7MK521 Market Analysis Sample

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An Economic Market Analysis of the UK Alcohol Market

Introduction 

The alcohol industry includes the market players that engage in the production, distribution, and marketing of alcoholic beverages. According to the World Health Organization (WHO), the definition of the industry is somewhat different. The production and distribution functions of the industry are closely associated with other markets namely agriculture, manufacturing of capital goods, trucking, and packaging industry.

A large number of participants take part in the operational process and make sure that the industry operates efficiently. The key participants of the U.K. alcohol market comprise the raw material suppliers, producers, distributors, wholesalers, vendors, contractors or input suppliers, etc.

The economic analysis of the U.K. alcohol market has been carried out so that the various latent functions that have a direct or indirect influence on the operational activities of the industry can be captured. A brief description of the market has been presented so that the readers can get an idea about the involved geographic sectors, trade sectors, kinds of alcoholic beverages, etc.  

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The historic trend of sales quantities and prices over time has been presented to ascertain the popularity of the offering (Alcohol purchase trend in the UK 2005-2016 | Statistics, 2017). The demand elasticity for alcohol has been conducted and its implications on the supply and pricing model have been highlighted. The supply chain model has been featured starting from the main producer to the retail sector. Ultimately the prospect of the future return for investors in the sector and the potential risks has been highlighted to understand its overall feasibility. 

U.K. Alcohol Market 

The vastness of the alcohol market in the U.K. must be understood to get an idea about the various operations that are carried out to produce the finest quality alcoholic beverages. As per Chaloupka, Grossman & Saffer, the geographic sectors, trade sectors and retail sectors, types of alcohol, and the regulatory environment have been covered under this section (Chaloupka, Grossman & Saffer, 2002). 

The alcohol industry just like any other industry has its influence on various other sectors of the U.K. It tries to exert its influence by focusing on key areas such as constituency building, policy substitution, information and messaging, economic incentive, and trade and litigation.

The U.K. alcohol industry tries to form industry groups, associations, and alliances with various parties including non-trade bodies so that it can have the scope to strengthen its existence in the entire nation. The focus of corporate social responsibility is high in the industry since alcoholic beverages have a direct influence on the health of the consumers. The participants that operate in the industry emphasize research activities so that superior-quality products can be offered in the market (euros, 2017). The latent intention of the players is to secure favorable terms so that they can have better access to new markets.

The different kinds of alcoholic beverages that are popular in the nation include beer, wine, ciders, spirits, etc. In the year 2016, the brewers continued to dominate the alcoholic drink market in the U.K. It has been estimated that the consumption volume would stagnate between the years 2016 and 2021 due to the growing maturing and health-conscious attitude of the customers (Euromonitor.com, 2017).  

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The current regulatory model of the U.K. alcohol industry is not very strong since despite the effort of regulators the marketers try to exploit the existing ambiguities in the process so that they can generate higher revenue. The Wine & Spirit Trade Association (W&TA) offers legal, regulatory and tax advice to the business concerns that are involved in the production, import, export, and sale of wines and spirits. There is a need to strengthen the regulatory environment so that the economic distribution can happen in a simplified manner.

Trends in the number of sales and prices with time by using original data 

Appendix 1 highlights the market value of alcohol in the U.K. Alcohol industry between the years 2012 to 2017. Market value can be termed as the total value retail sales price that is calculated using the fixed exchange rate for the year 2016. The statistical representation shows that the total value of the alcohol drinks in the nation in 2017 is around 66 billion Euros. The entire market in the nation is centered on beer (Forbes.com, 2017). 

It accounts for the majority of sales in both the on-trade scenario and the off-trade scenario. The consistent trend of the market value of the product shows that the industry is popular among the masses and there is a strong expansion possibility for the industry players. The annual expenditure relating to alcoholic beverages based on their volume level is fairly uniform.

The regulation of the price of the alcohol industry is one of the major tools that is used by the U.K. government to have control over the functional aspects of the alcohol market. The price structure of alcohol consists of three elements – costs to the producer and retailer including the labour costs, raw material costs, packaging and transportation costs, marketing charges, etc, tax comprising of excise duty and value-added tax, and the profits earned by the producer and the retailer. Appendix 2 shows the change in the consumption of alcohol in the U.K. in 2016 due to the influence of the political and socio-economic setting (Ias.org.uk, 2017).  

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Appendix 3 highlights the annual expenditure of the U.K people on alcoholic beverages from 2005 to 1016. The figures indicate that the industry is showing a consistent sales performance. As per Jernigan, the annual purchases of alcoholic beverages in 2016 have been the highest since 19 billion British pounds worth of alcoholic beverages were purchased by the customers (Jernigan, 2009).

