An institutional analysis of the beer market | Written by: Frank Bloemhof
Student number: 294673
International Business School, Hanze University of Applied Sciences, Groningen
Lecturer: Arnd Mehrtens
Written by: Frank Bloemhof
Student number: 294673
International Business School, Hanze University of Applied Sciences, Groningen
Lecturer: Arnd Mehrtens | | |

Date: 29 January 2015 Word count: 8,925

Abstract
The global beer industry - An Analysis of opportunities and risks in light of its institutional characteristics, as exemplified in part by Heineken. In this report you will read about a novel concept in economics called the Three Pillar Model, with a particular focus on the pillar of entities. After a general introduction, specific information about the beer market will be given. This is followed by a short analysis of the company Heineken NV, a Dutch beer brewer operating in over 170 countries worldwide. To end the report a conclusion will be given. This is followed by, which will include among other things the recommendation to create a strong bond with the consumer. In the very end you will find a list of all the sources that were used to write this report.

Contents Abstract 1 Introduction 3 1. Literature review 4 1.1 Three pillar model 4 1.2 Theories 4 1.2.1 Neoclassical economics 5 1.2.2 Institutional economics 6 1.2.3 Behavioural economics 8 1.3 Entities 10 1.3.1 Institutions 10 1.3.2 Organizations 10 1.3.3 Individual Actors 10 1.3.4 Trends 11 1.4 Paradigms 11 2. Methodology 13 3. Industry specific investigation 14 3.1 A brief history 14 3.2 Institutional characteristics 16 4. The company: Heineken NV 19 Conclusions 20 Recommendations 21 Bibliography 24

Introduction
In front of you is a report written for the International Business School, Hanze University of Applied Sciences, Groningen.
As you may have guessed, the subject of this report is “The global beer industry - An Analysis of opportunities and risks in light of its institutional characteristics, as exemplified in part by Heineken”
The subject was chosen because of a strong interest in the product of beer, and a desire to analyze what makes the market as it is.
The basis will be first of all a lengthy literature review in order to ensure that all of the theory is sufficiently mentioned and explained. This is necessary not only because of the vast amount of theory one would have to go through in order to get a clear picture of the topic area, but also due to the fact that a lot of terms are needed in order to clearly explain the causal interrelationships between different ideas. This requires a great deal of reading which is why it was decided to focus strongly on theory in the beginning.
After this you will find the actual analysis of the institution that is the beer market. This is a daunting task because of the fact that it’s an immense market and it more or less differs from country to country. However, there are certain characteristics that are part of every country’s beer market, which is what we will focus on for the purpose of this report.
In order to further clarify what we mean by the institutional characteristics it was decided to give an example of one company and how it is affected by everything around it. It is one thing to have a good product, but unless every other requirement is also in place you will still not be able to thrive.
Lastly you will find a few recommendations that could come in handy to the beer brewers of this world. Again, it is not the purpose of this report to give a binding recommendation to global beverage conglomerates because they probably know what they are doing. However, there are certain things that not everybody takes into account and this is what you will be reading throughout the report.
Since the field of studies of New Economic Realities is relatively new and unknown, a particular emphasis was put on explaining all of this before diving into the good stuff.
All that’s left for me to do is to wish you a lot of enjoyment when reading this report and to hope it can teach you something. * Frank Bloemhof, 2015.

1. Literature review 2.1 Three pillar model
The three pillar model is the central model that will be used throughout this report. It consists of 3 pillars, as the title might suggest. This model was constructed by lecturers of the International Business School, Hanze University of Applied Sciences, Groningen.
These three pillars go by the following names:

* Theories: Neoclassical Economics, Institutional Economics and Behavioral Economics * Entities: Institutions, Organizations, Individual Actors, Trends * Paradigms: Old school, corporate responsibility, sustainability

Figure 1 – The three pillar model as it was constructed by the International Business School (De Graaf et al., 2014)

For the purposes of this literature review I will explain all of these different parts of the Three Pillar Model with theory from relevant sources (books and journals) and how they relate to each other.
As you can see in the model above, there are a lot of causal interrelationships between the three pillars. For example, a theory like Behavioral Economics can have its influence on institutions as well as organizations, but at the same time they can also influence theories due to the fact that researchers take specific cases into account when constructing or adapting certain ideas and theories.
Another example is the effect that the paradigm of Corporate Responsibility has had on organizations in the way that they are now more than ever aware of their responsibilities and try to take them into account in their decision making as well as report on them.

