Heineken International, a global company which produces alcoholic beverages, is a Dutch brewing company. It founded in 1864 by Gerard Adriaan Heineken in Amsterdam known as De Hooiberg (the haystack). Obviously, it is not easy to become the world’s most valuable international premium beer brand. Heineken spent almost 150 years to own its 125 breweries in more than 70 countries and approximately 85,000 employees. Today, it brews and sells more than 170 international premium, regional, local and specialty beers, including Cruzcampo, Tiger Beer, Strongbow Gold, Desperados, Żywiec, Starobrno, Zagorka, Birra Moretti and so on. However, the two largest brands are Heineken and Amstel (Theheinekencompany.com, 2013).
Basically, there are three broad types of resources of production which are raw material, labour and capital. These resources play a main role in production. For instance, barley is the main raw material to brew beer which means Heineken International unable to produce any beer without barley. So, the price of barley will affect the price of beer as well. Furthermore, labour is also very important. It is not only the number of employees, but also the skill of them. Assuming that a company without any workers, how does it produce production? Especially like Heineken International, it needs a lot of labours with good skills in different countries to work for them. Another resource is capital, whereby i needed to create factories, machines and advance technology.
The demand of beer of each country is totally different. The chat below shows the global market positioning from 2009 (Slideshare.net, 2013). It can be seen that Europe and Americas are still the largest market in world even though sale volume of Europe market has declined a lot compare with last 20years.
Normally, demand of beer is driven by several factors such as disposable income levels which discussed above, price, population of beer consuming, consumption of various substitute products, tastes and preferences from consumers, quality of beer and product reputation (Transparencymarketresearch.com, 2013). Firstly, according to the Law of Demand, demand will be affected by price directly. Due to beers have inelastic PEoD measure, which means that the quantity demanded is unresponsive to changes in the price, government charged a tax with beers and the price of beers become higher. However, every country has different tax rates and policy. For example, Malaysia charged a higher tax which amounted to 7.40 ringgit per litre (UK Essays, 2013). So that tax rates and duties is the key that how much is the price of beer. As a conclusion, demand for beer is elastic because beer is not a necessity good and therefore demand is highly affected by price. Another factor is there are lot of substitutes for beer such as red wine, champagne, cigarettes and so on that people have more choice.
On the contrary, seasonality and climatic conditions will influence the demand of beer too. Demand will increase during the peak festival seasons. For example, in Malaysia, people will get more beer for the celebration during the festivals such as Chinese New Year, Deepavali and Christmas. Demand also affected by substitution and complementary goods. As price of substitute has decreased or income effect has risen will result in more people choose the cheaper alternatives. For instance, demand of Heineken has declined when Carlsberg’s products are in a promotion because people will get Carlsberg as substitute. Another example is people always have their beers with peanuts; if the demand of peanuts increase, the demand of beers will also increase. The relationship between beers and peanuts is complements. Cross price elasticity (XED) is that making a distinction between substitute products and complementary goods. XED for substitute is positive while XED for complement is negative.
Due to other three larger brewers which are Anheuser Busch, SAB Miller and Carlsberg Denmark, Heineken has to be interdependent which means they have to consider about the reaction of competitors’ rivals when they are making any decision like deciding price, sales target, advertising and marketing budgets, and other business policies. This is because any price change or decision will affect others directly when people get only few choices. To avoid interdependency, Heineken can either cooperate with their rivals or compete with them. The interdependency would not affect the price of the beers, only the government intervention will be able to do that. As if one of the rivals reduces the price to increase market share, it will reduce the shares of remaining firms, eventually harming everyone (Economicsonline.co.uk, 2013). There are the reasons avoiding price competition and using non-price competition.
In fact, Heineken is imposed a fine which the penalties totalled €273.7million by the European commission in 2007 with three other companies (Bavaria, Grolsch and Inbev) in Holland because operating a price-fixing carter together (Gow, 2007). They had control over 95% of the Dutch market which Heineken was claiming 50% and the other companies claimed 15% of the market each. Cartel is the collaboration of oligopolies to set the price for the market, like a monopoly. As an oligopoly industry, Heineken should match the price cut and followed by the market price but oligopoly could not help them to make the maximum profit. So Heineken forms a cartel with three other countries to increase profit. However, cartel is illegal and if cartels are formed, it will result in a decrease of consumer surplus. Lastly, Heineken is punished that paying €219.3million, Bavaria pay €22.85million and Grolsch pay €31.65million but Inbev do not have to pay any fine because they provided “decisive information” about the cartels operations between 1996 and 1999 (Josefsson, 2013).
Governments intervene to correct the serious types of market failure and undesired outcome, there are several forms can be taken. For alcoholic beverages industry, government will stipulate alcohol industry apply a special licence to buy the alcoholic industry to reduce the drinks. Furthermore, excise tax is imposed on alcohol which means any alcoholic drinks will be charged a tax. The objective of this action is government try to reduce consumption as well as to increase revenue and it is also a responsibility for consumption of undesirable goods. The result of adding the cost of tax is pushing up the alcohol beverages costs and it inclines the price as well. However, the price with extra tax is paid by consumers. The effect of tax can be shown as the diagram below.
