Strategic Analysis
Treaty Beer Company
Julieanne O Connor
C00145478
Presented to Ed Dennehy
02/12/2013
02/12/2013
Table of Contents
Introduction ............................................................................................................................................ 3
Purpose of the document ................................................................................................................... 3
Outline of the organisation ................................................................................................................. 3
Environmental Scan ................................................................................................................................ 4
Internal Environment .......................................................................................................................... 4
Management/Organisational structure .......................................................................................... 4
Marketing ........................................................................................................................................ 5
Operations ...................................................................................................................................... 6
Financial Analysis ............................................................................................................................ 6
External Environments ........................................................................................................................ 8
Natural Environment....................................................................................................................... 8
Porters Five Forces Analysis of the beer industry in Ireland........................................................... 8
PEST Analysis ................................................................................................................................. 12
Bibliography .......................................................................................................................................... 14
2|Page
Julieanne O Connor
02/12/2013
Introduction
Purpose of the document
The purpose of this document is to analysis Treaty Beer Company (TBC) and the industry in
which it competes. To identify strengths and weaknesses within the company but also
analysis the beer industry in Ireland and identify any problems which TBC have in relation to
the industry along with their competitors. This information is for the incoming CEO of the
company as the current CEO is retiring.
Outline of the organisation
Treaty Beer Company was set up in 1990 by John Murphy in Limerick city. The business
began in a warehouse in Limerick city in which they still use today, even though it is
currently run down and not up to the standards required for a brewing company.
TBC is a small family-run company with John the current CEO retiring and handing over the
running of the business to his son Cillian. The business has grown significantly since it was
first established, growing from a small three person company to now having 20 employees.
Sales within the company have increased dramatically from €20,000 in its first year in
business to €1,500,000 in sales this year. The company now produce four different bottle
formats; these include both Treaty Stout and Ale in 250ml and 500ml bottles.
There is a huge competitive market today in Ireland in comparison to when the company
first started. Competition has increased considerably from both the domestic and
international beer companies investing heavily in their brands, which means the great taste
of the beer cannot be solely relied on anymore.
3|Page
Julieanne O Connor
02/12/2013
Environmental Scan
Internal Environment
Management/Organisational structure
Treaty Beer Company is a family run business, owned and run by John Murphy, the CEO of
the company, since it was first established in 1990 in Limerick City. He is retiring in the near
future and passing on the business to his son, Cillian, when he retires. Cillian is 22 and has
recently graduated from IT Carlow with a BA (HONS) in Marketing, and has worked in the
accounts office informally for the past four years.
When John Murphy first set up the business he was previously a barman and went on to
owning a pub of his own. He began to brew beer in his home selling to the local community
around his home and set up the business after he received an inheritance. Murphy is a man
set in his ways as he still manages the business in the same way today as he did when he
first started selling the beer. The company first started with only three employees and now
has 20 employees working for them. Many of the employees are family or friends of the
family with little skills and experience in the brewing industry. The accounts and
administration manager is Murphy’s wife who has no qualifications in office management or
accounting. Working with her are two part time employees, with many records including
inventory being kept manually. Murphy himself does a small amount of admin work
opening all mail and reviewing customer billing before they are sent out, he also requests
any expenditure over €100 be approved by him. The lack of experience seems to be a
regular occurrence in the business as the factory, warehouse and delivery department
manager is a friend of Murphy and although a former barman has no qualifications in
operations management or brewing. The other staff within the business are generally
unskilled and untrained. There are no specific roles given to the staff as they usually take
turns in making the beer and driving the delivery truck showing no formal organisation
amongst the staff. Although Murphy used to visit the factory and warehouse regularly to
inspect operations he no longer has the time, causing the disorganisation of the staff. The
following graph illustrates the breakdown of staff within the business:
4|Page
Julieanne O Connor
02/12/2013
CEO
John Murphy
Production, Warehouse
& delivery
Accounts &
Administration
- 1 manager
- 1 manager
- 15 full-time employees
- 2 part-time employees
Marketing
Product
TBC manufacture ‘traditional’ Irish beer. The beer is sold in four bottle formats:

Treaty Stout 250ml

Treaty Stout 500ml

Treaty Ale 250ml

Treaty Ale 500ml
Both products contain 5% alcohol. The products are sold on the basis it is a high quality
traditional Irish beer in which the company use all natural ingredients sourced from local
suppliers around Limerick.