Factors affecting demand and supply of alcohol in the UK 

Several factors come into play that has an impact on the demand and supply of alcoholic beverages in the U.K. market. From an economic perspective, alcoholic beverages are the consumer commodities that are affected by consumer behavior.  The elements that affect the demand and supply of other commodities apply to alcohol as well. They include the alcohol prices, the price of related commodities, the income of the U.K. consumers, taxes involved, alcohol consumption habits, taste and preferences of the customers, and the bandwagon effect. The relationship that exists between demand and the price of alcohol ascertains the slope of the demand curve (Kirinholdings.co.jp, 2017). The other variable components affect its position in the demand map. Appendix 4 shows the demand curve of the alcohol market of the U.K. 

The change in the pricing model results in the movement along the demand curve. The change in the other factors leads to the shifting of the demand curve either towards the center or away from the center depending on the relationship that exists between the variable component and demand for alcohol. The role of the key factors has been highlighted below. Appendix 5 shows the supply curve of alcohol consumption in the U.K. market. The various factors that influence it include the price of alcohol, cost of production, factors of production, and price of the input materials (Sousa, 2014).

Price – The price that is charged by the marketers for the alcohol affects its demand in the market. Setting up high prices can decline the demand for the product and the reduction in its prices can increase its demand in the U.K. market.

Price of related commodities – The other commodities like soft drinks, juices, etc that act as substitute beverages could have a vital impact on the alcohol demand. The availability of better options at a lower rate can automatically motive customers to prefer other beverages over alcohol-based beverages.

Income of the U.K. customers – The income level of the customers has an impact on the alcohol demand in the U.K. The people with higher income mostly spend more on alcohol.

Cost of production – The cost of producing alcoholic beverages influences the supply pattern of the alcohol. When the cost is high the supply automatically declines since the marketers or businesses would earn lower profits (Kirinholdings.co.jp, 2017). 

Price of the input materials – The prices of the input materials such as fruits, labor, etc directly influence the supply of alcohol in the market. The higher the price of the required material, the lower is the supply quantity of the alcoholic beverages. 

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Price elasticity of demand of alcohol in the U.K. market 

The price elasticity of demand for alcohol in the U.K. market can be defined as the relationship that exists between the changes in the quantity of demand due to the change in its price. The price elasticity for alcoholic beverages could be used to estimate the change in alcohol consumption. The various factors that come into play and influence the demand for alcohol include licensing restrictions, the income of the U.K. customers, social and legal elements, etc. 

The different variables that come into play indicate that the price elasticity for most alcoholic beverages is higher in the developed markets as compared to the developing and emerging industries. The price elasticity that has been used refers to long-term plasticity (Euromonitor.com, 2017). The sign of the price elasticity is negative since the price factor and the demand factor are inversely related. When the price of alcohol rises, its demand for the U.K. market declines, and when the price of the alcohol reduces, the demand increases.

This elasticity measure shows how the consumers react to the change in the pricing model of alcohol. The change in the price of alcohol impacts the supply and the overall retailing pricing strategy of alcohol in the U.K. market. As the demand for alcoholic beverages increases in the market the retail pricing also increases so that marketers can earn higher  profits (Chaloupka, Grossman & Saffer, 2002). 

 

Supply Chain of Beer in the U.K. 

In simple language, the supply chain can be defined as the set of operations, activities, and resources that play a key role to move a product or service from the supplier to the customer. The U.K. supply chain of beer has been illustrated in this section. The various participants starting from the main producer to the retailers that are involved in the process have been covered since they all play a significant role to provide the ultimate offering to the end consumers. Since beer is one of the most popular alcoholic beverages that has a consistent demand in the market its supply chain model has been highlighted. Appendix 6 shows the diagrammatic representation of the participants that are involved in the supply chain of beer.

The supply chain model includes all the actors that contribute to bringing alcohol to the end consumers. The involved parties have been segregated into five categories namely the raw material suppliers, producers, distributors and wholesalers, vendors, and retailers (on-license vendors and off-license vendors). The raw material suppliers are primarily the farmers that initiate the entire process (Forbes.com, 2017). They grow the required ingredients such as grains, hops, etc.  

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The producers are the companies that manufacture alcohol. They are involved in the brewing, distillation and bottling process. The distributors and the wholesalers are the intermediaries that connect the producers with the vendors. The vendors include both on-license vendors such as pubs, clubs, restaurants etc and off-license vendors like supermarkets, individual shops. The input suppliers are the participants that supply products or services to the other participants in form of freight services, marketing services, farming equipment, etc.

Structure, Conduct, and Performance Issues in the Beer production of the Supply Chain 

The supply chain of the beer production model encompasses various challenges and bottlenecks. Due to the involvement of a large number of players, the complexity in the production of beer increases. The efficiency of the raw material supplier has a vital impact on the ultimate beer that is produced. Poor quality of grains or yeast could reduce the beer quality and thus adversely affect its demand (Chaloupka, Grossman & Saffer, 2002). 

The producer needs to have the best possible equipment and machinery to optimally utilize the inventory. Similarly, the brewers must have total control over the involved processes so that the finest quality beer can be generated.

The vendors and retailers must ensure that the finest quality beer is served by them in the U.K. market. They should try to deliver a consistent performance so that the originality of the beverage is maintained throughout the production and delivery process. To minimize the production issues such as wastage, poor quality of raw materials, and high price, all the participants need to work in a coordinated fashion.

