Business Investment Decision of Arts Alliance

Subject: Sociology
Type: Evaluation Essay
Pages: 11
Word count: 2931
Topics: Globalization, Accounting, Business Ethics, Finance, Marketing
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Introduction

A business investment decision should take into consideration the analysis of the industry to which the company is thinking of investing. It helps in gaining substantial knowledge of the present industrial trends and a detailed overview of the market situation (Kahneman, Lovallo and Sibony, 2011). The United Kingdom based venture capitalist company Arts Alliance, largely known for its huge investment portfolio in the country, is seeking to acquire the business rights of Lambs Run. The estimated business partnership of £200-300 million can help the company to leverage its present economies of scale by a significant amount (Case Study, 2016). The purpose of this paper is to examine the present alcoholic market trends of the UK along with the identification of its competitors and the customer preferences. Based on the study, the paper has provided recommendations of how effectively the company can go ahead with its investment plan by ensuring high degree of return.

Analysis of Industry and Present Market Trend

  •  Market Situation, Volume, Value and Growth

According to the study conducted by Key Note (2016), the liqueurs and spirit marketplace of the UK has been exhibiting high degree of robustness due to the unprecedented growth rate since the last few years. The key factor of this huge success is the increased volume sales for dark rum and whisky (Mintel, 2017). Furthermore, Mintel (2017) proposed that the price inflation also contributed to the growth of sales value. The UK is identified to be the largest marketplace for spirits in the Europe with a moderate rate of growth both in terms of volume and value since 2011 (MarketLine, 2016). The year 2017 witnessed a total revenue collection of £5.8 billion with a growth 20.8% over 2012-2017 (Mintel, 2017).

Figure 1: Market Value of the UK Spirit Market (2011-2015)

(Source: MarketLine, 2016)

Figure 2: Alcohol Consumption Level in the UK from 2011-15

(Source: MarketLine, 2016)

The above figure clearly depicts that the people residing in the UK have increased their consumption level in spirit by a significant amount. The growth rate is comparatively better than the other European counterparts with an increase in the level of liqueur consumption by 1.6% and a total of 298.6 million litres. It is estimated that the compounded growth rate is likely to remain around 1.5% for the upcoming years. The period of 2013-14 witnessed a drastic increase in the growth percentage and since then has not shown any sign of decline (MarketLine, 2016).

According to WTSA (2016), the alcohol market place in the UK was responsible for providing employment opportunities for a large number of country’s youth with a total present sales worth of £3.9 billion till 2016. The following figure gives a detailed overview of the present sales revenue collection along with an estimated overview till 2022.

Figure 3: Total and Estimated Sales Value of Liqueurs and Dark Spirits for the period 2012-22

(Source: Mintel, 2017)

One of the primary aspects of analysing the present industry trend is to provide valuable insights regarding the benefits Arts Alliance is likely to gain from its investment decision. The study conducted by Key Note (2016) identified that rum occupies a very small percentage of 4.8% value dominance in the UK with the majority of the shares being held by tequila, liqueurs and others by 43.5% along with Scotch whisky positioned in the second place (18.9%) (Key Note, 2016).

Figure 4: Sector wise Categorization of Market Value of Liqueurs and Spirits in the UK, 2015 

(Source: Key Note, 2016)

The above results made it necessary to conduct a deeper study regarding the percentage change in market value of rum over a period of 5 years (2011-15). The year wise market value analysis identified an increase in 18% from 2011 to 2015 (Key Note, 2016). The total sales value accounted for about £590million in 2015, thereby favouring the investment decision to Lambs Rum by Arts Alliance.

Figure 5: Market Value of the UK Rum Sector, 2010-15 (Retail Selling Price)

(Source: Key Note, 2016)

  •  Behaviour, Attitudes, and Interests of Customers

Figure 6: Usage of dark spirits, by type

(Source: Mintel, 2017)

According to Mintel (2017), nearly 49% of the adults residing in the UK have exhibited high consumption rate of dark spirits, whereas 44% prefer liqueurs. The study suggested that consumers have a high preference towards the various promotional factors associated with the products rather than resenting to low price. A percentage variation of nearly 47% to 36% signifies that promotional offers tend to exert more influence on the purchase behaviour of the customers over low price (Mintel, 2017). Consumers largely relate to the consumption of alcohol as a symbol of status and significance, and thus, consider low price as a factor responsible for diminishing their perceived social recognition. Moreover, in case of high price situation, the customers exhibit a relative bargaining attitude towards different brands (Mintel, 2017).

Figure 7: Dark spirits buying factors

(Source: Mintel, 2017)

Consumption of spirits is largely observed among the younger generation, mostly below the age group of 35 over a much smaller consumption rate among elderly people above 55 (Mintel, 2017). The consumption pattern of alcohol and spirits among customers is influenced by a variety of demographic, psychographic and behavioural factors. Customers tend to exhibit high consumption rate out of their personal interests, likings or as a factor of symbolisation to high social status and loyalty (Silvera, Lavack and Kropp, 2008). It has been observed that the preference towards a particular category of alcoholic drink tends to change over time. The changing pattern is largely related to the variation in the earning capacity of the customer and the gradual upliftment towards the ladder of maturity.

