Executive summary
This report presents the economic analysis of ‘Carlsberg Group’, one of the leading brewery groups in the world to identify potential ways to increase profits.
This report focuses on demand, and market equilibrium analysis and factors that may affect demands for company’s product. Cost management and resource allocation is also analysed for potential benefits. Moreover, market structure is discussed along with financial performance. External factors such as government and trade policies are identified.
Table of Content
Introduction……………………………………………………………………..1
About Carlsberg Group…………………………………………………..1
Findings………………………………………………………………………….2
Factors that may affects demands………………………………………..2
Cost management…………………………………………………………3
Market structure……………………………………………….………….3
Regulation and Policies………………………………………………….4
Conclusion and Recommendation…………………………………….……….4
References………………………………………………………………………5
Introduction
Economic analysis seeks to understand how marketplaces are functioned, how price changes, what can influence costs of the firm, and influent profitability (Begg, and Ward 2013). Thus, the analysis is expected to help improve company’s performance and benefit by understanding the current economic factors affecting the company. While the market structure benefits the firm due to difficulty in entering, there is a potential to earn above average.
About Carlsberg Group
Carlsberg was established in 1847 by brewer J.C. Jacobsen. The firm is one of the leading brewers companies in the world, with wide range of beer and other beverage brands. It is the UK’s fourth largest brewer selling more than 700 products with the most popular and liked products: Carlsberg, and Carlsberg Export. Carlsberg UK also imports products from Spain, Italy and the United States.
Findings
Factors that may affects demands
Various factors may affect the quantity demanded of beer. For instance, price, the increase in price can reduce demands (Begg and Ward, 2013). Another factor is taste and preference, where consumers’ attitudes towards products are reflected (Begg and Ward, 2013). Moreover, Prices of substitutes and complements such as whisky can affect the demand.
The market for the firm’s products seems to currently be in equilibrium, however, as the costs of production for brewers is expected to increase by 16% in 2019 (Wood, 2018), it may affect the supply curve to left-shift, causing the price to rise to a new equilibrium point (Begg and Ward, 2013).
(Figure 1 shows the price of 1 box of 12 Carlsberg beer can)
The price of one box of 12 Carlsberg cans increased in 2018 from £22 to £36.99, rised from £22 to £30 in the February, went up to £35 in the beginning of March, then, decreased to £32 in April. The price remained stable at £32 until it increased to £36.99 in late November. The increase in price might be due to the increase in barley price after summer heatwave scorched harvests across Europe, as well as the raise of price in energy, and aluminium (Wood, 2018).
The degree of elasticity of demand can be estimated by the following equation: 𝑬𝒑=%∆𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 ÷ %∆𝑷𝒓𝒊𝒄𝒆
According to Statista database, the sale volume of Carlsberg beer is 112.4, and 116.9 million litres in 2016 and 2017 respectively. The price of Carlsberg lager increased by 2.6% in 2017 (Perrett, 2017). Thus, the calculated elasticity of demand is 1.5096. This means for every percentage that beer prices increase, the quantity of the beer consumed raise by 1.5096%.
Therefore, the firm may increase the price to earn above average profit. However, as the current price is benchmarked to competitors, it is suggested that the company differentiate their additional products to persuade consumers willing to pay for added price, while keeping the original product price constant.
Cost management
According the company’s annual report, during 2017 and 2018 stopped providing its own porterage services and chose DHL as its secondary logistics, resulting in decreasing in indirect production overheads by $117 Million, and staff costs by $9 million.
In order to observe the firm’s economy of scale, degree of operating leverage (DOL) is calculated, as this multiple shows the relationship between operating income and sale (Kenton, 2018). The calculation is
𝑫𝑶𝑳= % 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒊𝒏𝒄𝒐𝒎𝒆 ÷ % 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒔𝒂𝒍𝒆𝒔
According to the company’s annual report, the change in operating income in 2017 compared to 2016 is 7.6%, while the change is sales is -1.72%, thus: 𝑫𝑶𝑳=𝟕.𝟔% ÷ −𝟏.𝟕𝟐%= −𝟒.𝟒𝟏𝟖𝟔
This can be interpreted that it might have reached diseconomy of scale point, because an increase in operating income by 1% is expected to decrease the sales by 4.4186%.
The firm also owns other brands such as Kronenbourg, Grimbergen, and Baltika Brewery, with 709 different products in total (Carlsberg Group, 2018). This shows that it is able to make use of its specialization.
Market Structure
The beer market structure seems be oligopoly because products are not highly differentiated, and there are only few firms that dominate the market such as Carlsberg, Budweiser, and Heineken. Moreover, to enter the UK beer market is highly difficult due to high costs of production and market dominance of existing firms.
To compete in the market, the economy pricing strategy is used to keep the price low. According to Tesco retail website, a box containing six 330ml cans for Carlsberg costs £5, same for Heineken and Budweiser. This strategy is likely the most proper one because once the price is at any lower, it can affect the profit, on the other hand, if the price is higher, consumers might choose competitors’ products.
