CHINA BREWERY ANALYIS

Anheuser Busch and Harbin Brewery Group of ChinaCASE ANALYSIS

Sajjad Ali Shaikh 5458 Khalid Yousuf 3724 Baqi bullah 3614 Farhan Aslam 6036 Arsalan Liaqat 47145/4/2008

ContentsExecutive summary.....................................................................................................................................2

Mission, objectives and strategies.............................................................................................................3

Vision..........................................................................................................................................................3

Mission.......................................................................................................................................................3

Value...........................................................................................................................................................3

Strategic objectives:....................................................................................................................................3

Industry Analysis..........................................................................................................................................4

PEST ANALYSIS.............................................................................................................................................5

Political and legal.........................................................................................................................................5

Economical..................................................................................................................................................5

Social...........................................................................................................................................................5

Technological...............................................................................................................................................5

Environmental.............................................................................................................................................5

Global Market..............................................................................................................................................6

Key Success Factors.....................................................................................................................................8

Driving Forces..............................................................................................................................................8

CPM.............................................................................................................................................................9

EFE (EXTERNAL ANALYSIS FACTORS)............................................................................................................9

IFE (INTERNAL ANALYSIS FACTORS)...........................................................................................................10

TOWS.........................................................................................................................................................12

SPACE MATRIX...........................................................................................................................................13

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Executive summary

This case is about Anheuser Busch and Harbin Brewery Group of China. Anheuser Busch is one of the leading brands of beers. company was established in 1864 in St. Louis, Missouri, United States, Anheuser Busch has grown to be one of the world’s largest beer companies, Operating 12 breweries within and 15 breweries outside of the United States, It is best known for the world’s top two selling beers, Bud Light and our flagship brand Budweiser current market share of the company in the world is 10.8.

Chinese Beer market is an increasing market with a huge potential. Ranked 1st for volume per year but 11th rank for litres per person. Low average price for beer. Huge foreign interest on this market but foreign investment usually failed. In 2004 company acquire Harbin brewery in china. Foreign companies tend to face problem as provincial regulation are there to protect local companies and furthermore to keep the tax revenues within province. Regulatory roadblocks were designed to keep tax revenues at home. Many recognized global brands were unable to make there mark because they didn’t understand the customer taste and preference which is clearly visible as they hold 0.5 percent of Chinese market.

Anheuser-Bush entry into China was in 1993 through a 5% participation to the capital of Tsingtao brewery, the internationally renowned Chinese brewer based on the East coast and later in February 1995, through a 140 Million $ acquisition of a 80% stake in Zhongde Brewery, a large brewery in Wuhan, in Hubei province, eastern China. The Company produced its global brand “Budweiser” in Wuhan and engaged a massive advertising campaign to build the name as a premium brand all over China. The results were not as expected due to the fragmented nature of the market, the severe competitive rivalry in the crowded premium segments and the difficult logistical problems in transportation, warehousing and distribution. The market share of Anheuser-Bush in China in 2003 was around 1%.

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Mission, objectives and strategies.

Vision: Through all of our products, services and relationships, we will add to life’s enjoyment.

Mission: Be the world’s beer company (Products and services; Self-concept) Enrich and entertain a global audience (Customers; Markets) Deliver superior returns to our shareholders (Concern for survival, growth and

profitability)

Value: We believe in… Quality in everything we do. (Self-concept) Exceeding customer expectations. Trust, respect and integrity in all our relationships. (Philosophy) Continuous improvement, innovation and embracing change. (Philosophy) Teamwork and open, honest communication Each employee’s responsibility for contributing to the company’s success Creating a safe, productive and rewarding work environment. (Concern for employees) Building a high-performing, diverse workforce. Promoting the responsible consumption of our products. Preserving and protecting the environment and supporting communities where we do

business. (Concern for public image)

Strategic objectives: Expansion production into China through acquisition of Chinese major beer companies reposition its brand by catering to elite and create perception of being a premium brand increase ownership by 27% by year 2009 expand there operation up to there central province in order to expand there market share In order to sustain growth and stability it needs to acquire smaller brands which would

enable it to enhance its brand portfolio and expand its business under the umbrella of company name

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Industry AnalysisThe China beer industry is the world’s largest by volume. Total domestic volume in 2005 was 307 million hectoliters, up 10.2% vs. 2004. Excellent growth has continued in 2006 with officially reported domestic volume increasing 13% through September vs. the same period, prior year.

