some

considerable time.

Although in the current economic climate there are large numbers of highly skilled

unemployed people Mr Murphy decides to stick to his old management style and structure

by employing friends and friends with the view that it may save costs, when in fact it may be

having the opposite effect. As the business is not operating to its full potential it is highly

possible that employees have little or no motivation to carry out their tasks. This can lead to

a low morale in the workplace, which in turn will have a negative effect on the company as a

whole.

Management / Organisational Structure

Treaty Beer Company does not have a defined management structure in place where

authority is delegated from the companies CEO to senior managers. Instead John Murphy

who has no previous qualifications manages the business the same way he did when he first

began. He used to however frequently check the factory and warehouse to inspect

operations but no longer has the time. Mr Murphy only focuses on the day to day running of

the company, he is very set on his way and ensures that all the billing material is personally

inspected before they are mailed out to the customers. He ensures that at all expenditure

and payments over €100 are approved by him. There does not seem to be any indication of

set roles for the employees in the company, each employee appears play a part in more

than one aspect of the business’ operations for example, the truck drivers role is not only

confined to transporting the goods but also playing a part in the brewing of the beer.

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John Murphy (CEO)

Production, Warehouse &

Delivery

Accounts & Administration

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MarketingProduct:It is clear that the company follows a product differentiation strategy opposed to a cost-

based strategy. Treaty Beer Company has got a good reputation which has been built on

high quality products, winning numerous international quality awards for beer in the 1980’s

and 1990’s. The company produces Treaty Stout and Treaty Ale both 5% alcohol content.

The products are sold in 250ml and 500ml bottle formats. The products have gained a good

reputation for their quick delivery but its reputation has suffered recently due to rumours of

insolvency in the local business community. It is apparent that no market research has been

carried out, as the sales proportion is 50/50. It is evident that the company is not concerned

about understanding their target market as they are not aware of which size bottle is more

favourable in each sector. The 250ml beer is also a smaller serving than the typical pub size

330ml, this could be an implication why the product is not selling.

Price:It is evident that Mr Murphy is not concerned with the profits made from each sale but he is

more so concerned with making the actual as he is willing to negotiate the prices with each

customer. It is clear that Mr Murphy needs to get a clear and accurate costing of the

products so he can identify where he is making the most money. He also needs a more

accurate figure on the relative sales of each product for him to understand where the

demand lies.

Place:Treaty Beer Company distributes from a run-down warehouse in Limerick City. The beer is

produced on the basis of forecasts made by John Murphy and the bottles are stored in the

warehouse. The company does not have a sufficient transport method to carry out

deliveries, the products are delivered to the bars and hotels by an old company truck that

has started to break down. There is a great emphasis on supplying local businesses, there is

no evidence that suggests Mr Murphy is selling or promoting the product outside the

Limerick area.

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Promotion:John Murphy does all of the sales work and public relations work himself. He has employed

people in the past but he feels like they cannot be trusted, because of this Mr Murphy

spends one half of every day making sales calls. There seems to be no formal advertising

carried out and Mr Murphy has failed to invest significantly in the promotion of the beer’s

image replying on the quality of the beer to act as the company’s selling point. The company

does not participate in social media marketing to engage with their customers, the company

does however have a website monitored by Cillian, but it only gives basic information on the

company. Treaty Beer Company does not allocate enough resources for its marketing

purposes, the company uses one computer for both administrative and marketing purposes.

Financial Analysis:Using the financial data provided, the following financial ratios were constructed to assess

Treaty Beer Companies capability

Liquidity Ratio’s Current Ratio = Current Assets/Current Liabilities = 300,000/440,000 = 0.6818 times

An acceptable current ratio is 2:1, Treaty Beer Company falls below this industry

benchmark. This shows the company is having difficulties paying short term obligations

using short term assets.

Quick Ratio = Current Assets-Stock/Current Liabilities = 300,000-50,000/440,000 =

0.568 times

These two ratio’s show the company are currently unable to pay their short term debts, it’s

not a sustainable situation and has clearly caused them problems already. Suppliers are

already reluctant to give them lines of credit.

Profitability Ratio’s Net profit margin = 25,000/1,500,000 = 0.01666*100 = 1.66%

This means for every €1 the company earns from sales it’s only getting a net profit of €1.66.