The price will increase when the tax is imposed on it, as the diagram shows that P1 increase to P2. As the result of price increasing, supply curve shift (S1 shift to S2). P2 is the price includes tax and S2 is the supply includes tax. Due to the tax of alcoholic drink is paid by consumers, the consumer surplus will more than producer surplus. It means producer passes on most or perhaps all of an indirect tax to the consumer by increasing the market price. Therefore, the demand when a tax imposed is price inelastic.
In my opinion, Heineken will continue competing in alcoholic beverages industry and growing became the largest brewer in world. Even though they are the third largest brewer in global so far, they still have their loyalty market in Europe. Their objective are aim for sustainable grown as a market leader, embraced innovation as a key component of their strategy in the area of production, marketing and communicating, and optimize product portfolio. They will be able to achieve their goals if they can improve their weaknesses like increase profits margin, increase start up cost and decrease debt. However, several strengths make them be superiority in market which are large work network and Alliance with Union of European Football Associations (UEFA). Especially UEFA is more effective for Heineken to develop their industry because it has over 140 million viewers worldwide per game as a kind of brand awareness. It is also in accordance with their goal which is an innovation way to disseminate in marketing.
Economicsonline.co.uk. 2013. Monopoly. [online] Available at: http://economicsonline.co.uk/Business_economics/Oligopoly.html [Accessed: 23 Oct 2013].
Gow, D. 2007. Heineken and Grolsch fined for price-fixing. theguardian, [online] 18th April. Available at: http://www.theguardian.com/business/2007/apr/18/7 [Accessed: 22 Oct 2013].
Investopedia. 2009. Oligopoly Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/o/oligopoly.asp [Accessed: 23 Oct 2013].
Josefsson, M. 2013. Oligopolies collusion. Yokohama International School, [blog] 8th February, Available at: http://blogs.yis.ac.jp/14josefssonm/2013/02/08/oligopolies-collusion/ [Accessed: 20 Oct 2013].
UK Essays, A. 2013. Business Environment in Malaysia. [online] Available at: http://www.ukessays.com/essays/marketing/business-environment-in-malaysia-marketing-essay.php [Accessed: 20 Oct 2013].
Sabmiller.com. 2013. SABMiller - Investors - Understanding SABMiller - Business overview - Global beer market trends. [online] Available at: http://www.sabmiller.com/index.asp?pageid=39 [Accessed: 22 Oct 2013].
Theheinekencompany.com. 2013. The HEINEKEN Company - Age Gate. [online] Available at: http://www.theheinekencompany.com/ [Accessed: 22 Oct 2013].
Transparencymarketresearch.com. 2013. Beer Market - Global Industry Size, Share, Trends, Analysis And Forecasts, 2012 - 2018. [online] Available at: http://www.transparencymarketresearch.com/beer-market.html [Accessed: 22 Oct 2013].
Slideshare.net. 2013. Heineken. [online] Available at: http://www.slideshare.net/MKTGatHPU/heineken-7889643 [Accessed: 23 Oct 2013].
Www.Addison.Co.Uk, A. 2013. Financial Review - Heineken N.V. Annual Report 2012. [online] Available at: http://www.annualreport.heineken.com/report-of-the-executive-board/financial-review.html [Accessed: 20 Oct 2013].
On the contrary, seasonality and climatic conditions will influence the demand of beer too. Demand will increase during the peak festival seasons. For example, in Malaysia, people will get more beer for the celebration during the festivals such as Chinese New Year, Deepavali and Christmas. Demand also affected by substitution and complementary goods. As price of substitute has decreased or income effect has risen will result in more people choose the cheaper alternatives. For instance, demand of Heineken has declined when Carlsberg’s products are in a promotion because people will get Carlsberg as substitute. Another example is people always have their beers with peanuts; if the demand of peanuts increase, the demand of beers will also increase. The relationship between beers and peanuts is complements. Cross price elasticity (XED) is that making a distinction between substitute products and complementary goods. XED for substitute is positive while XED for complement is negative.
Beer used to be a luxury good but it now has become a normal good for most of the people who can afford it. Moreover, look at the global market expansion, per capita alcohol consumption is rising as disposable incomes increase and consumers trade up from informal alcohol (such as spirits) to beer, especially in developing countries like Asia, Africa and Latin America (Sabmiller.com, 2013). What makes beer become normal and influence the global market expansion? Both of the answer is people’ income levels have changed to be higher, which means when people become wealthier, their capacity of economic will also incline. This is called income effect. As the result, we can also say that beer has high income elasticity of demand.
