Competitive Analysis & Two-Firm Comparison Paper Group | Sapporo Holdings

Brandon Altman Professor Geraldine Wu International Studies Program: Europe Spring 2019

Word Count: 2393 – Excluding Titles

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Table of Contents

Part 1: Industry Analysis Pg. 3 Part 2: Firm Analysis Pg. 6 Part 3: Location Matters Pg. 9 References Pg. 12

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Part 1 Industry Analysis

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Nature of Danish Industry: The Danish beer market has proven to be an extremely attractive industry, as evidenced by the shocking increase in beer-firm numbers over the past two decades. According to Draft Mag, “at the end of the 20th century, had around a dozen to its name, most conspicuously Carlsberg, one of the world’s largest brewers of industrial . A decade into the 21st century, the nation boasted almost 150 breweries.” This microbrewery boom brought in a large variety of craft that have tended to do especially well given that “the notoriously unstable Danish weather [caused] an increase in sales of craft beer due to people being driven away from the beaches and into bars or their own homes, where the consumption of craft and specialty beers is higher” (Euromonitor).

On a competitive level, Denmark is a somewhat difficult market to compete in on a large scale. As stated by Euromonitor, “ continued to be highly consolidated with the two leading players, Carlsberg Denmark and , accounting for three quarters of total volume sales in 2017. The success of the leading players can partly be attributed to a high level of brand recognition and loyalty amongst Danish consumers, as well as strong distribution networks and ongoing marketing campaigns.” This consolidation proves tough to new entrants, who in addition to establishing their own brand name, are forced to invest in control of distribution, marketing of products, and establishment of supplier and production relations.

Main Factors Affecting Competitive Dynamics in the Industry | Key Success Factors One can argue that an increase in the product offering available is a signal of greater competition, though others will argue that it is a sign of lower barriers to entry. Brewers of Europe stated in a report regarding the contribution made by beer to the European economy that “there has been a general decline in beer consumption over time… [with] companies responding by introducing new products which respond to consumer demand particularly for more craft or niche beers.”

These craft or niche beers cover a number of price points to match varying consumer demand, and additionally diversify offerings of products to match different tastes. In order to stay alive in the heavily diversified market, brands are forced to invest in research to discover efficiencies within manufacturing and supply chain management. Brand success can be determined through regional success, and brand recognition or loyalty in a market where there are such a large number of options.

Five Forces Analysis Bargaining Power of Suppliers According to , a high risk for 2018 was the industry consolidation of customers and suppliers. The group stated that “consolidation among customers and suppliers also leads to increased dependency, pricing pressure and the risk of margin pressure.” It appears that Carlsberg makes continuous efforts to develop alternative sourcing solutions in an attempt to decrease reliance on their current supplier partnerships. Given that the largest brand in Denmark faces these concerns, the bargaining power of suppliers must be high.

Bargaining Power of Buyers In a market with ever-changing tastes, bargaining power of buyers is high, especially in the Danish market. In order to appease the varying tastes of consumers and customers, Carlsberg and other Danish beer brands have been forced to release a diversified offering of products to match different interests. Companies like Carlsberg Group have a number of different brands under their arsenal in order to cover a variety of price points to match consumer demand.

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Threat of Substitutes The rise of microbreweries has proven to be a major cause for concern for top Danish beer brands. IBIS World states that “There is a high level of competition from external sources, particularly manufacturers of other alcoholic beverages such as wine and spirits. Manufacturers of these substitute beverages compete for generally the same base of consumers as beer manufacturers. Some major beer manufacturers have diversified their corporate holdings to include wine and spirits to leverage economies of scope and to capture a wider demographic of alcohol consumers.”

Threat of New Entrants | Strengths/Weaknesses of Major Competitors The Danish beer market has seen its fair share of new entrants over the past decade, especially in the craft beer sector. Therefore, on the smaller scale of breweries, the threat is high. However, because the craft/niche market is so fragmented within itself, larger brands don’t see the individual new entrant as a threat, and rather the trend of entrants as a threat. The top three beer manufacturers in Denmark are Carlsberg, Royal Unibrew, and Harboes Bryggeri. Consistent between all of the brands is a wide portfolio of products, with offerings of traditional beers and also a variety of craft beers.