Firstly we will go through the different theories, after which we will discuss entities. We will end with the paradigms as can be found in the three pillar model. 2.2 Theories
Economics is a very broad area of research. For the purposes of this report there are 3 main theories that will be discussed, as can be found in the paragraph above (Figure 1). Before we get into the different theories, it is important to define the word theory. A theory is “an idea or set of ideas that is intended to explain facts or events” or “The general principles or ideas that relate to a particular subject” (Merriam-Webster, 2014). In this case the latter applies more than the former. Neoclassical economics, new institutional economics and behavioral economics are all based on general principles and ideas that relate to every individual theory. 2.3.1 Neoclassical economics
Neoclassical economics is term used for several different fields of economics focusing on the determination of prices, outputs and income distributions in markets, through supply and demand.
The term was born in 1900 (Colander, 2000) and rests mainly on the following 3 asssumptions: 1. People have rational preferences between outcomes that can be identified and associated with values. 2. Individuals maximize utility and firms maximize profits. 3. People act independently on the basis of full and relevant information.
(Weintraub, 2007)

These 3 assumptions have had a great influence on economics as a whole, leading to such terms as “The Theory of the Firm” (Jensen & Meckling, 1976). This theory will be more deeply explained in the next parts.
As mentioned before, the term “neoclassical economics” was coined in 1900, but the theory itself dates back a little back further, to the 1870s. The change from classical to neoclassical economics has been going under the name “Marginal revolution”, given shape by 3 different actors.
Firstly, there is William Stanley Javons, who forced the notion of utility into British economics and thus is seen as its father in Britain (Jevons, 1871). Then there is Carl Menger, who developed the idea that goods are valuable not because the necessarily provide utility, but because they serve different purposes and differ in importance (Menger, 1871). Thirdly, there was Léon Walras, who was similarly working on the marginal theory of value (Walras, 1874), but at the same time began pioneering the general equilibrium theory, which attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets.
Even though these publications are quite old, they are still relevant when talking about Neoclassical economics. So I will be using these as my sources where I need them.

Another key point of Neoclassical economics is that it is based on something called perfect competition. In a market that operates under perfect competition, there are no barriers of entry; it is not possible for a single firm to control; No abnormal profits are possible; there is perfect knowledge and it is always balancing towards an equilibrium.

However, as the assumptions of neoclassical economics are based on something that is not entirely correct according to some economists, it would be good to go a little more into detail as to why this is the case. This will be discussed in the following two sections, Institutional Economics and Behavioural Economics.

2.3.2 Institutional economics
Institutional economics focuses more on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior. Before we get more into this, it might be good to explain what an institution is. An institution is ”An organization founded for a religious, educational, professional, or social purpose” (University, 2015). However it is important here to note that an organization in the sense that we know it is not an institution, but more a humanly devised constraint that structures political, economic and social interaction (North, 1991). There are two key terms in this: Rules of the game and Incentive Systems. Rules of the game are the actual constraints that Douglas North talks about when describing institutions and incentive systems are benefits, rewards or costs that that motivate economic actions. (North, 1991)
We have to add here that an institution does not necessarily have to founded; it can also simply be brought into existence (somewhat) involuntarily.

As such, anything can be an institution. For example, the Roman Catholic Church is an institution, but so is marriage. Mass media is an institution, but so are specific markets. They are important when conducting research about anything related to what we call New Economic Realities, even though conventional economics has paid little attention to them. (Altman, 2012) Coincidentally, for the purposes of this report the institution that will be put under a spotlight is the beer market.

An institution serves a number of different purposes: * steer individual behavior in particular direction * structure everyday activity * reduce uncertainty * shape social interactions

It is important to note that when linked with Neoclassical economics, we don’t talk about classic Institutional economics but more about “New Institutional Economics”. This field of economics can be traced back to the work of Ronald Coase, who said “Economic theory has suffered in the past from a failure to state clearly its assumptions” (Coase, 1937). On top of this, Coase also came up with the name for the principle of Transaction Costs, a principle which was initially coined by John R. Commons (Commons, 1931). A transaction cost is the cost of engaging in economic exchange. In New Institutional Economics, transaction costs are large enough to keep decisions that benefit society at large from taking place. (Altman, 2012).
There are 4 factors affecting transaction costs:

1. Property Rights/Power relationships
Relates to the rights associated with certain natural resources and who gets to take advantage of them. This has caused a lot of problems where oil is concerned. There are some countries with a lot of oil reserves but no rights to take them. These rights have instead been seized by big oil companies who are taking all of the oil (resources) and by default, the profits. This is also an example of why the correct institutions should be put into place to avoid certain pitfalls.

2. Relational contracts
A concept that creates mutual expectations from 2 parties entering in a “contract”, which can be anything from selling/buying a bottle of beer to acquiring a company. They are not so much official contracts which we see in agency theories, but more unwritten rules or guidelines which are based on a trust formed between 2 parties. As such, even when you buy a small product you immediately enter in a relational contract with the company or person that supplied you this particular product. You expect it to be tasty, or of high quality, or whatever other expectation you might have from the product. At the same time, the supplier would like you to not abuse his product in a way that could damage his or her reputation.

