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Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

In Last Orders for Guinness we see a company grappling with declining sales. Guinness has chosen innovation, in the shape of Guinness Red, as a strategy to reverse its fortunes, but what other avenues could it explore?

One possible strategy is to look to new territories for salvation. Guinness is very popular in Europe, in the US and in parts of Africa, particularly Nigeria. That still leaves sizeable swathes of the world with potential for growth. But there’s a big stumbling block with this strategy: distribution.

If you brew beer centrally, in Dublin for instance, how do you actually get it to market? Well, tankers sail it across to Britain, and when the beer arrives it’s loaded into lorries and distributed across the country.

"getting the product to the consumer can be difficult"

But what if this ‘distribution network’ didn’t exist? If Guinness wants to sell to a developing economy, and the infrastructure doesn’t exist in the way that it does in Europe, then they would have to think again about how to service the market. It’s relatively easy to build and operate a brewery, but getting the product to the consumer can be difficult.

Consider the South African market, for example. One reason why SABMiller have a virtual monopoly there is because they’ve got a well established distribution chain going into the townships. It’s difficult for other companies to replicate and therefore compete with them in this environment.

One way to obtain access to a distribution network is to join forces with a company that’s already built one. For example, in 2004 the Belgian company Interbrew and the Brazilian company AmBev merged, creating InBev. This hook-up allowed InterBrew to use Ambev’s distribution channel to sell beers such as Becks or Stella Artois to Brazil. Likewise, Ambev gained access to the European market for its Brazilian Beers.

There are other, more creative ways, to gain distribution capability. There’s one company in Denmark, for example, that uses a meat distributor in Italy to reach its target market: restaurants in Italy. Guinness may have to think outside the box in a similar fashion if it decides to expand overseas.

Take it further

• Join the discussion - what should Guinness do to save itself?
• Video extras - do things look black for Guinness?
• Competitive advantage - how can companies ensure they've got a lead over their competitors?
• Last orders for Guinness - after years of falling sales, Guinness fights back with new stouts and adverts
• When there’s nowhere to go but each other’s arms - the global brewing business is going through another of its spasms of consolidation
• 'Strategic alliances in international distribution channels' by Rajiv Mehta, Pia Polsa, Jolanta Mazur, Fan Xiucheng and Alan Dubinsky, published in the Journal of Business Research.
• Transforming Your Go-to-Market Strategy: The Three Disciplines of Channel Management by V Kasturi Rangan and Marie Bell, published by Harvard Business School Press
• Gaining and Sustaining Competitive Advantage by Jay Barney, published by Prentice Hall

About the author

Geoff Mallory is a Lecturer in Strategic Management and Director of the Postgraduate research Degrees Programme at the OU Business School. He has taught organization theory and strategy in a variety of countries and contexts.

Subscribe to Geoff Mallory's posts

 

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

Avon competes in a global industry which, according to estimates from Datamonitor, was worth $120 billion in 2002. Avon, which was perhaps one of the first global cosmetics companies, is now overshadowed by industry leaders such as L’Oreal and Procter & Gamble. These companies are over three times the size of Avon when measured by turnover.

The Money Programme 'Avon’s Still Calling', highlights the very different set of competitive forces the company faces now, compared to those it faced when it was founded. Competitors have grown in number, diversity and financial power. Meanwhile, the demographics, preferences and brand awareness of consumers have changed.

'Avon’s Still Calling' also raises concerns about the company’s strategic response to these competitive forces. Can its cost and revenue structure and business model deliver a sustainable long-term profit? Yet the major problem identified is the lack of any retail presence. Avon relies too much on the direct selling channel.

The success of Avon rests on addressing some key questions. Some commentators have talked about the idea of “retail theatres”, outlets that offer the consumer a shopping experience rather than just an opportunity to buy the product. Would creating such a distribution channel be feasible?

Could the company generate the revenues and afford the costs associated with such a shift? If it went ahead, would Avon apply this model in all of its markets or just where its market share is static or declining?

Perhaps, and even more importantly, would they be trying to copy their major competitors? Most writers on strategy argue that “me too” strategies don’t work. You may copy a competitor’s approach, but your resources (money, brand and people) are setup in a different way.

For example, some traditional booksellers such as Blackwell in the UK and Borders in the USA launched online bookstores to compete with Amazon. However, a key source of Amazon’s advantage is their proprietary software. The competition just didn’t have the expertise or resource to successfully replicate this, and thus their online activities floundered.

Avon’s trying to improve brand awareness by increasing advertising spend and other activities, for example through its sponsorship of ITV’s Footballers’ Wives. It’s also addressed its product range and introduced internet selling.

However, the basic question remains: should Avon seek to imitate its largest rivals such as L’Oreal? Or should it take advantage of the unique capabilities and model it's developed over many years?

Avon’s model has allowed it to succeed in overseas and emerging markets (75% of turnover comes from outside the US) and to sustain profit performance. One way to expand the current model would be to sell additional products through their direct selling channel.

So far Avon has chosen to make changes within the current model. Will these be enough? Avon will need to blend strategic management thinking and thorough industry knowledge if it’s to continue calling!

Further reading

• Avon’s Still Calling – Avon’s share price is falling and the company’s out to reinvent itself. The Money Programme discovers what it’s got up its sleeve.
• Competitive advantage – how can companies ensure they've got a lead over their competitors?
• Securing your brand – how do you build value into a brand? More to the point, how do you preserve that value?
• The world's top beauty companies
• Contemporary Strategy Analysis by Robert Grant, published by Blackwell

About the author

Geoff Mallory is a Lecturer in Strategic Management and Director of the Postgraduate research Degrees Programme at the OU Business School. He has taught organization theory and strategy in a variety of countries and contexts.

Subscribe to Geoff Mallory's posts