Industry Rivalry The Danish beer market, as stated, consists of a wide variety of brands, with not much consumer loyalty beyond the largest brands. Because of this, “competitive behaviors occur most often through marketing and brand promotion where the amount of price competition is limited” (IBIS World). The largest brands like Carlsberg or Royal Unibrew are likely to acquire the top competing niche brands in an attempt to gain more market share.

Economics of industry IBIS World explains the impact of Eastern European demand as follows: “Demand from has exhibited little growth over the past five years, hurting brewers such as Carlsberg that depend heavily on the region for brand exposure.” Carlsberg in addition to other Danish beer brands addressed this by expanding into other regions. Carlsberg described their economic risks as follows in their 2017 annual report: “Adverse economic conditions may result in reduced consumer demand and a higher degree of price sensitivity on the part of consumers, while major social or political changes may disrupt sales and operations. Political and economic instability may lead to adverse exchange rate fluctuations, increased credit risk, insolvency of suppliers, goodwill impairment, operational restrictions and possibly nationalization of assets.” With the rise of the far right in Denmark, some could argue that a number of these risks are rather close to reality, generating danger for the beer manufacturing market.

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Part 2 Firm Analysis

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Carlsberg SWOT Analysis Strengths Carlsberg Group is the largest beer manufacturer in Denmark, and captures 3.9% of global market share (IBIS World). The group is well diversified, with a well-established house of brands that each have their own loyal followings. Due to this variety of brands in their arsenal, Carlsberg Group is also able to offer a large variety of types of beer, at different price points corresponding to different demand markets. Further, the brand is extremely international, with market presence in over 100 countries.

In 2017, Carlsberg brought in over 61.8bn DKK in revenue, or nearly $9.5bn US. With such substantial income, the group has the flexibility to invest heavily in marketing, equipment, and acquisitions. The group recognizes the value of marketing communication and invested 9.7% of their net revenue in it during 2017. These marketing activities are comprised of sales campaigns, sponsorships, advertising and in-store displays. Carlsberg is the brand sponsor of Liverpool Football Club and has gained a collective following of thousands of viewers across their social media channels.

Weaknesses As Carlsberg is an international brand, their products are subject to factors that are outside of their control. In 2017, Carlsberg faced a decrease in volume sold, due to “the PET downsizing in and bad summer weather in parts of Western Europe.” Further, the brand is subject to foreign exchange movements and the prices of raw materials could potentially be negatively affected. Carlsberg has listed their largest risks in 2018 as the following: commodity & foreign exchange impact, industry consolidation, partnerships, and political & economic instability.

Other than their flagship brands (Carlsberg and Tuborg), Carlsberg Group’s niche brands don’t have much international recognition (Marketing 91). These smaller brands are where the Group stands to make their most substantial gains in growth, but are also their most risky; if the Group does not invest properly, the smaller brands can become cash dumps with no substantial returns, or could even result in losses.

Opportunities Carlsberg has recognized the importance of a strong base of local brands, and in 2017 made an attempt to accomplish this through investment in their smaller, niche brands in markets like , , and Sweden. This investment revolved around brand strengthening and sharpening, “providing affordable crafty propositions that tap into the increased consumer interest for craft & specialty beers and consumer willingness to pay a premium for these products.”

In addition to their alcohol-based offerings, Carlsberg is also invested in the alcohol-free market. The category has proven to be an excellent opportunity for growth, given the recent trend of wellness across Europe, and also offers excellent margin opportunities.

Another area for growth is emerging markets, which “have been an increasing source of interest for major brewers… and are expected to show much stronger growth than developed markets” (IBIS World). Asia has proved to be a region of specific interest for Carlsberg Group, and “the Group has expanded its presence in the region, both organically and through acquisitions… [this region is especially interesting because of] young populations, urbanization, rising disposable income levels, and growing economies.”

