Read the mini-case provided then do a value chain analysis. Beer has been brewed in Germany for more than 3,000 years. A diverse set of people have been brewers from house wives to monks and nuns to professional brewmasters. The first governmental regulations concerning beer focused on paying taxes for beer around 500 AD. The most famous early law was established in 1516: the Bavarian "Reinheitsgebot" (Purity Decree). It mandated that beer only be made from water, hops, and barley. This was to protect Bavarian beer makers who brewed a unique beer in cold conditions. Yeast was added to the list many years later after it was discovered that yeast led to fermentation. Quite by accident, brewers realized a specific type of yeast that requires cold temperatures led to the special taste of Bavarian lager beers. Invention and innovations have been (and are) important in creating high quality, good tasting beer. In the 500s, monasteries began brewing more beer, and they took a scientific approach to improve beer quality, taste, storage time, and brewing techniques. These efforts improved the quality, enhanced the taste, and decreased the time to brew beer. One of the most important innovations was adding hops which started around 800 AD. Hops improved the taste and, more importantly, the preservation of beer. Another of the important inventions was the thermometer which allowed brew masters to determine the best temperature for processing the barley and allowing the barley’s sugar to develop as well as the best temperature to add the yeast to the wort. Refrigeration was another important innovation which allowed brewers to brew lagers in large quantities all year long because lagers need cooler temperatures whereas ales need warmer temperatures. Around 1000 AD, monasteries were the only places that were allowed to brew beer in Germany. In a typical monastery, there was an abbot who controlled the brewery. He assigned the task of brew master to a competent prior, the task of growing the hops and barley to another brother, the task of obtaining barrels and flasks to another brother, and the task of delivering the finished beer to local alehouses and other customers to another brother. In the 1800s, governmental regulations were changed which allowed rural and urban breweries to produce as much beer as they desired which increased the number of breweries. There are now over 1,200 German breweries (more per capita than any other country) which produce over 7,500 different beers. Most breweries are family businesses which are not large enough to export beer. German breweries have access to barley, hops, and wheat grown in Germany, and there are strong agricultural production groups with political power to protect the interests of growers. Most breweries have access to pure water through their own wells. There is a wide array of yeast cultures available, too, which results in tremendous taste variation. Germany has well-established training programs for brewing beer. The government keeps taxes low on beer and provides funding for training programs in the beer industry. These factors result in Germany having some of the most inexpensive and highest quality beer. Germany also produces some of the most diverse beer drinking vessels from steins, to glasses. Traditionally, a different beer container was developed for each type of beer or each brewery. There are educational programs for the science of brewing, producing malt, and managing brewery waste (much of which is used in feeding livestock). This includes a certificate for brewmasters which is a highly regarded profession. There are festivals across Germany that celebrate beer with the largest being Bavaria's Oktoberfest which is over 200 years old and is the world’s largest outdoor fair. However, there has been a considerable decline in domestic consumption of beer in Germany recently. That is the biggest challenge facing the beer industry currently. An aging population is avoiding consuming as much beer as they used to. Younger generations prefer mixed drinks, alco-pops, or wine. There has also been a global decrease in the consumption of beer as consumer health consciousness rises. Germany has one of the largest markets for beer in Europe. Approximately 2.7 billion gallons of beer are drunk each year. That is approximately 30 gallons of beer per person. Germany has highly sophisticated beer drinkers who are better informed than most around the world. They might even be called “Beer Snobs.” They have strong preferences for beer types and even the different tastes the yeasts produce. They will not accept inferior beer. Because of the Reinheitsgebot, laws regulated the ingredients that were allowed in German beer for hundreds of years. This led to German beer gaining international recognition for its quality. This law also limited the ability of the German beer industry to respond to changing consumer tastes. Currently, there is a growing demand for other types of beers that do not adhere to the Reinheitsgebot. For example, there is a demand for beers with other tastes, such as fruit flavors; with different grains, such as amaranth; and with different sweeteners, such as molasses. There is also rising consumer interest in craft breweries, especially in the USA. The top German brewery is the Radeberger Group which brews over 50 beers for Germany with 15% of the market share. It has 14 brewing facilities dispersed throughout the country. Krombacher is the best selling beer in Germany. Global competitors have entered the German beer industry. The majority of domestic producers are too small to challenge and compete with them. With over 86,000 different global beers, there is fierce competition in the global market, especially from less expensive options in high consumption markets, such as the US. AB InBev is the second largest brewer and exports to over 130 countries including Beck’s – the German beer that is exported the most; although, InBev, the current owner of Beck’s has started brewing the beer outside of Germany. Warsteiner is the second largest brand and exports the most German beer. Some of the beers it exports are Warsteiner Pilsner, Warsteiner Dark, and König Ludwig Wheat. Privatley held, Warsteiner Group is led by Catharina Cramer, the Chief Executive Officer who represents the sixth generation of the family owners. In the past few years, Warsteiner’s premium beers have seen an increase in worldwide demand; although, the majority of the demand comes from the hospitality industries in the European Union and the United States with hotel bars becoming a fast growing market. Because this demand is much larger than it can meet by producing domestically, Warsteiner has decided to expand its production capability to meet the new demand. The firm has determined that expansion is only viable if it either (1) produces beer in another country for a lower cost or (2) outsources the production entirely to a joint venture it establishes with a foreign brewer. Both options could produce the beer more inexpensively and in higher volumes.