3. Agency
Agency theory deals with problems of asymmetric information between contractual parties. More precisely, the asymmetry between a principal and an agent. The relationship between the these two is called the "agency," and the law of agency establishes guidelines for such a relationship. The formal terms of a specific principal-agent relationship are often described in a contract.

4. Path dependency
Path dependency means that history matters in determining the choices people make today.
(Furubotn & Richter, 2010)

It is precisely because of these factors that New Institutional Economics are so complicated and why transaction costs is something that in essence sounds very simple, but is actually very complicated.

In order to determine how Institutional Economics are given shape in terms of behavior, we will now take a deeper look at behavioural economics, again by the hand of some of this field’s most highly acclaimed publications. 1.2.3 Behavioural economics
Behavioral economics is a relatively new field of economics which has been called into life to contradict the generally accepted principles brought forth by Neoclassical Economics that people have rational preferences, maximize utility or profits and act independently on the basis of full and relevant information(1.2.1).
There are a number of different people who have written about the subject of behavioral economics. For the purposes of this report, we will be talking about 3 different authors: Herbert Simon, Daniel Kahneman and Dan Ariely.
Firstly there is Herbert Simon, who is known as one of the pioneers of behavioral economics. He came up with 2 terms that are still used widely to this day: Satisficing and Bounded Rationality. In his 1955 Article “A behavioral model of rational choice” he wrote the following: “The task is to replace the global rationality of economic man with a kind of rational behavior that is compatible with the access to information and the computational capacities that are actually possessed by organisms, including man, in the kinds of environments in which such organisms exist” (Simon, 1955)
This is what we mean when we talk about Bounded Rationality. Where other fields of economic (specifically Neo-Classical Economics) assume that people, and by extension companies, operate on a basis of full and unlimited information, Simon argued that people have in fact only got access to very limited information when making decisions, which means that the rationality with which people were thought to make decisions, is in fact heavily bounded by a lack of information.
A result of this bounded rationality is that people don’t actually maximize when making (economic) decisions. Instead, they opt for something called “Satisficing”. This basically means “They do the best they can to get the best possible results they can, given the psychological, physiological and environmental constraints they face”. (Altman, 2012) In order to illustrate what we mean by this an example of this behavior might be welcome: “Humans, for example, when in shopping mode, aspire to something that they find acceptable, although that may not necessarily be optimal. They look through things in sequence and when they come across an item that meets their aspiration level they go for it. This real-world behavior is what Simon called satisficing.” (Hindle, 2009)
One of the most interesting concepts in modern economics comes from the brilliant brain of Daniel Kahneman. In his book called Thinking Fast and Slow he attempts to teach us the difference between the two systems in our brains: System 1 and System 2. In his words, these are the differences between system 1 and system 2:
System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control.
System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration. (Kahneman, 2011)
The book presents us with a lot of “cognitive biases”, which serve to shed a stronger light on what might be pitfalls in conventional or neoclassical economics. A cognitive bias is a tendency to think in a certain way, leading to systematic deviation from a standard of rationality or proper judgment. These cognitive biases are the main cause of discrepancy between fast and slow thinking. I will illustrate what I mean by this with one of many examples of these biases found in Kahneman’s book: 1. The Halo-effect: “This is the tendency to like or dislike everything about a person—including things you have not observed” (Kahneman, 2011, Page 82)
In essence, this means that we have a hard time believing bad people can have good traits or the other way around. Similarly, this counts for enterprises too. In the paradigm of social corporate responsibility this would lead us to reason that a company that does good things for its environment is automatically assumed as a “good” company and thus can make use of this image.
In order to further illustrate the Halo-effect, think about the following:
When we think about Adolf Hitler, we all think of one of the most truly evil people of the 20th Century. Everything about him seems like he was the epitome of evil. However, he placed a high emphasis on strong family values, which most people consider to be a good trait. This means that there are (inevitably) things about him that aren’t so bad.
Although this example is, of course, very extreme, I think it serves as a good example of the halo effect in its negative sense. People would never automatically assume there may have been a few good traits in the person of Hitler in their fast thinking mode, but if you give them time to think about this slowly it may lead us to think there are some positive traits.
However, this means in no way that Mr. Hitler was a good person. For this reason, Kahneman tells us ““WYSIATI” or What You See Is All There Is. What is meant by this is that we have to focus on the raw data that we see before is. We have to combat over confidence by basing our beliefs not on subjective feelings but rather on critical thinking.
Additionally, there are good examples in the book about “WYSIATI”, concerning a number of other biases. The framing effect is something that is often overlooked, yet immensely powerful. An example of the framing effect is: cold cuts described as “90% fat-free” are more attractive than when they are described as “10% fat.”(P. 87) (Kahneman, 2011)

Furthermore, Kahneman tells us that, in essence, classical economists are wrong in operating on an assumption of consumers being rational. According to him, people are by definition irrational and sometimes need a nudge in the right direction (especially where macroeconomy is concerned, i.e. legislation).