Price
The price of the product is based on the bottle size for both Stout and Ale. The 250ml bottle
is sold at €1.50 per bottle and the 500ml bottle is sold at €2.50 per bottle. After direct costs
and overheads the company make 50cent profit on both bottles. This results in a 33% profit
on the 250ml bottles and 20% profit of the 500ml bottle. Customers are offered 30 to 60
days credit. Although many customers see this as a great advantage they feel Murphy will
often negotiates on price and payments out of desperation to close the sale.
Place
The main market for Treaty Beer Company is the Limerick market. The primary market of
TBC is the ‘upmarket’ hotels and pubs in the Limerick region. They distribute the product
direct from the warehouse using the only delivery truck the company. Sales of the products
are 50/50 split between the hotel and pub industry.
5|Page
Julieanne O Connor
02/12/2013
Promotion
TBC rely almost solely on the quality of the product for its promotion. The company
position itself as a traditional Irish beer manufacturer. There is not a huge investment in
promotion by the company as they see quality of the beer as the USP of the company.
Murphy is the only sales person within the company spending half of every day making sales
calls. The company also have a website which only gives basic information to customers.
Operations
TBC operate from a rundown warehouse in Limerick city, and have being doing so since it
first opened in 1990. The company have only one delivery truck for the products which is an
old truck and is starting to break down on a regular basis and customers do rely on TBC for
their quick delivery service. The beer is produced on the basis of sales forecasts made by
John Murphy and then stored in the warehouse awaiting delivery. Inventory records for the
company are kept manually but are highly unreliable. Treaty Beer Company has been
operating without any systematic management or financial control as Murphy believes it
would be too costly and unnecessary. Although there are many operating problems Murphy
still believes any problems the company have are due to the current economic downturn
and are only affecting the company in the short-term.
Financial Analysis
From the information provided the following ratios were conducted to evaluate the financial
position of Treaty Beer Company.
Current Ratio:
Current Assets
Current Liabilities
=
300,000
440,000
= 0.68
Current ratio for TBC is 0.68:1
Industry average is 2:1
This shows that TBC is below the industry average by 1.32. This means that the current
assets of TBC are not sufficient to cover liabilities; it doesn’t mean the company is in debt
but they will have difficulty meeting obligations.
Acid test Ratio: Current Assets – Inventory
Current Liabilities
Acid test ratio for TBC is 0.57:1
=
300,000 – 50,000
440,000
=
0.57
Industry average is 1:1
6|Page
Julieanne O Connor
02/12/2013
Acid test ratio measures the ability of the company to use its near cash or pay back it
liabilities immediately. This shows that TBC cannot fully pay back its liabilities as their
results stands at 0.57, 0.43 below industry.
Net Profit Margin: Net Profit =
25,000
=
0.017 = 1.7%
Sales
1,500,000
Net profit ratio for TBC now stands at1.7%. This indicates how much of each euro earned by
the company is translated into profit.
Gross Profit Margin: sales – COGS
Sales
= 1,500,000 – 700,000
1,500,000
= 53%
Gross profit margin for TBC is 53%. It assess the firm's financial health by showing the
proportion of money left over from sales after accounting for the cost of goods sold. Gross
profit margin serves as the source for paying additional expenses and future savings.
Overall the Treaty Beer Company have no long term debts but they do not have enough
money to cover their short term debts. They also need to review the salary of both the CEO
and accounts manager in order to control expenses. TBC need to review their financial
structure and put in a better system.
7|Page
Julieanne O Connor
02/12/2013
External Environments
Natural Environment
The drinks industry in Ireland has always paid great attention to the environment and the
role it plays in the manufacturing process. Consumers are also more environmentally
friendly now-a-days and are more aware of issues such as carbon footprint and recycling in
their purchasing decisions. Many drinks companies in Ireland are members of Repak, which
is a government initiative to increase recycling. Many companies are always looking for
ways to increase the recycling of their products. Within on-trade, publicans can return
bottles and kegs to be refilled and reused. In one company a simple change like this,
resulted in 2,925 tonnes of glass being reused and a total annual saving of €1.03million.