Heineken adapt an oligopoly market structure. Oligopoly defined as a few numbers of firms have an impact on price and on competitors and they are able to dominating in a large market (Investopedia, 2009). Heineken is considered as an oligopoly because it is one of the few beer companies that brew and sale various alcoholic beverages in global market, having sales volume 171.7 million of hectolitres in 2012 (Www.Addison.Co.Uk, 2013). There are ‘Big-Four’ brewers hold 50% of the global market share and Heineken is the third largest brewer leading beer brand in Europe.
Due to other three larger brewers which are Anheuser Busch, SAB Miller and Carlsberg Denmark, Heineken has to be interdependent which means they have to consider about the reaction of competitors’ rivals when they are making any decision like deciding price, sales target, advertising and marketing budgets, and other business policies. This is because any price change or decision will affect others directly when people get only few choices. To avoid interdependency, Heineken can either cooperate with their rivals or compete with them. The interdependency would not affect the price of the beers, only the government intervention will be able to do that. As if one of the rivals reduces the price to increase market share, it will reduce the shares of remaining firms, eventually harming everyone (Economicsonline.co.uk, 2013). There are the reasons avoiding price competition and using non-price competition.
The demand curve is kinked because rivals brewer match the price cut. Heineken face a downward inclined demand curve but the elasticity depends on the reaction of rivals to changes in price and output
The diagrams below show that a rise in marginal costs will not necessarily lead to higher prices providing that the new MC2 curve cuts the MR curve at the same output. The kinked demand theory explained that there will be price stickiness in these markets and that firm will rely more on non-price competition to boost sales, revenue and profits.
In fact, Heineken is imposed a fine which the penalties totalled €273.7million by the European commission in 2007 with three other companies (Bavaria, Grolsch and Inbev) in Holland because operating a price-fixing carter together (Gow, 2007). They had control over 95% of the Dutch market which Heineken was claiming 50% and the other companies claimed 15% of the market each. Cartel is the collaboration of oligopolies to set the price for the market, like a monopoly. As an oligopoly industry, Heineken should match the price cut and followed by the market price but oligopoly could not help them to make the maximum profit. So Heineken forms a cartel with three other countries to increase profit. However, cartel is illegal and if cartels are formed, it will result in a decrease of consumer surplus. Lastly, Heineken is punished that paying €219.3million, Bavaria pay €22.85million and Grolsch pay €31.65million but Inbev do not have to pay any fine because they provided “decisive information” about the cartels operations between 1996 and 1999 (Josefsson, 2013).
Governments intervene to correct the serious types of market failure and undesired outcome, there are several forms can be taken. For alcoholic beverages industry, government will stipulate alcohol industry apply a special licence to buy the alcoholic industry to reduce the drinks. Furthermore, excise tax is imposed on alcohol which means any alcoholic drinks will be charged a tax. The objective of this action is government try to reduce consumption as well as to increase revenue and it is also a responsibility for consumption of undesirable goods. The result of adding the cost of tax is pushing up the alcohol beverages costs and it inclines the price as well. However, the price with extra tax is paid by consumers. The effect of tax can be shown as the diagram below.
Reference
List
Economicsonline.co.uk. 2013. Monopoly. [online] Available at: http://economicsonline.co.uk/Business_economics/Oligopoly.html [Accessed: 23 Oct 2013].
Gow, D. 2007. Heineken and Grolsch fined for price-fixing. theguardian, [online] 18th April. Available at: http://www.theguardian.com/business/2007/apr/18/7 [Accessed: 22 Oct 2013].
Investopedia. 2009. Oligopoly Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/o/oligopoly.asp [Accessed: 23 Oct 2013].
Josefsson, M. 2013. Oligopolies collusion. Yokohama International School, [blog] 8th February, Available at: http://blogs.yis.ac.jp/14josefssonm/2013/02/08/oligopolies-collusion/ [Accessed: 20 Oct 2013].
UK Essays, A. 2013. Business Environment in Malaysia. [online] Available at: http://www.ukessays.com/essays/marketing/business-environment-in-malaysia-marketing-essay.php [Accessed: 20 Oct 2013].
Sabmiller.com. 2013. SABMiller - Investors - Understanding SABMiller - Business overview - Global beer market trends. [online] Available at: http://www.sabmiller.com/index.asp?pageid=39 [Accessed: 22 Oct 2013].
Theheinekencompany.com. 2013. The HEINEKEN Company - Age Gate. [online] Available at: http://www.theheinekencompany.com/ [Accessed: 22 Oct 2013].
Transparencymarketresearch.com. 2013. Beer Market - Global Industry Size, Share, Trends, Analysis And Forecasts, 2012 - 2018. [online] Available at: http://www.transparencymarketresearch.com/beer-market.html [Accessed: 22 Oct 2013].
Slideshare.net. 2013. Heineken. [online] Available at: http://www.slideshare.net/MKTGatHPU/heineken-7889643 [Accessed: 23 Oct 2013].
Www.Addison.Co.Uk, A. 2013. Financial Review - Heineken N.V. Annual Report 2012. [online] Available at: http://www.annualreport.heineken.com/report-of-the-executive-board/financial-review.html [Accessed: 20 Oct 2013].