So there is Kahneman, but another very interesting player in the Behavioral economics field is Dan Ariely. His book “Predictably Irrational” tells us people are indeed predictable, even in their irrationality. The main concept of his publication is that when you add give people a choice between one product that is normal and one that seems “deluxe”, sales for the normal product will almost invariably go up. A striking example of this is the following: “When Williams-Sonoma introduced bread machines, sales were slow. When they added a "deluxe" version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain” (Ariely, 2008)

2.3 Entities
Now that we have taken a look at the different theories that will be used throughout this report, it is important to also take a look at the different entities that shape of the beer market, which is the institution we will be talking about.

1.3.1 Institutions

Firstly, it is important to note what exactly we mean when we talk about an institution. The best definition is: In economic parlance, an institution consists of constraints that help structure behavior in the economic realm. (Altman, 2012)(Paragraph 1.2.2 of this report)
So if we are talking about a certain market, the institution that is this market ensures that the behavior of the majority of the players in this market becomes somewhat predictable. If somebody does something that is completely out-of-the-blue crazy, the market will usually not react to this favorably.
In the case of the beer market, there are other institutions to take into account. Because of the fact that sales of beer are regulated, one has to take into account the laws and regulations that come with selling alcohol. Additionally, governments have a power to artificially raise the price in most economies.

2.4.2 Organizations
An organization is defined by the word itself. This can be either for-profit organizations (corporations) or non-profit organizations which are mostly NGO’s like Médecins sans Frontiers (Doctors without Borders) or the Wikimedia foundation (which runs Wikipedia among other websites). 2.4.3 Individual Actors
Individual actors also have a strong influence on the global economic marketplace. In most recent years we have had the pleasure of getting to know everything about the credit crisis and the friendly people of the media have alerted us to a few individuals who are more responsible for this than anyone else. One of these people is Alan Greenspan, whose easy-money policies during his tenure as the president of the U.S. Federal Reserve has been suggested to a major factor in the subprime mortgage crisis (Hilsenrath et al., 2012).
This leads us to reason that a very smart (or arguably not very smart) individual can on his own, or in correspondence with other individuals, create a situation which can have disastrous consequences not just for themselves but even for specific markets or, in this case, entire economies. 2.4.4 Trends
The last point of the middle pillar which needs to be discussed is the question of Trends. Trends are a very powerful thing. When we talk about this we talk not about market trends per se, but about trends in which corporations take place. The biggest trend of our age is digitalization. This can be illustrated by the example of Wehkamp, a Dutch catalog sales company:
Wehkamp used to be run on the basis of a catalog in which people could pick a product and then order their desired purchases either over the phone or by filling in a paper which was attached to the back of the catalog. However, with the advent of the internet and thus the trend of digitalization, Wehkamp soon realized that this was no longer viable and instead decided to build a website from which to sell its articles. Initially, both options were offered but after a while the paper catalog became obsolete and these days its customers can only order their products online, thus saving Wehkamp enormous transaction costs due to the fact that they don’t have to print (literally) a million catalogs anymore each year. Coincidentally, they were fast enough to get into the trend and are now the market leader in online warehouse activities in the Netherlands.
This goes to show that a trend can have enormous impact on companies. Of course in this case the trend was such that they never really had a choice but this can happen with any trend if it snowballs strongly enough.
Trends are the most closely related with the next topic, which is Paradigms

2.4 Paradigms
Paradigms are what leads companies to define their strategies and as such, can be related to trends in the way that both paradigms and trends have a strong influence. However, a paradigm can influence an entity but it can also be the other way around.
For example, if we look at the Corporate Responsibility Paradigm we can see that a lot of corporations worldwide have started to adopt programs to improve their Corporate Social Responsibility, or CSR.
Companies are nowadays heavily investing not only in the reporting of how they are performing in terms of CSR but also in actually improving this. In some companies this is regarded as simply a tool to boost sales or create more goodwill among the consumers, in other CSR has become a goal instead of the means to improve profit. Of course this can also be combined. An example of a company which practices excellent CSR is Google, which was ranked the company with the best CSR reputation worldwide in 2014 (Dill, 2014). This was achieved by firstly putting its employees but also by the following: “The company scored big in all three areas, gaining particular attention for citizenship practices, reporting that its data centers use less than 50% of the energy typically required such facilities, and that the company has committed more than $1 billion to renewable energy projects.” (Dill, 2014)
So paradigms can influence entities, but can it also be the other way around? The answer is yes. To illustrate this we will take the example of the Enron scandal which led to the Sarbanes-Oxley act in 2002. This act created an institution in that it means that now companies are regulated much more strictly in terms of governance, but this is closely linked with the paradigm of Corporate Responsibility. Because of the now stricter regulations and a strong emphasis on governing companies responsibly, many companies that were maybe not even affected by the Sarbanes-Oxley act also start to behave in a more responsible, mainly to avoid future scandals and bankruptcy.