Gross profit margin = 1,500,000-700,000/1,500,000 = 53%

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Activity Inventory turnover: 1,500,000/50,000 = 30

This signifies the number of times the average number of stock is turned over in a yearly

period

Asset turnover: 1,500,000/900,000 = 1.7 times

How well the company utilizes their assets

Leverage Debt to assets ratio = 900,000/400,000 = 1

This measures how much funds have been borrowed to fund the business

Debt to equity ratio = 900,000-400,000/400,000 = 2.25

This shows a comparison of the equity of the owners with the funds provided by the

creditors.

Treaty Beer Company has no long term debts which is extremely good for the potential to

expand in the near future. They need to examine the financial structure and possibly review

the salary expenses of the CEO and his wife as they seem excessive given the size of the

business.

External Environment Natural Environment As there is more concern regarding the impact of climate change it continues to be a central

point as businesses try to implement better business in terms of reduce costs and risk while

achieving positive impact on the surrounding world. As this is a priority, businesses in the

beverage sector have begun implementing strategies to reduce their Greenhouse Gas

emissions and their impact on the global climate. (Bieroundtable, 2010)

With beverage companies relying on water as a key ingredient in their products it is

essential that micro brewers take precise care while tending to the issue of wastewater.

According to (Kanagachandran and Jayaratne, 2006) it has been estimated that around 3 to

10 litres of wastewater is generated per litre of beer produced in breweries.

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PEST AnalysisThe brewing industry from the early days has had a solid tradition and has advanced

throughout Ireland, originally by retail brewers, the owners of pubs and alehouses who

brewed beer for sale on their own premises (ABFI, 2013). It however like many other

markets similarly faces constantly changing political, economic, social and technological

changes which would have a serious effect on the strategic decision making of a company

such as Treaty Beer Company.

Political Factors Overall there has been a slight decline of consumption of Beer in Ireland as many traditional

key markets have been made more aware of the social effects associated with the

consumption of alcohol. Although a return to weak growth in 2010 the market is forecast to

experience lengthy contraction in the future (MarketLine, 2013).

The taxes the government place on all alcohol products have a major impact on the retailing

price, the Drinks Industry Group of Ireland (DIGI) cited from (Times, 2013) said that the

increases of tax are ‘damaging a vital national industry’. In the 2012 budget there was a 10

cent increase on beer, which suggests how damaging it could be for jobs and tourism in

Ireland (Times, 2013). Within the European Union, Ireland now has the fourth highest beer

excise, the DIGI reports that the government have yet again decided to increase excise on

beer in the Budget for 2014, this will have prolonged effects for small companies such as

Treaty Beer Company. (Foley, 2011)

The health, safety and welfare at work act 2005 sets out the main requirements for

improving the working conditions for employees (Health & Safety Authority, 2005). It

applies to all places regardless of the amount of people employed in the company. There

are various legislations in place that would affect Treaty Beer Company if it were to be

inspected. Mr. Murphy being a self-employed person is predominantly responsible for

creating and sustaining a safe and healthy workplace for all employees in the company.

It is evident that he does not adhere to any of the requirements. As the company is in

disrepair, the premises is in no way fit for the purpose for employees to be working in. The

company truck is also not in a fit state for the employees to be driving, as it has started to

break down and is unreliable. These two factors display poor work ethic by Mr. Murphy and

if the company was to be inspected and found to be in breach of legislation it could lead to

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minor or major repercussions such as issuing a high Court Order (Health & Saftey Athority,

2013)

Under the Intoxicating Liquor Acts, it is an offence to sell alcohol to anyone under the age of

18 (Citizens information, 2012) this would have an immediate effect on Treaty Beer

Company and who they sell their products to.

The national average wage would have an effect on Treaty Beer Company. As of 1st July

under SI 331 of 2011 the national minimum wage to pay an employee is €8.65 per hour

(Citizens information, 2012).