Threats According to the Danish Brewers’ Association, beer consumption in Denmark has decreased over time, following a trend similar to Western Europe, where Carlsberg has struggled in the past. From this, one can predict investments by Carlsberg to generate an increase in brand loyalty. In order to do this,

Competitive Analysis & Two-Firm Comparison Paper 8 according to the DBA, Carlsberg will have to adjust to trends like becoming more authentic, through the release of more local, natural, organic, and healthy beers.

In a growing market, Carlsberg faces competition on all fronts from the rise of craft beers, consolidation among competitors, and a continued increase in the number of small breweries (Euromonitor). According to pourmybeer.com, “beer drinkers have become more adventurous. Now when they shop, they’re more interested in finding something new rather than more of the same.” This threat is consistently being addressed by Carlsberg through further release of their own craft beers and acquisitions of small microbreweries.

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Part 3 Location Matters

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Two-Firm / Two-Country Comparison: Carlsberg Group (Denmark) & Sapporo Holdings (Japan)

Historical / Economic Japanese history with alcohol goes as far back as the 3rd century, where “Chinese historians recorded the fact that the people of ancient Japan engaged in excessive drinking, singing, and dancing” (Japan Visitor). This early adoption of drinking led to a more organic integration of drinking into modern society. Beer however, according to a blog titled Yatta Tachi, did not arrive in Japan until the 18th century, accompanying Dutch traders. It was around this time period that Japan’s largest brands were founded, including Sapporo. The industry did not begin to blossom however, until the Prohibition in the , which according to the Brewers Association of Japan, led to “surplus brewing equipment being imported into Japan.” Following the Second World War, Japan’s economy rapidly grew with US-assisted programs, leading to an increase in propensity to spend among Japanese consumers, and hence an increase in demand for beer.

Denmark however, has a much longer history with beer. The known tradition of brewing in Denmark dates from approximately 1370 B.C. (Beer and Brewing). Even in the 15th century, the country had kings who ordered the domestic growth of hops to reduce German hop imports, eventually leading to around 150 breweries operating by the end of the 17th century. Carlsberg was founded in 1847, nearly 30 years prior to Sapporo.

It is because of this deep-rooted history that Carlsberg was able to successfully compete and grow to the size that it is functioning at today. Given Japan’s late cultural adoption of beer, Carlsberg and the Danish beer market had a significant head start on establishing cultural embedment of their products. This later adoption of beer by Japan meant that it was less embedded in their culture, as compared to sake and other Japanese alcohols. Sapporo entered a Japanese market with a much higher threat of substitution, and competition on multiple fronts as compared to Carlsberg’s single focus.

In regards to their economies, Japan and Denmark are on completely different scales. Japan’s GDP is estimated at nearly 5 trillion USD, while Denmark is only estimated at around 300 billion USD. However, Carlsberg has done notably better than Sapporo in terms of revenue, which can be attributed to Carlsberg’s numerous mergers and acquisitions over their history. Carlsberg dominates the entire Danish beer market. In comparison, Sapporo has to compete with the likes of Asahi Group, Kirin Holdings, and Suntory Holdings. According to a Wall Street Journal post, Sapporo only held 10.2% of the Japanese beer market and is very unlikely to merge with any of the other groups, especially as the spearhead of the deal.

Social / Cultural / Legal Drinking is a staple of Japanese culture. In fact, it interweaves itself in all facets of society: at home, among groups of friends, and even in the work place. In Japan, the pastime of drinking with others is “so common that it even has its own term: nominication” (Gogonihon). However, where Japan distinguishes itself from many other countries is the necessity to go out drinking with coworkers. It is expected that you attend a drink after work, and additionally that you actually drink. It is seen as a slight if you do not.

In Denmark however, drinking is limited to friendly outings. The nation focuses on the feeling of coziness and warmth, or hygge. Danes are known as beer drinkers, and according to the World Health Organization, “45% of Danes prefer beer, while 39% prefer wine” (Insight Out Magazine).

Sapporo and other Japanese brands have thrived in this Japanese culture, where beer has essentially become a staple of socializing. The culture also allows Sapporo to market to a larger variety of

Competitive Analysis & Two-Firm Comparison Paper 11 consumers in a variety of settings. Carlsberg on the other hand is forced to limit their marketing to social outings and at-home drinking, any other market necessitates Carlberg to define a new need, which can be costly and potentially ineffective.