2. Methodology
Writing a report about the subject of New Economic Realities is a daunting task. There is a lot of theory to be read and it is impossible to cover every single aspect.
The process is loosely based on the “research onion” (Saunders et al., 2009). Because of the scope of the project and the limited time available it was not possible to do any field research, which is why a case study approach was chosen, the case being the institutional characteristics of the beer market.
Before setting out to actually start writing, first an understanding had to be created. This was done by reading the book “Behavioral Economics for Dummies” (Altman, 2012), and supporting this with theory from other sources.
This was of particular importance because there are a lot of terms that come by again and again. The biggest issue was the term “transaction costs”, which is defined as” A transaction cost is the cost of engaging in economic exchange” (Commons, 1931). This seems like a simple enough term but there are a lot more factors to consider here. They are most strongly influenced by: Property rights/power relationships, relational contracts, Agencies and Path Dependency (Furubotn & Richter, 2010). By understanding this concept a much clearer idea about New Institutional Economics was created.
When talking about behavioral economics I mostly used the publications of Daniel Kahneman (Kahneman, 2011); Herbert Simon (Simon, 1955) and Dan Ariely (Ariely, 2008). These 3 authors combined give us a very strong insight into the working of the human mind and as such a strong idea of what behavioral economics entails.
Part of the report was written based on the theory from a number of very highly distinguished authors, but in order to write a report about a business segment we also need other sources. I went for example to the Heineken Annual Report (Heineken NV, 2013) when having to write about something that I assumed would be findable in there (which coincidentally, it was).
I then set out to write a recommendation based on the information I found and which you as the reader will be able to go through.

3. Industry specific investigation
3.1 A brief history
It might be very difficult to imagine when you see modern beer brewing instruments, but the beer market dates back to, at the very earliest, 3500 B.C. That is to say, there are indications that more than 5000 years ago people were already enjoying a “divine drink with intoxicating effects” (Beer Academy, 2011).

So this means that mankind has been enjoying the sometimes sweet, sometimes savory but always amazing taste of beer for a very, very long time. In fact, aside from water and wine, beer is presumably the oldest drink in the world.

However, in this report we are not concerned about the product itself, but about the institutions that form the market it is today. Even though there are some immense companies around today, there are some breweries that deserve recognition for something else. They have stood the test of time and have been in continuous operation since their respective origins of operation:

1) Weihenstephaner, 1040, located in Friesing, Bavaria, Germany.
2) Weltenburger, 1050, Weltenburg, Bavaria, Germany.
3) Affligem, 1074, Belgium.
4) Grimbergen, 1128, Belgium.
5) Tongerlo, 1133, Belgium.
6) Bolten, 1266, Germany.
7) Aldersbach, 1268, Germany.
8) Hirter, 1270, Austria.
9) Furstenberg, 1283, Germany.
10) Aktienbrauerei Kaufbeuren, 1308, Germany. (Stansfield, 2013)

Anybody who has tasted (some of) these beers will be able to testify as to why they have been around for so long and to this day are still being sold. However, that’s beside the point.
The point here is that the institution of “beer markets” has been around for almost a 1000 years, making it a very old market indeed. Of course, there is a big possibility you will never have heard of the above breweries/companies, for the simple fact that they are nowhere near the “top of the food chain” in terms of size. Those honours are reserved for the following 5 companies:

5. China Resource Snow Breweries Ltd.
- Based in China
- Produces 106.2 million hectoliters per year
- 5.4% World Beer Production
4. Carlsberg Group
- Based in Denmark
- Produces 120.4 million hectoliters per year
- 6.2% World Beer Production
3. Heineken International
- Based in The Netherlands
- Produces 171.7 million hectoliters per year
- 8.8% World Beer Production
2. SABMiller
- Based in the UK
- Produces 190 million hectoliters per year
- 9.7% World Beer Production
1. Anheuser-Busch InBev
- Based in Belgium
- Produces 352.9 million hectoliters per year
- 18.1% World Beer Production
(Bon, 2014)

So as you can see here, the 5 biggest breweries in the world produce nearly 50% of the world’s beer. This is an immense amount of beer and surely creates some friction between the big companies and the smaller companies trying to compete. In the next section I will try to give you a clearer idea of some of the institutional characteristics of the beer market.