Future returns for an investor and potential risk 

The future of the alcohol industry in the U.K. seems very bright due to the high demand for the offered beverages. The consistent trend indicates that the future returns for an investor in the alcohol sector are quite bright since there is a host of unique and legitimate ways to invest in the industry. 

The primary aspect that must be taken into consideration is the proper selection of the alcohol company. It would ensure that the investors get a decent financial return by investing in the right kind of alcoholic beverage (Forbes.com, 2017). Currently, the alcohol investment fund is a popular investment option in the U.K. business setting. The tailor-made investment approaches allow individual investors to minimize their risks and earn profits. 

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The potential risks that are involved in the industry for an investor include the usual investment risks that might arise in any other industry such as high regulations by the U.K. government, taxes, fluctuation in the interest rate and the foreign currency exchange rate, etc. All these aspects could have a crucial impact on the income-generation capacity of the investors (euros, 2017). These factors along with the external elements like climatic change, natural calamities could have an impact on the investor’s return in the alcohol sector. Thus the investor must try to maintain a diversified portfolio so he can minimize the risks and increase the chance of earning higher returns.

Conclusion 

The economic market analysis of the UK alcohol market indicates that the industry exhibits a consistent performance over the years and there is still a chance of its further expansion. Even though it was expected that alcohol sales and consumption in the U.K would remain to stagnate between 2016 and 2021, the uniform demand of the commodity shows that the business participants have a bright future in the industry. Despite the involvement of various factors in the industry, the demand for alcohol in the market is high among people. 

The alcohol industry involves a wide variety of prominent participants that engage in various commercial strategies to enhance their revenue-generation capacity, target new customers in the U.K. market, etc. The performance issues that are involved in the production process of alcohol have been highlighted. The various risks that are involved in the process show that the investors and marketers that operate in the industry must adopt a careful business strategy to have a sustainable business performance. 

The various economic and socio-political elements come into play and affect the performance of the participants in the competitive business setting. Since the economic market analysis is a vital part of the complete market analysis, it has been used to understand the business environment of the U.K. alcohol industry.    

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References

Alcohol purchase trend in the UK 2005-2016 | Statistics. 2017. [online] Annual expenditure on alcoholic beverages in the United Kingdom from 2005 to 2016, b.  

Chaloupka, F.J., Grossman, M. and Saffer, H., 2002. The effects of price on alcohol consumption and alcohol-related problems. Alcohol research and health, 26(1), pp.22-34. 

euros, M. 2017. Alcoholic drinks: market value in the UK 2012-2017 | Statistic. [online] Statista. Available at: https://www.statista.com/statistics/491080/alcoholic-drinks-united-kingdom-uk-market-value/ [Accessed 31 Oct. 2017]. 

Euromonitor.com. 2017. Alcoholic Drinks in the United Kingdom. [online] Available at: http://www.euromonitor.com/alcoholic-drinks-in-the-united-kingdom/report [Accessed 31 Oct. 2017]. 

Forbes.com. 2017. Forbes Welcome. [online] Available at: https://www.forbes.com/sites/johnfitzsimons/2017/04/20/4-alternative-ways-to-invest-in-alcohol-today/#efb303e11a10 [Accessed 31 Oct. 2017]. 

Forbes.com. 2017. Forbes Welcome. [online] Available at: https://www.forbes.com/sites/johnfitzsimons/2017/04/20/4-alternative-ways-to-invest-in-alcohol- oday/2/#79f193732c94 [Accessed 31 Oct. 2017]. 

Ias.org.uk. 2017. What determines the price of a drink? – IAS. [online] Available at: http://www.ias.org.uk/Alcohol-knowledge-centre/Price/Factsheets/What-determines-the-price-of-a-drink.aspx [Accessed 31 Oct. 2017].

Jernigan, D.H., 2009. The global alcohol industry: an overview. Addiction, 104(s1), pp.6-12.

Kirinholdings.co.jp. 2017. Business and Other Risk Factors | Management Policy | Investor Relations | Kirin Holdings. [online] Available at: http://www.kirinholdings.co.jp/english/ir/policy/risks.html [Accessed 31 Oct. 2017].

Sousa, J., 2014. Estimation of price elasticities of demand for alcohol in the United Kingdom. London: Her Majesty’s Revenue and Customs.

 Appendices

Appendix 1

7MK521 Market Analysis Sample

Source: (Chaloupka, Grossman & Saffer, 2002)

Appendix 2 

7MK521 Market Analysis Sample

Source: (Ias.org.uk, 2017)

Appendix 3

7MK521 Market Analysis Sample

Source: (Kirinholdings.co.jp, 2017)

Appendix 4 

7MK521 Market Analysis Sample

Source: (Euromonitor.com, 2017)

Appendix 5

Source: (euros, 2017) 7MK521 Market Analysis Sample

Appendix 6

7MK521 Market Analysis Sample

Source: (Ias.org.uk, 2017)

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