Although these political factors seem to be daunting, there are also positive aspects for

Treaty Beer Company such as the availability of government grants. These grants can be

attained from Enterprise Ireland, County Enterprise Boards and from E.U agencies. (Wlash,

2012). There is also a positive aspect for the company, there are internship schemes

available for jobseekers to get experience before entering the labour market. (JobBridge,

2013)

Economic FactorsTourism plays a significant role in the Irish economy. The tourism sector has changed

significantly and is at its most confident since the economic downturn in 2008 according to a

survey which was carried out with 750 tourism businesses for Failte Ireland. (Independent,

2013)

65% of serviced accommodation operators stated increase visitor numbers for the first time

since the beginning of the financial crisis. Each of the three reported that the number of

visitors went up- Hotels (68%), guesthouses (58%) and B&BS (46%) (Independent, 2013)

The beer sector attracts foreign visitors who spend over a third of their budget on food and

drink and 60% of these tourists eat in pubs, along with this it also supports numerous

Cultural festivals and sporting events which is vital for tourism and the opportunity for

Ireland to gain a steady economy. (ABFI, 2013)

Recycling is becoming a more important economic factor in today’s society, European

figures display that Ireland now ranks 10th in the EU with a rate of 81.20%, higher than the

EU average of 70% (Farrelly, 2013). Beer companies in Ireland contribute to this

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environmental factor through the returnable glass bottles, these glass bottles account for

70% of beer consumed. (ABFI, 2013)

The brewing industry is energy intensive and is one of the largest industrial uses of water

(Olajire, 2012). The Commission for energy regulation has devised a scheme of water

charges, starting with the Water Services Act, 2013. This introduction of water rates will lead

to higher costs for Treaty Beer Company in 2015. (Citizens information, 2013)

Barley prices are expected to plummet in 2013 from current high levels according to a

report published by Teagasc Agriculture (Moloney, 2012). A recent article in the Irish

Independent identified that freezing conditions in Germany, Poland and France were

originally thought to only have minimum impact on crops but the actual damage was

underestimated. (Murphy, 2013)

Social FactorsWith pub sales continuing to plummet due to more people substituting to buying alcohol in

supermarkets, off-licences and drinking at home it holds a major threat for small businesses

like Treaty Beer Company. A recent report by DIGI cited from (McCárthaigh, 2013) suggests

how hotels, bars, pubs and restaurants are continuing to suffer because of the increase in

sales of off-licences, which grew 5% in 2011. This change towards home consumption has

resulted in off-licenses accounting for 60% of the market. The report indicated that pub

sales dropped by 7.2% and the total volume of alcohol sold in pubs fell by 5.5%

(McCárthaigh, 2013)

Along with the social aspect, there brings serious health issues which would be a major

threat for Treaty Beer Company. Over the last 10 years, alcohol consumption has risen

significantly in Ireland with Irish adults among the highest consumers in Europe, at 14.2

litres per adult. (Hope, 2013)

The consumption of alcohol can contribute to the development of mental health problems

and also the potential to intensify pre-existing mental health issues. (Alcohol Action Ireland ,

2012)

In the result of one of the most dynamic recessionary periods in history of Ireland, it is

critical that the FMCG industry recognizes that attitude of consumers are changing in

relation to the consumption of alcohol (DataMonitor, 2011). Attitudes towards drink driving

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has changed massively over time, in a 2006 road safety authority study 8 out of 10 drivers

surveyed expressed that drink driving was extremely shameful and certainly worse than tax

evasion and shoplifting (Road Safety Authority , 2013)

Technological FactorsBrewing beer was renowned as an extremely old art and science but improvements

introduced by the macro-environmental forces of technology have changed the perception

of the industry. Refrigeration and motorized transport has allowed for the link of the

brewing industry worldwide. (Read, 2013)

Brewery operations have benefited from developments in construction materials and

systems including heating, cooling and packaging. Alternative packaging like aluminium cans

that are bottled shaped and the introduction of kegs were made possible by improved

technology (Pontinen, 2013)

Porters 5 forces Degree of rivalry

There is an intense rivalry in the brewing industry as there are a large number of

competitors. Ireland now has more breweries than at any time since the early 1920's

(Pattinson, 2012). There are 19 active breweries (16 in the Irish Republic, 3 in Northern

Ireland. This includes the number of all breweries both premium domestic and

microbrew/craft brewers.