3.2 Institutional characteristics
The beer industry has a set of very specific institutional characteristics. It is important to note that this industry is very old and as such has been developed over a very long period of time. This means that in a way it is stuck in its own characteristics, meaning that it can be challenging to change things.
The first characteristic I would like to discuss is the transaction costs (Furubotn & Richter, 2010) incurred in the beer market.
This of course goes 2 ways, from the consumer to the producer and the other way around. From the consumer to the producer the transaction costs are relatively low. People know what kind of beer and they like and provided the opportunity, they will get this. However, things get trickier when you think about how this is the other way around.

Because of the history of the beer market (and the alcohol market in general), there are quite a few restrictions in place. These all add to the transaction costs incurred by companies. Of course the regulations are not the same in every market, but for the purposes of this report an example will be given from what these costs might be in the Dutch market. Starting in 2014, the legal limit to buy alcohol in retail establishments as well as restaurants/bars/pub/etc. was raised to 18 years. This means that any drinks containing alcohol can no longer be sold to youths under 18 years of age. (Van Rijn, 2013) This is just one example of restrictions set by governments in an attempt to govern the beer/alcohol markets.

This means that companies cannot just sell alcohol to anyone. Then there are issues in terms of commercials/marketing. For example, in the Dutch market companies are not allowed to market beer on TV where it has been proven that more than 25% of its viewers are legally underage (De Nederlandse Reclame Commissie, 2011). Another example of the many restrictions is the fact that you are not allowed to show people who are below 25 years of age and are drinking in any official marketing materials. Of course these restrictions differ in every country but it is clear that there are a lot of things to consider when you want to promote something as a beer company.

Another example of high transaction costs is the fact that many of the biggest beer companies operate in a lot of different markets and as such may not always be aware of every regulation or cultural difference. A very concrete example of this comes from the 1994 Football World Cup. Heineken had devised a marketing plan where they would imprint flags of all the qualified countries under its bottle caps. This seemed like a good idea, but what they did not take into account was the fact that the Saudi Arabian flag depicted a Holy Islamic Verse. Even though this is a seemingly small oversight, Muslims all over the world reacted furiously to the fact that their holy verse was associated with a drink that contains alcohol. As a consequence Heineken was forced to recall all of its bottle and discontinue the promotion, leading to not only embarrassment but also very high costs for the company. (Dalgic & Heijblom, 1996) This example was given to show that sometimes the characteristics of the beer market really lead producers and marketers to tread on egg shells. Even the smallest oversight has the potential to cause a gigantic uproar and subsequently wreak havoc with the transaction costs. Another striking characteristic has already been mentioned before but it might be good to mention again the fact that 5 companies have a combined market share of 50% in the global market. This means that if you are one of these companies you will probably be happy about this, but it also means that the barriers of entry can be quite significant if you want to expand internationally as a small brewery. One thing that has been speaking in favor of small breweries is the recent trend of the so-called “craft beers”. A craft beer is defined as “a specialty beer produced in limited quantities” (Merriam-Webster, 2012). This trend is strongly influencing the institution of beer markets in the USA as you can see in the graph below:

(Molla, 2014) This trend is a bigger threat to “Big Beer” than many people think. Of course, they still own the lion’s share of the market but it is clear that the strong upward trend could, and probably should, be regarded as a threat. Another typical characteristic of the product beer is that it’s highly subject to several cognitive biases (which were mentioned in the literature review: Page 8). Groupthink and herd following behavior are the most prevalent examples of this. If all your friends drink a certain beer you are most likely to start preferring the same beer as well.

Next it would be good to take a look at the 4 factors that influence transaction costs in any institution and apply those to the beer market to get a better overview: Property rights/power relationship: There are not many property rights to take into consideration in the beer market. Of course there are a lot of trademarks but they exist solely to preserve a brand. In terms of the product itself, anyone is free to produce beer provided they can get their hands on the ingredients (which, again, is possible for anyone).
The power relationship between bigger and smaller breweries is more interesting. One of the biggest issues these days is the potential take-over of SABMiller by AB InBev, which would lead to seriously skewed power relationships.
Relational contracts:
An important aspect of institutional economics is that it leads to relational contracts, which are not contracts bound by a piece of paper but more expectations that parties have of each other when engaging in economic transactions. This means that corporations have certain expectations of its consumers and vice versa. In the case of any alcoholic beverage, one very important issue here is overdrinking. In no way, shape or form does any corporation want to be associated with binge- or coma-drinking. This can be detrimental to its results and lead to very high transaction costs in the long run if it is not maintained and/or avoided on an adequate level.
Agency:
As was mentioned before, the agency theory deals with problems of asymmetric information between two parties. This comes into existence when a so-called principle-agent relationship is created where one party knows more than the other party. Of course, you always want to stay ahead of your competition and in some cases this can be a good thing. For example, some companies have a specific ingredient that only they use which is what makes their products stand out (Heineken’s A-Yeast is one such example).

