Distillers Delight was an influential brand in low-proof alcoholic-beverage category which successfully introduced in the US in 1990 and in the UK six years after. The Delight market experienced rocketing development and it helped the corporate reap a fantastic return. However, with an unexpected increase in excise-tax in 2003, the company started to perform poorly and suffer unparalleled loss. Macroeconomic analysis (PEST): Political factor: 1)Tax policy Alcoholic drinks made huge contributions to the UK government total revenues.
Data showed that among European countries, the tax on alcohol in UK was relatively highly levied. (See Appendix 1) And the tax policy was changed in 2003 which sharply increased excise taxes on to people who purchased alcoholic beverage. The main reason that the government did so was to generate more revenue. From Appendix 2, we can clearly see that the excise duty revenue from alcohol drink had a progressive increase year by year. The increase in excise tax caused the total price to customers increase while the money received by producers remain the same.
Thus, some customers stopped buying alcoholic drinks since they could no longer afford the higher price, and some of them started to buy alcohol abroad because the imposure of excise tax could be seen as a way to encourage imports or even smuggling. The importation from across the channel was relatively cheap, which negatively affected the domestic producers or local companies to great extents. 2) Licence Act 2003 The Act established an integrated scheme which was used for the sale or supply of alcohol in retails or clubs, to provide regulated entertainment, or late night refreshment.
This Act helped the government to control the supply of alcohol beverages in order to have restrictions on alcohol availability. And it also increased the companys’ general and administrative expense. On one side, sales declined dramatically. On the other hand, the operating cost had been shoot up. Thus, the company’s actual sales were way below what they expected in the first place. Economic factor: Although the Iraq war happened in 2003, the UK’s economy was not under the influence of that. The economic situation gradually went back to the right track, and its interest rate reached historical low levels(See appendix 3).
Based on the data, UK’s GDP reached 754 billion in the first three seasons of 2003, which was a 1. 9% increase compared to the corresponding period in 2002. (Reference: http://down. cenet. org. cn/view. asp? id=78299) With the change in the ideological progress, people realized that alcoholic drinks were prejudicial to health, they spent less money on that. As we can see in the appendix 4, the alcohol receipts increased, as well as total expenditures on alcohol, but the GDP and other household consumption expenditures rose even more.
To some extent, alcoholic drinks could be seen as inferior goods which decrease in demand when consumers’ income rise. In other words, the proportion of expenditure on alcohol had been shrinked considering the total expenditures. Social factor: There was no doubt that people become more and more aware of their health. Low-proof alcoholic beverages were better than the higher ones, but alcohol consumption was more or less harmful to people if people drank above suggestted amounts. It could lead to alcohol abuse disorders, alcoholism and even death.
Based on National Institutes of Health research, If people drink heavily only once a month, chances of having an alcohol use disorder are around 20%. But if people exceed the guidelines once a week, the chances immediately jump to 33%. Not only this, people who have drinking manners usually lose productivity in the workplaces and they tend to bring social harms like breakdown their own families. Just as seen in appendix 5, drinking alcohol beyond limit is a behavior which is derelict of duty to himself, his family, his friends, his co-workers and the whole society.
Trends in increasing health consciousness made the demand for alcoholic drinks decline. From public health’s perspective, the government’s measure of increasing taxation on alcoholic drinks could effectively limit consumers’ demand and their accessibility which eventually discouraged certain drinking behaviors. Technological factor: The introduction of Distillers Delight was planned in 1980s, and it came into the UK market in the mid 1990s. The technology had to be updated and improved on regular basis.
As the researchers, they also need to think about the questions like: how to produce low-alcohol beverages while maintain the taste and quantity expected by consumers. Moreover, technology usually has time value where the R&D (innovation) is the key. The replacement of the technology forced the productions with old technology (almost 20 years) to have the lower price. Thus, the sales price had to be reduced, otherwise the market would not accept. Microeconomic analysis (the five forces): The threat of the entry of new competitors:
As described above, Licence Act 2003 regulated that the company which sold the alcohol need a premises licence. (Reference: http://www. legislation. gov. uk/ukpga/2003/17/contents) Thus to say, strong regulation over the industry relatively prevented the entrance of new competitors. The market was dominated by several large producers and it was evolving from the oligopoly structure. The threat of substitute products or services: There did exist many substitutes to replace the low-proof alcoholic drinks. Within the alcohols, some had lower alcohol content (like beer and wine) and some had higher alcohol content (like spirits).
As seen in appendix 6, the majority of people had the preference of low-proof alcoholic drinks, but still had group of people who were willing to try or love the higher alcoholic drinks. In terms of beverage, English enjoy tea, coffee and alcoholic drinks like apple cider. Therefore, there were so many options for the consumers which threatened low-proof alcoholic drinks. The bargaining power of customers (buyers): The customers were very senstive to and they could raise the voice to the change in the price.
As the increase in excise tax pushed up the total price, companies like Global Distillers originally did not respond to this change, which meant that they still remained the sales price as before. However, comsumers did not accept the fact that the total price had been risen by leaps and bounds. They fiercely resisted and they refused to buy them accordingly. Thus in the end, consumers’ behaviors pushed the companies to come up with the new and lower price policy. The bargaining power of suppliers: The rate of inflation went up significantly.
This meant that the cost of raw materials like cereal grains, grapes or apples serged as well. So, the supplies had the bargaining power to negotiate the cost of inputs though there were many suppliers in the market. The intensity of competitive rivalry: As mentioned above, the entrance of the market was relatively difficult. However, there had already been so many producers in that market, and Global Distillers (its brand Distillers Delight was market leader in the low-proof category) needed to pay close attention to any movement done by competitors. The case said that Glbal Distillers must tightly follow their competitors’ actions.
In this industry, there existed both price war and non-price war. (Appendix 7 shows the elastic and inelastic supply of alcholic drinks. ) Once competitors lowered the price, they had to reduce the sales price right away, or else they would lose the whole market. Once competitors increased their advertising budget, they were forced to do the same thing as well. The corporates must keep in mind that make new and creative products were the only way to beat the rivals. Product differentiation was extremely essential. Different color, flavor, ingredients, production method could help them to become the winner.