Both Denmark and Japan are extremely similar in their handling of underage drinking. It seems that authority has turned a blind eye to it, with a majority of teenagers stating that they drink. This enables both Carlsberg and Sapporo to market to a younger age group, and naturally establish brand loyalty even before the legal age.

Both economies have faced a decrease in overall alcohol consumption. However, Japan’s beer market has “continued to diminish due to a higher liquor tax, shifting trends in alcoholic beverage product sales, and a shrinking national population” (GAIN). This means that Sapporo will be forced to invest more in establishing a need for their product, while Carlsberg, who is losing market share to craft beers, needs to focus on being more competitive and inventing new flavors.

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References

Alcoholic Beverages, www.japan-guide.com/e/e2037.html. Alcoholic Drinks Report 2018 - Beer, Statista Bhasin, Hitesh. “SWOT Analysis of Carlsberg - Carlsberg SWOT Analysis.” Marketing91, 20 Dec. 2017, www.marketing91.com/swot-analysis-carlsberg/. CBG Annual Report 2017 FINAL - Carlsberggroup.com. carlsberggroup.com/media/22828/carlsberg-breweries-as_annual-report-2017.pdf. “ Rising.” DRAFT, 16 Mar. 2012, draftmag.com/copenhagen-rising/. Cracking Open Japan’s Craft Beer Market, Global Agricultural Information Network (GAIN), https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Cracking%20Open%20Japan %E2%80%99s%20Craft%20Beer%20Market_Tokyo%20ATO_Japan_8-31-2018.pdf “ in Japan.” Coming of Age Day | JapanVisitor Japan Travel Guide, www.japanvisitor.com/japanese-culture/drinking-in-Japan. Euromonitor International. www.euromonitor.com/beer-in-denmark/report. Global Beer Manufacturing, IBISWorld Industry Report, http://clients1.ibisworld.com.proxy.library.nyu.edu/reports/gl/industry/default.aspx?entid =390 Integrated Report 2017, Sapporo Holdings Group, http://www.sapporoholdings.jp/ir/report/pdf/Sapporo_AR2017.pdf Japan, Convention of. “History of the Japanese Beer Industry｜Brewery Convention of Japan.” Brewers Association of Japan, www.brewers.or.jp/english/09-history.html. “Japan's Drinking Laws.” Nomunication, www.nomunication.jp/japans-drinking-laws/. “Japanese Drinking Culture Is as Unique as Anywhere Else. Learn More Here.” Go! Go! Nihon, 5 Feb. 2019, gogonihon.com/en/blog/japanese-drinking-culture/. Koichi. “Is Underage Drinking and Smoking a Problem In Japan?” Tofugu, Tofugu, 7 May 2013, www.tofugu.com/japan/underage-drinking-in-japan/. “Skål! The Danish Drinking Culture from the Inside.” In-Sight out Magazine, 11 Apr. 2013, insightoutmagazine.wordpress.com/2013/04/10/skal-an-inside-of-the-danish-drinking- culture/. The Contribution Made by Beer to the European Economy. brewersofeurope.org/uploads/mycms-files/images/2016/publications/economic-report- countries/denmark.pdf. “The Culture of Alcohol in Japan vs. in America.” Yatta-Tachi, 17 Jan. 2018, yattatachi.com/alcohol-culture-japan-vs-america. The Danish beer and soft drink market 2017, The Danish Brewer’s Association “The Japanese Beer Market: International Growth vs. Internal Craft Beer Development – Scandinavian Brewers' Review.” Scandinavian Brewers Review, scandbrewrev.dk/the- japanese-beer-market-international-growth-vs-internal-craft-beer-development/. “The Oxford Companion to Beer Definition of Denmark.” Craft Beer & Brewing Magazine, beerandbrewing.com/dictionary/WBZ1ZDnezn/. “The Seasonality of Beer.” Pour My Beer, 5 Feb. 2019, pourmybeer.com/seasonality-of-beer/.

Competitive Analysis & Two-Firm Comparison Paper