The consumption preference of rum among the consumer in the UK has shown a percentage increase of 4.8% in 2015 with sales values of nearly £590 million (Key Note, 2016). The sales growth rate has posed a significant boost due to the increased demand for spiced rum products among the customers. Customers are largely attracted to the large number of brands entering the spiced category of products with special reference to the premium category. As the rum manufacturing brands continue to earn competitive advantage over others with their unique product variants, the UK liqueur marketplace witnessed massive growth (Key Note, 2016). 

Consumers have a high preference towards the brands that have developed an ethical appeal in the marketplace. According to the study conducted by Mintel (2017), 36% of buyers respond to the companies that have represented themselves as a socially responsible alcohol-manufacturing brand in the country. In response to this, several companies have ensured that their product packaging highlights the aspects of several charitable programs undertaken by them in the UK. The increased awareness regarding health has also made consumers consider the calorie aspect of the alcoholic product being consumed by them (Kim and Chintagunta, 2012). All these factors of consumption made it essential for the rum companies operating in the UK to ensure that their products comply with all the product specifications as demanded by the customers. 

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According to Case Study (2016), confidence of customers regarding their spending habits has increased by a significant amount of 103 points. The spending habits of the consumers are influenced by a variety of factors, comprising of present economic conditions, relative prices of the product, health-consciousness, work-life balance, rate of employment, job-life security and various other factors as shown in the following figure.

Figure 8: Factors Affecting Shopping Habits of Consumers in the UK

(Source: Case Study, 2016)

The high health consciousness among the consumers resulted in a decline in the alcohol consumption rate among the target population of the UK (Key Note, 2016). Mintel (2017) identified that the sugar content in the alcohol is the primary factor of concern for the consumers. Due to the adverse effects of excessive sugar-content due to alcohol consumption, the consumers have exhibited a gradual tendency of restricting themselves from buying such products. This resulted in developing a negative response towards the marketing appeal of the alcohol manufacturing companies.

According to Case Study (2016), the shopping attitude of a consumer varies significantly on a yearly basis and according to the number of goods being purchased. The frequency of consumer visits to shops is the highest (nearly 2.6) when the number of goods to be purchased varies between one and five. However, the frequency gradually declines and even results in being negative (nearly -3.9) with the increase in number of purchased items. A detailed overview of the consumer spending attitude is shown in the following figure:

Figure 9: Difference in Shopping Habits of Consumers (Yearly)

(Source: Case Study, 2016)

The interest of the customers towards spending a substantial amount on goods is mainly due to a high confidence index. The increased confidence is primarily due to the gradual progression of the economic conditions of the UK.   The UK economy is in a comparatively better condition with low unemployment rate and wage inflation (Case Study, 2016). The consumers are taking full advantage of this economic stability to spend more towards non-food items, notable one being the alcoholic drinks. According to Case Study (2016), the consumers tend to exhibit high degree of attraction towards brands that are largely known for their advertising, promotion and innovative product ideas.

The above study has provided important insights regarding the behavioural and consumption intention of the consumers in the UK. Arts Alliance can use the results to ensure that it overcomes the negative trends prevailing in the consumer attitudes and thus immensely gets benefitted from its investment decision to Lambs Rum. In spite of the high health consciousness of the consumers in the UK regarding the consumption of alcohol, there has been significant increase in the total sales revenue earned by the alcohol industry through online media (Carruthers, 2017). It clearly signifies the prospective business opportunities for Arts Alliance to explore the rum marketplace in the UK with special reference to the consumer preferred online sales mode.

  •  Analysis of Competitors

Arts Alliance in its investment decision to Lambs Rum is likely to face tremendous competitive forces from the leading rum manufacturing companies like Havana Club, Captain Morgan and many more like Jack Daniel’s, Baileys, Courvoisier (Mintel, 2017). Havana Club originated from Cuba occupies a significant position among the top ten premium rum brands of the world and is largely valued for its unique taste. To ensure aromatic freshness of the spirit, the company ensures packaging of the bottles with special Cuban Barrel Proof quality specifications (Montgomery, 2016). Moreover, the popularity of the brand in social media platforms has helped it in occupying a remarkable position over others. The distribution channel of Havana Club is magnificent and ensures delivery both through the online channels and offline retail supermarkets (Montgomery, 2016).

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Figure 10: Market share of UK retail whisky market

(Source: Mintel, 2017)

Captain Morgan, the Jamaican based rum manufacturing company can give substantial competition to Lambs Rum due to its global market dominance. The company largely justifies its brand slogan “Drink Responsibly – Captain’s Orders; To Life, Love and Loot” and has gained huge success with its Morgan Spiced drink category that uniquely combines the Caribbean Rum with an array of natural flavours, tastes and spices (Tesco, 2017).  The brand has achieved high sales growth rate and immensely popularity in international countries like Canada, the UK and Germany along with a prominent marketplace in the US (Paskin, 2012). The company presently enjoys market value of 51% with a sales volume of 54% (Mintel, 2017).  