Overall, the industry has reported a 64% recycling rate for packaging waste. Another way in
which companies are looking to reduce waste includes reducing the weight of glass, using
reusable plastic interlayers and the possibility of changes to bottle lids. These changes will
cut out the packaging sent to customers reducing waste from the start (Malmhake, 2013).
Breweries all over the country have devised some great innovative ways to prevent waste of
spent grain in the company. Spent grain constitutes for almost 85% of a breweries byproduct, this ‘waste’ is used in the agricultural sector as animal feed or compost
(Witkiewicz, 2013).
Protection of the environment is of key importance to the industry. Reductions of energy
usage, using environmentally friendly materials along with increasing awareness of recycling
are all areas in which companies are seeking to become more efficient and environmentally
flexible (Malmhake, 2013).
Porters Five Forces Analysis of the beer industry in Ireland
Porters’ five forces analysis assumes there are five forces which determine competitive
power within the competitive industry of a business (Manktelow & Carlson, 2013). These
forces are:
8|Page
Julieanne O Connor
02/12/2013
1. Threat of new entrant
There is always a threat of new entrants in any competitive market. In the Irish beer
industry there are many areas for new entrants in the market, from small scale
microbreweries to larger international breweries investing in the Irish market. There is
rising demand in the alcohol industry across Europe for so-called ‘real ales’ (Marketline,
2013). These real ales are marketed on high quality and assortment leading them to be sold
at higher prices. The Irish market has a number of these ‘real ales’ with numerous
microbreweries already existing across the country within specific regions. However, there
are many barriers to entry which will affect new entrants. The main barrier in this industry
being economies of scale. Porter defines economies of scale as “declines in unit costs of a
product as the absolute volume per period increase” (Porter, 1980). Therefore, the higher
the quantity of products produced the lower the cost of production per product. The larger
companies in the market tend to rely mainly on the mass-market production of
internationally renowned palatable lagers leaving the microbreweries market more open
(Marketline, 2013). The bigger breweries have this great advantage as they have a greater
ability to spend more on branding, marketing and promotions, setting them apart from their
competitors. This also helps gain larger shelf space with a retailer which is usually limited.
In addition brewing beer is hugely capital intensive, from the manufacturing process to
taxes and regulations involved leaving small scale companies at a major disadvantage. So as
we can see there is somewhat threat of new entrants but it is low to moderate as it is
dependant mainly on larger breweries (Boeing, 2008).
2. Threat of substitutes
The main threats of substitutes are of course, other alcoholic products and on smaller scale
non-alcoholic beverages, such as low/no alcohol beers. The purchase of these products is
on the increase and many factors contributing to consumers changes cannot be controlled
by the industry (Marketline, 2013). Consumers are taking better care of themselves are
therefore paying more attention to their alcohol intake. Opting for ‘less fatten’ drinks or
spirits or just sometimes simply avoiding alcoholic drinks. Pressure from sellers of
substitute products is considered to be on the increase but this is again down to
consumption patterns changing. The cost of switching to substitutes is practically nonexistent, so it is only really in the mind of the consumer that the change is costly if they are
perhaps brand loyal (Boeing, 2008). This is also the same for distributors as the per-unit
9|Page
Julieanne O Connor
02/12/2013
volume prices for beer are higher than for spirits or wines leaving more room for profits if
they switch (Marketline, 2013). Overall, there is a moderate threat from substitutes but this
is on the increase.
3. Bargaining power of buyers
The power of buyers is significantly high when it comes to the beer industry (Marketline,
2013). There are three components of the buyer’s market; these include
distributors/wholesalers, supermarkets/restaurants and consumers (Beer Insights, 2013).
Distributors have the main influence and hold the most buying power in the industry.
Distributors are the main link with retailers and consumers from the manufacturers. This
gives distributors huge power over the manufacturers and gives them great room for
negotiations regarding price and increases promotion/incentives from the manufacturers
(Boeing, 2008). Supermarket chains are frequently able to negotiate favourable terms
regarding prices, this helps to increase their buying power immensely. Again, with buyers,
switching costs are relatively low giving them greater power, so they can use this as an
advantage to them in negotiations. Large supermarket chain tend to offer a wide variety of
beers on the shelves in order to provide for consumer tastes, and often provide their own
brand products (Marketline, 2013). With this always being a threat to the manufacturers
the supermarkets can negotiate prices so the products will be on their shelves.