Path dependency:
History matters. This is the lesson that’s contained in the path dependency theory. Basically it tells us that historical choices influence the choices we make today, i.e. if I bought a product of a certain brand I really liked and I need to replace said product, I might very well buy this brand again.
This is somewhat related also to the bandwagon effect, where the combination is especially potent. If a company manages to create a strong following for its brand in terms of groups and simultaneously manages to introduce some form of path dependency this is a very effective tool. From many peoples’ experience this is something very prevalent in the beer market where entire regions keep buying the same product simply because they are used to it. 4. The company: Heineken NV
Open your world. This is the slogan of Heineken today. The slogan fits with a company that is branded in exactly the same manner everywhere in the world. Premium lager is the keyword we are looking for here. Anybody who has ever travelled and tasted Heineken on different continents will know that it tastes eerily similar, whether you are in The Netherlands, The USA or Malaysia. This is the biggest strength of the company’s flagship beer, and indeed the company as a whole. The challenge here is immense, considering the fact that Heineken is actively involved in 178 different countries worldwide. (Heineken NV, 2013)

Of course, there is not just one brand in the portfolio of Heineken. Interesting fact is that Heineken is the only consistent factor when you look at the company’s key brands across the world. Aside from Heineken beer itself, every continent has its own taste and as such, Heineken has acquired specific brands in each market. One example of Heineken’s investing prowess is the case of Tiger beer. It was acquired by Heineken in 2012 (Reuters, 2012), but at the time was positioned awkwardly in the market. After acquisition of Heineken, sales of Tiger beer were increased by 20% in the first year (Bouckley, 2013)
Even though all of Heineken’s brands grew in the low digit numbers, but Tiger grew by a whopping 20%. This was achieved by positioning the brand in between mainstream and the more “exclusive” brands Heineken has in its portfolio. This strategy proved highly successful considering the 20% growth, which is unprecedented in the modern beer market.
This brings us to the positioning of Heineken within the beer market. The company has always prided itself on delivering premium beer for an affordable price in many countries. They are able to do this by keeping a strong eye on their transaction costs. One of the ways they manage to keep this low is by producing their products as close to their intended markets as possible. This would not possible for companies that produce a medium volume, but because of the company’s high global production numbers this is a very efficient strategy, allowing for a very strong reduction of transport costs.
As you may know, beer consists of 4 ingredients: Barley, Hops, Water and Yeast. The first 3 ingredients are available everywhere. Of course Heineken only wants a-grade products but they are able to procure these anywhere. The only thing that Heineken uses that no-one else does is its “HEINEKEN A-yeast” (Heineken NV 2, 2014). Because of this it must be transported to all the production plants from a separate location which slightly adds to the transaction costs of selling a bottle, can or glass of Heineken.
Of course not all Heineken beer is produced locally. The central production plant in The Netherlands still plays a vital role when it comes to “imported Heineken” which is the crème de la crème of the company’s portfolio in every country except the Netherlands.

Conclusions
A lot of subjects have been touched upon in this report. It is impossible to go into detail with everything that has been discussed, but it is hoped that it gives a slightly better idea of the institutional characteristics of the beer market.
By firstly describing the theory backed with the sources that go with this a better understanding should have been created about the subject we call “New Economic Realities”. The three pillar model certainly is something that is a little bit difficult to understand in the beginning, but by giving some concrete examples and explaining all of the theory that goes with it this should be slightly easier.
Another important reason to write this report was to gain more understanding about the way Heineken positions itself within its market. Again, the whole story is impossible to tell since it would lead to too much text and frankly, an unreadable report. By keeping it small yet effective this should aid the understanding of the reader even further.
To end off the report there will be recommendations given in the chapter below in order to further enhance the quality of the report.