The market dominance by the leading competitive brands results in imposing severe threats to Arts Alliance in its investment decision to Lambs Rum. It makes it essential for the company to adopt innovative business procedures and product categories to earn competitive advantage over the premium brands. Lambs Rum under the leadership of Arts Alliance must use its market prominence in the UK marketplace and satisfy the consumer demands with its unique spiced flavour variants (Paskin, 2014). These two factors play a significant role in ensuring high success rate to Arts Alliance in its investment venture. 

Global Insights

The consumption rate of alcohol is considerably high with consumers coming from every demographic background. The alcohol consumers residing in UK can be subdivided into various groups based on their age, gender, lifestyle, family and the social status of the society (Case Study, 2016). The following figure gives a detailed demographic profile of the consumers who have a high degree of preference towards consuming alcohol. The demographic index is highly beneficial for the retailers to identify the target consumer segments.

Figure 11: Demographic Profile of Alcohol Consumers

(Source: Case Study, 2016)

According to Case Study (2016), the relative degree of profit or loss of a rum vendor largely determines the product value. This value plays a significant role in ensuring high degree of product penetration along with consumer brand preference. Moreover, product value often results in consumers to switch from one brand to another. The following figure gives a detailed description of the relative profit or loss experienced by an alcohol seller and the associated sources.

Figure 12: Source of Gain or Loss for Vendors

(Source: Case Study, 2016)

According to the Case Study (2016), the major UK based retailers responsible for selling rum products comprise of Northern Star, Worthingtons, G-Mart, Carter Foods, TW Retail and First Step Stores as shown in the following figure.

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Figure 13: Major Rum Retailers of the UK and their Sales Value

(Source: Case Study, 2016)

The above figure is a clear indication of the fact that the retailers enjoy substantial amount of profit from selling rum products in the UK. However, retailers largely vary on the percentage of different variety of alcoholic products in their stores like, TW Retail has exhibited high sales value in rum. On the other hand, Worthingtons has enjoyed a sales dominance of spirits with rum lying in the second category among profitable products.

3.1 Future Prospect of the Selected Business Model

The increased consumption level of alcoholic products among the population of the country provides prospective investment opportunity for Arts Alliance. The venture capitalist must take advantage of the increased demand for rum products in the country and therefore ensure attracting a large number of customers. According to Key Note (2016), the spiced category of rum products has been in high preference list of the consumers. Therefore, Arts Alliance must ensure the usage of the market presence of Lambs Rums and its spiced rum products to gain prospective returns on the investment made. This is primarily due to the fact that people residing in the UK are resenting to innovation while it comes to their perceived level of product consumption (Case Study, 2016).

Consumers have a high preference towards products that have strong ethical and marketing appeal among all the brands operating in the market place. Purchase decision of a consumer is influenced by a variety of factors like preference, perception and most importantly, the brand image developed by the product (Solomon, Russell-Bennett and Previte, 2012). Therefore, Arts Alliance should ensure developing a prospective marketing approach for its investment decision. The company to make its position spectacular can use the huge preference towards the reliance on online media for advertising purpose by customers effectively (J.U Kim, W.J Kim and Park, 2010).

Recommendations

Arts Alliance is thinking of establishing business rights over Lambs Rum from Allied Domecq and thereby establish itself as one of the renowned rum seller in the UK marketplace. The company should ensure developing prospective business relationship with the leading retail chains operating in the country. A strong distribution system is necessary for ensuring the sales success rate of the company. Moreover, the leading retailers have a well-distributed customer base, which can be used by Arts Alliance to make them aware of the products being sold by itself. The advertising expense of the company can be reduced by a substantial amount since it can use the brand loyalty developed by the retailers to market its products. The company can enjoy an average return of £1.03 from the investments made on advertising through different media platforms. Moreover, the company should develop an excellent supplier base to ensure that it never runs out of stock and goes on satisfying the consumer demands. 

The company should stress importance on the development and manufacturing of innovative products to retain the changing taste and preference of the consumers. This along with the use of online advertising media by Arts Alliance will help in attracting the customers. Online advertising platforms such as use of social media websites are widely recognized for understanding the taste and preference of the consumers. Arts Alliance can use it to extensively interact with the customers and make them aware regarding several products of Lambs Rum.

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Conclusion

Arts Alliance, a UK venture capitalist firm, will gain prospective returns from its investment decision in Lambs Rum. This is primarily because the alcoholic marketplace of the UK is in high demand and witnessing a significant enhancement in the sales volume. Although health consciousness among the consumers resulted in a steep decline in the consumption level, the venture is prospective due to the rising demand of spiced rum products. Moreover, Lambs Rum has a prominent market recognition in the UK with its spiced category product. Therefore, Star Alliance can use this market presence along with several product innovation to gain popularity with its new venture. Investment in the alcohol marketplace has been highly beneficial due to gradual increase in the sales revenue and volume since the last few years. The consumption rate of alcohol in the UK enjoys a prominent position over other countries in the European continent.

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