Of course, consumers are always part of the buyer’s power. Buying power is not directly
linked to consumers but consumer trends and preferences are channelled through
distributors and retailers as they are the final user (Boeing, 2008). As consumer trends
change this will change what is being purchased. For example, consumers in Ireland are
currently moving towards craft beers, prompting a greater supply to retailers.
4. Bargaining power of suppliers
Suppliers in the beer industry have very little bargaining power. The main inputs include
malted grain, hops and bottles or barrels. Generally ingredients for the beer are purchased
from independent suppliers, usually local farmers close to the breweries or sometimes
malted barley would be bought from a third-party producer. Beer, when produced is always
packaged on site, weakening supplier power (Beer Insights, 2013). There are numerous
independent hop growers, which are usually small operations, which further weaken
supplier power as manufacturers do not need to depend on a single supplier. Barley
10 | P a g e
Julieanne O Connor
02/12/2013
producers do have some power however within the industry. Barely producers do not
solely rely on the beer market as barely can be used for other products such as animal feed,
but this is not enough to influence their power greatly. Therefore, there is low buyer power
within the beer industry (Marketline, 2013).
5. Intensity of rivalry
Competition within the beer industry is moderate but is also on the increase (Boeing, 2008).
Competition for many years has being based primarily on brand and quality with price not a
major influence on peoples decisions. Brands fought hard to become the top brand in the
industry. The market in Ireland is severely consolidated, being dominated by three large
players, holding 82.4% of the total market volume combined (Marketline, 2013). In order to
become more identifiable to the public, some of the larger brands within the industry have
introduced brand management. With the increase of substitute products within the
industry and consumer patterns changing, the industry is being greatly affected resulting in
rivalry increasing. Companies want to be the brand chosen and always want to be in the
consumers mind (Marketline, 2013). Some of the major players offer premium beers in
order to increase intensity of the market. With these factors in mind we can see rivalry is
quiet high in the beer industry.
11 | P a g e
Julieanne O Connor
02/12/2013
PEST Analysis
Political
The drinks industry is one of the most competitive in Ireland (Malmhake, 2013). Open
market competition promotes efficiency, innovation and output resulting in value
innovation and excellence in the products that are produced. Therefore, competition policy
is crucial to support, promote and sustain competitiveness within the industry. The drinks
industry subscribes to 10 core principles which are incorporated into regulatory policies.
These include: clarity of purpose, economic & cost benefit analysis, consultation,
transparency, proportionality, consistency, simplification, consolidation, coordination, and
accountability.
The Irish government have strict regulations in order to moderate the consumption of
alcohol in Ireland. For instance, persons must be over the age of 18 to purchase or consume
alcohol in Ireland. The government are trying to remove the bad name the Irish have in
relation to drinking habits. The drink driving regulations within Ireland has being reduced
greatly to just 50mg of alcohol per 100ml of blood, resulting in one pub measure of spirits
being over the limit. Also the introduction of the smoking ban in public places has had an
indirect effect on the alcohol industry as a large proportion of the brewing industry sales
come from these establishments (Foley, 2013). People tend to stay at home now reducing
the amount of drinking in compared to the years before this was enforced.
Economical
The Irish alcohol sector generates around €2 billion in revenue for the state annually, and
supports 62,000 jobs around the country (Malmhake, 2013). The total consumption of
alcohol has increased by 10.8% since 2004; however, domestically produced alcohol has
declined by 21.8%. Irish spend almost €3billion each year on beer in pubs, clubs and
restaurants (IBEC, 2013). The volume of imported alcohol products has also increased
dramatically, growing by almost 90% since 2000. There are concerns for the sustainability of
small rural pubs due to the changed economic environment. Many of the rural pubs have
found ways around this with the provision of food, now 58% of tourists choose pubs for
food in comparison to 28% opting for restaurants. One of Ireland’s main tourist attractions
is the Guinness storehouse. The industry is, however a highly substantial contributor to the
12 | P a g e
Julieanne O Connor
02/12/2013
exchequer in terms of excise and VAT, generating total tax revenue of €2.151 billion in 2012
(Foley, 2013). Ireland has the fourth highest excise levels on beer in Europe (IBEC, 2013).