Recommendations
As we found out during the analysis of the beer market, it is both very complicated and very uncomplicated. The product itself is older than almost any other mass produced beverages which has led to the processes already being highly efficient.
However, there are always improvements possible, even when most people maybe believe this is not the case. The most important thing is to keep adapting to new trends. An interesting new concept that has not been around for very long but certainly has potential is social media marketing.
If beer breweries can make this a more integral part of their marketing strategies they can be sure to see an increase in sales. There are already some tremendously interesting examples for this, but we will illustrate one here in order to get the point across more efficiently: Amstel Beer’s digital detox campaign. With the advent of social media and the internet, smartphones have become more and more popular and can already not be thought away from daily life. This is not a big problem when people are at home or otherwise alone (in a bus for example, or waiting at the dentist’s office), but a lot of people have started using their phones also in bars. And this in turn bothers many other people who would prefer to actually have a conversation. Amstel played into this by creating a platform with which every 8 hours of leaving your phone alone would earn you a free Amstel. This may seem a little bit silly but it is easy to imagine that it greatly improves a group of people’s conversations if they can collectively earn free beer by talking and leaving their phones alone.
Of course companies are always looking for an edge and this is only one example, but it serves to illustrate exactly that creativity that companies should be striving for.
Thus, the first recommendation would be to make sure that people have a positive image about your brand. Of course the youth of this world should be targeted since they can represent both your current customers but if you manage to maintain a strong brand loyalty they can be your customers for a long time to go.
In order to create a bit more structure for this recommendations part it would be wise to give this a bit more structure. For this reason the following 4 factors will be discussed: Property rights/power relationships, relational contracts, agencies and path dependency 1.2.2 (Institutional economics).
Property rights/power relationships
In terms of property rights there are no big issues in the beer market. If we take the oil industry it can be really complicated as illustrated before. However, it is important to ensure that you have and maintain the rights to everything you use or might want to use (like for example Heineken’s a-yeast which is vital to its premium product).

Relational contracts
A relational contract is a “contract” that is entered in upon transaction (i.e. when a relationship is built between 2 parties)(1.2.2). In this case this is combined with path dependency. The beer market is highly dependent on habits as discussed before, meaning people will naturally form a preference for one reason or another. This also leads to a relational contract in terms of the quality of the beer. This means that if for one reason or another the quality of your product dramatically drops, this will automatically lead to friction with a customer who used to be highly loyal. For this reason it is of vital importance to make sure that there is extremely strong quality control so that the product quality never falters (implementing total quality management would be a good start to ensure this).
Agency/Principal-agent relationships
This deals with relationships between contractual parties. An example of a contractual relationship would be the one between Anheuser-Busch and Fifa. This contract ensures that they will be the official and sole supplier of beer for the World Cups of 2018 and 2022. This is very beneficial for them because it gives the specific brand it will supply (Budweiser) a lot of visibility if we consider the fact that the World Cup is the most-watched multi-day sports event in the world.
It is important to realize that these contracts exist and that there are always possibilities for ensure new ones. For this reason, it would be recommendable to big beer companies to always keep an eye out on events that would need a sponsor or “official supplier”. This can greatly enhance the value of the brand in terms of image as well as sales.
Additionally, decision costs are another transaction cost that is often overlooked.
It is not easy to create promotion for beer due to the many restrictions set by institutions (mostly national governments) but this is not to say this is not possible. Companies should always aim to make the decision process easier. The before-mentioned Amstel marketing strategy served as a good purpose. The idea is that once someone drinks one glass of Amstel, they will automatically want to drink more of it because by now they are more used to the taste. Thus the decision to drink another Amstel will become more prevalent. This is effective for individuals but obviously works even better if groups of people are drinking your beer.
Moreover it should be stressed that the merger between SABMiller and AB InBev that has been mentioned throughout the report should at all costs be avoided for 2 reasons. Firstly from the point of view of the 2 companies involved. If a company gets too big it will get lazy and unresponsive, which will lead to a decline in the long run. Secondly, it will of course be detrimental for the other companies if their main competitors all of a sudden start working together and procures a market share of 25%.
This also leads to another party that is involved in the beer market (and alcohol markets in general) which would be governments and other legislators. The free market approach is not always possible due to the fact that alcohol is a restricted good, but setting stronger regulations is not necessarily a good idea.
By keeping the market more free, companies can more freely put ideas into practice and create stronger brands, which in turn will lead to more tax-income. Of course, the regulations which are already in place (minimum ages for example) serve their purpose, but overregulating markets is never a good idea. As such it is advisable to not make a superstrong use of the power position of governments and instead work together with the biggest beer companies in order to create a better environment/institution for the company and ultimately more tax-dollars/tax-euro’s/tax-peso’s.
Lastly the advent of microbreweries has been discussed in earlier stages. This is where the future of the beer market seems to lie, at least for now. For this reason, a good suggestion to ensure strong growth in the future would be to acquire some of the most strongly developing microbreweries. Of course the danger here is that they will become to be too big and will not appeal to their markets anymore.
This means that even though they might show a very strong potential, it would be wise to keep them artificially small-medium sized. This way they will retain their strong potential for higher profits while at the same time not becoming too big.
Of course this decision should not be considered lightly because nothing is ever set in stone, but for now it seems that this is the future of beer.

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