In Ireland the beer market is severely combined, with the three largest players holding

82.4% of the total market volume. Purchasers have an extensive range to choose from

combined with a moderately low switching costs enabling rivalry. There is a strong degree of

product differentiation with various beers, such as non-alcoholic, ales, stouts etc.

(MarketLine, 2013)

Supplier power

With more multinational players in the market breweries now include a degree of vertical

integration, weakening supplier power (MarketLine, 2013). Hops are usually purchased from

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independent producers, with barley generally bought from farmers. As many of these

suppliers run independently and on a smaller scale, their influence is weakened.

New Entrants

Potential entrants to the brewing industry may face problematic barriers to entry by those

already dominating the market. The market leaders have already achieved economies of

scale which may be a threat for new entrant. Along with the new entrant creating brand

recognition, they also may face serious problems gaining such a large capital outlay.

Government regulations of beer is also strict, and may impact on the ease of market entry.

Overall, there is a moderate likelihood of new entrants.

Substitute Products

The main substitutes for beer are other alcoholic beverages such as spirits and wine, and in

some cases non-alcoholic beverages such as functional drinks, which can act as substitutes

for low/no alcohol beer (MarketLine, 2013). A major threat to the beer brewing industry is

that the switching cost of changing to a substitute product is nearly non-existent. To achieve

a sustainable competitive advantage in relation to substitute products is to develop brand

loyalty. There is also the matter of the benefits of alternative substitutes, beer is usually

stored in chilled locations making it more expensive to store compared to substitutes such

as spirits. Overall, there seems to be a moderate threat from substitute products

(MarketLine, 2013)

Buyer Power

Retailers and supermarkets hold the potential to negotiate terms on price with beer

producers, this enhances buyer power significantly. The potential for switching costs is not

predominantly high, which increases buyer power in all segments. However as buyers need

to accommodate consumers and offer a wide range of beers, this weakens buyer power.

(MarketLine, 2013)

Apart from smaller producers such as microbreweries, producers and retailers operate in

distinctive businesses, with very low potential of forward and backward integration. Overall,

buyer power is assessed as moderate. (MarketLine, 2013)

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BibliographyABFI, 2013. The Irish beer industry and its importance to the Irish economy, Dublin: IBEC.

Alcohol Action Ireland , 2012. Alcohol, suicide and mental health. [Online] Available at: http://alcoholireland.ie/policy/policy-documents-1/[Accessed 30 November 2013].

Bieroundtable, 2010. Beverage industry enviornmental roundtable, Dublin: Antea Group .

Citizens information, 2012. Alcohol and the law. [Online] Available at: http://www.citizensinformation.ie/en/justice/criminal_law/criminal_offences/alcohol_and_the_law.html[Accessed 17 November 2013].

Citizens information, 2013. Water charges. [Online] Available at: http://www.citizensinformation.ie/en/environment/water_services/water_charges.html[Accessed 30 November 2103].

DataMonitor, 2011. Alcoholic Beverage Consumer Trends In the UK: Winning Strategies In A New Decade, Dublin: DataMonitor.

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Independent, 2013. Tourism sentiment at highest level since boom - Failte Ireland. [Online] Available at: http://www.independent.ie/irish-news/tourism-sentiment-at-highest-level-since-boom-failte-ireland-29674912.html[Accessed 20 November 2013].

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JobBridge, 2013. National Intern Scheme. [Online] Available at: http://www.jobbridge.ie/[Accessed 19 November 2013].

MarketLine, 2013. Beer in Ireland, London: MarketLine.

McCárthaigh, S., 2013. Pub sales fall as people switch to drinking at home. [Online] Available at: http://www.irishexaminer.com/ireland/pub-sales-fall-as-people-switch-to-drinking-at-home-191981.html[Accessed 29 November 2013].

Moloney, M., 2012. Economic prospects for agriculture , Dublin: Teagasc Agriculture.

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Times, I., 2013. Drinks industry reversal on tax on alcohol. [Online] Available at: http://www.irishtimes.com/news/ireland/irish-news/drinks-industry-seeks-reversal-of-tax-on-alcohol-1.1520473[Accessed 4 November 2013].

Wlash, B., 2012. Government Grants – Small and New Business Start-Ups, Dublin: News and blog.

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