Social
The Irish drinks industry is one of the greatest national assets to the country (Malmhake,
2013). Beer is Ireland’s favourite alcoholic drink. Irish people drink 91 litres of beer per
head annually, resulting in almost 275 million pints of beer consumed every year. Irish
brands are of high quality and internationally recognised brands (IBEC, 2013). Many of the
companies within the Irish drinks industry support the Irish culture and the Irish people.
Throughout the country many companies support local activities, through sponsorship of
events such as sporting, cultural and artistic endeavours; from ‘The Gathering’ which took
place all across the country to the sponsorship of local GAA clubs (Malmhake, 2013).
Drinking is a major part of the social culture in Ireland. The Irish base many events or
occasions such as weddings, birthdays, etc around the pub and alcohol. Binge drinking is a
major problem in Ireland. Binge drinking is considered to consume more than 5 units of
alcohol at any time (DrinkAware, 2013). The youth culture is considered to be major binge
drinkers, particularly students as they tend to consume more than the recommended
allowance numerous times a week (DrinkAware, 2013).
Technological
The Brewing of beer is a very old art which started in the late 1700’s (IBEC, 2013). Few
technological changes have come about in the brewing process but changes by the macro
environment have forced technology to change the industry. New technologies such as
refrigeration and motorised transportation have allowed for the integration of worldwide
brewing industries (Reader, 2013).
Other than these factors there have been very few advances that have affected the actual
brewing process. The only major advance was the introduction of hops in the 19 th century
(McGreevy, 2013). Today, there are millions of breweries worldwide still using the same
technique (McGreevy, 2013).
13 | P a g e
Julieanne O Connor
02/12/2013
Bibliography
Beer Insights, 2013. Beer marketers insight. [Online]
Available at: http://www.beerinsights.com/index.php?option=com_content&view=article&id=1&Itemid=9
[Accessed 30 11 2013].
Boeing, L., 2008. Beer Breweries industry analysis, s.l.: dr. Matt Ford.
DrinkAware, 2013. Drinking in Ireland-the facts. [Online]
Available at: http://drinkaware.ie/index.php?sid=11&pid=522
[Accessed 25 11 2013].
Foley, A., 2013. The Economic Contribution of the drinks industry of Ireland, Dublin: Drinks Industry Group of
Ireland.
IBEC, 2013. the irish beer industry and its importance to the Irish economy, Dublin: ABFI.
Malmhake, A., 2013. ABFI Policy. [Online]
Available at: http://www.abfi.ie/Sectors/ABFI/ABFI.nsf/vPages/ABFI_Policy~abfi-policy?OpenDocument
[Accessed 01 12 2013].
Malmhake, A., 2013. Environment. [Online]
Available at: http://www.abfi.ie/Sectors/ABFI/ABFI.nsf/vPages/ABFI_Policy~environment?OpenDocument
[Accessed 28 11 2013].
Manktelow, J. & Carlson, A., 2013. Porters five forces. [Online]
Available at: http://www.mindtools.com/pages/article/newTMC_08.htm
[Accessed 20 11 2013].
Marketline, 2013. Alcoholic Drink in Ireland, Dublin: Marketline.
Marketline, 2013. Beer in Ireland, Dublin: Marketline.
McGreevy, R., 2013. Brewing up a storm: crafty new Irish beers going down nicely. [Online]
Available at: http://www.irishtimes.com/news/consumer/brewing-up-a-storm-crafty-new-irish-beers-goingdown-nicely-1.1510880
[Accessed 26 11 2013].
Porter, M. E., 1980. Competitive Strategy, New York: Free Press.
Reader, C., 2013. Macroenvironmental factors that affect the beer industry. [Online]
Available at: http://www.ehow.co.uk/list_7392420_macroenvironmental-forces-affect-beer-industry.html
[Accessed 29 11 2013].
Witkiewicz, K., 2013. Sustainable Uses of Spent Grain. [Online]
Available at: http://www.craftbeer.com/craft-beer-muses/sustainable-uses-of-spent-grain
[Accessed 25 11 2013].
14 | P a g e
Julieanne O Connor