The company also grows by acquisition. In 2010, the firm also bought Scottish & Newcastle, one of the iconic British brewers, resulting in more economy of scales due to synergies and specialisation (Meulen
and Bruze, 2010). As a result, net revenue of the firm raised by approximately 5.8%, according to the annual report.
(Figure 2 shows return on equity of Carlsberg Group from 2013-2017)
The financial performance seems slightly unstable, seeing the sharp decrease in 2015 in figure 2, however, overall, the ROE positive ranges from around 2% to 10%.
Regulation and policies
UK government’s policy are not in favour of the business activity. Citizens under 18 are not allowed to buy alcoholic drinks, therefore gaining young customers is impossible. Trade policies also affected Carlsberg when exporting their products, for example, tax for alcoholic goods in China ranges up to 40% (Government of Canada, 2018). While environmental legislation does not affect the firm since it acts according to the law with corporate social responsibility such as using renewable energy and corporation with local community to ensure sustainable use of water (Carlsberg Group, 2018).
Conclusion and recommendation
The Carlsberg seems to be able to make use of economy of scope, while it is at the diseconomy of scale point. However, with positive elasticity demand, the firm can still increase price to earn above average profit without threat of new competitors due to oligopoly market structure. Thus, it is recommended that the company release a new differentiated product with higher price.
References:
- Begg, D., Ward, D., 2013. Economics for Business. 4th ed. New York: McGraw-HillEducation (UK) Limited.
- Carlsberg Group. 2011. Carlsberg Annual Report 2011. [ONLINE] Available at: https://carlsberggroup.com/media/5253/carlsberg_2011-annual_report_english.pdf. [Accessed 15 December 2018].
- Carlsberg Group. 2016. Carlsberg UK Announces Proposal to Outsource Secondary Logistics. [ONLINE] Available at: https://carlsberguk.co.uk/newsroom/carlsberg-uk-announces-proposal-to-outsource-secondary-logistics/. [Accessed 14 December 2018].
- Carlsberg Group. 2017. Carlsberg Annual Report 2017. [ONLINE] Available at: https://carlsberggroup.com/media/22523/carlsberg-as_annual-report-2017.pdf. [Accessed 15 December 2018].
- Carlsberg Group. 2018. Carlsberg Group Products. [ONLINE] Available at: https://carlsberggroup.com/products/. [Accessed 14 December 2018].
- Carlsberg Group. 2018. ENVIRONMENTAL POLICY. [ONLINE] Available at: https://carlsberggroup.com/media/17987/environmental-policy.pdf. [Accessed 14 December 2018].
- Kenton, W. 2018. Degree Of Operating Leverage – DOL. [ONLINE] Available at: https://www.investopedia.com/terms/d/degreeofoperatingleverage.asp. [Accessed 15 December 2018].
- Meulen, M, A., Bruce, A. 2010. Heineken, Carlsberg to Cut Costs. [ONLINE] Available at: https://www.wsj.com/articles/SB10001424052748704188104575082811491971750. [Accessed 14 December 2018].
- Perrett, M. 2017. Carlsberg and Heineken Unveil Price Increases. [ONLINE] Available at: https://www.morningadvertiser.co.uk/Article/2017/01/23/Carlsberg-and-Heineken-unveil-price-increases. [Accessed 14 December 2018].
- Statista. 2017. Sales volume of the Carlsberg Group from 2012 to 2016, by type of beverage (in million hectoliters). [ONLINE] Available at: https://www.statista.com/statistics/781129/sales-volume-of-the-carlsberg-group-by-type-of-beverage/. [Accessed 14 December 2018].
- Tesco. 2018. Budweiser Budvar Original 6X330ml Cans. [ONLINE] Available at: https://www.tesco.com/groceries/en-GB/products/300063282. [Accessed 14 December 2018].
- Tesco. 2018. Carlsberg Export Lager 6X330ml Can. [ONLINE] Available at: https://www.tesco.com/groceries/en-GB/products/301839521. [Accessed 14 December 2018].
- Tesco. 2018. Heineken Lager 5% Can 6X330ml. [ONLINE] Available at: https://www.tesco.com/groceries/en-GB/products/255218744. [Accessed 14 December 2018].
- The Canada Trade Commissioner Service. 2018. Import Regulations in China. [ONLINE] Available at: https://www.tradecommissioner.gc.ca/china-chine/market-facts-faits-sur-le-marche/125684.aspx?lang=eng. [Accessed 14 December 2018].
- UK Government. 2018. Alcohol and Young People. [ONLINE] Available at: https://www.gov.uk/alcohol-young-people-law. [Accessed 14 December 2018].
- Wood, Z. 2018, Beer prices set to rise after heatwave hits barley harvest. [ONLINE] Available at: https://www.theguardian.com/food/2018/sep/11/beer-prices-set-to-rise-after-heatwave-hits-barley-harvest. [Accessed 14 December 2018].