China’s per capita beer consumption in 2005 was 23.4 liters, which was slightly lower than the estimated global average of 24.8 liters. However, China’s per capita consumption already surpasses that of Hong Kong (21.5) and Taiwan (21.1). China beer industry volume growth will slow.

The China beer market remains highly regionalized. Shares of national beer output, YoY growth, and per capita consumption by official China region in 2005 were as follows:

The chart below shows China’s Top 10 brewers by output in the first half of 2006 and it specifies the foreign ownership of each Top 10 brewer, if any:

Foreign companies tend to face problem as provincial regulation are there to protect local companies and furthermore to keep the tax revenues within province. Regulatory roadblocks were designed to keep tax revenues at home. Many recognized global brands were unable to

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make there mark because they didn’t understand the customer taste and preference which is clearly visible as they hold 0.5 percent of Chinese market.

PEST ANALYSIS

Political and legal Decentralized power structure Unstated hierarchy of power High tax on transportation Big power of the local and provincial authorities Logistics laws

Economical Important growth of China economy Huge and fragmented market Increase of urbanization rate

Social Low income and standard of living

Technological Poor level of infrastructure

Environmental Development of urban areas Reduce emissions of carbon dioxide Recyclage of bottles Obligation to share technology and knowledge for foreign firms

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Others, 43.00%

Scottish& Newcastle,

3.30%

Interbrew, 8.40%

SABMiller, 8.90%

Anheuser-Busch, 10.80%

Grupo Modelo, 2.80%

Coors, 2.6

Kirin, 2.20%

Heineken, 7.60%

Ambev, 4.70%

Carlsberg, 5.70%

Global Market

STRATEGIC GROUPS:

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Porter’s Five Forces

• Threats of new entrants: High barriers to entry:

Fragmented market Distribution networks Government Regulations

Economies of scale in marketing, production and distribution.• Rivalry (price competition has been decreasing):

Increasing competition from imported beers (however, national brewers own part of these breweries).

2,200 wholesalers and 560,000 retail establishments. Creative and enticing advertising by majors. Growing popularity of micro-breweries and other craft-beers. Alternative: expansion to super-premium beers and other segments with lower

demand elasticity.• Substitutes:

Growth in: Premixed drinks Alternative malt beverage Alternative non-alcoholic drinks (from juices to mineral water)

However, beer remains the largest drink sector.• Buyer’s Bargaining Power:

It changes from segment to segment, but in general: Low switching costs Brand loyalty Increasing health conscience

However, for craft-beers, which are perceived as having higher quality, these characteristics may not always hold.

• Suppliers’ Bargaining Power: Most supplies come from competitive industries which are more fragmented than

the beer industry. Farmers Labor (the case of unionized labor)

The more consolidated supplier is that one supplying bottles/cans. • Government

Has the potential to change regulations/laws and taxation levels

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Key Success Factors

Low cost structure (Scale of economies and learning) Effective marketing & advertising strategy to expanded market share Successful brand loyalty and recognition Product innovation and production efficiency (packaging and automation) International expansion to countries with increasing consumption trends Strategic price increases and premium pricing

Driving Forces

Marketing innovation - thanks to a rather uniform character of the product, breweries are trying to find other possibilities of differentiation, which is based mainly on building the brand assisted by advertising.

Long-term industry growth rate –In the decade between 1988 and 1998 the 10 largest brewers hardly arose from 35.8% to 37.6%. Over the last five years this development has accelerated strongly, the 10 largest increased by nearly 20% and have now 57% of the global market. Consolidation led by major international brewers during recent years brewers like Heineken and Interbrew have started internationalizing their activities. Coors and Molson have merged within last couple of months. Volume growth in developing markets China: Second largest market (by sales) and growing. Largest market in total volume. Eastern Europe and Russia

Cost efficiency –The price of the beer does not grow respectively with the price of supplies, breweries areforced to develop more effective ways of operation. Therefore it becomes one of the most important keys of reaching profits.

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CPM

Anheuser-Busch CRE (SABMiller) TsingtaoCritical Success Factors Weight Rating Score Rating Score Rating Score

Low cost structure 0.15 4 0.6 3 0.45 3 0.45

Effective marketing 0.1 4 0.4 2 0.2 4 0.4

Successful brand 0.15 3 0.45 3 0.45 3 0.45

Strategic price 0.1 3 0.3 4 0.4 3 0.3

Organizational Culture 0.1 4 0.4 4 0.4 4 0.4Revenue Generation 0.25 3 0.75 4 1 3 0.75

International expansion

0.15 4 0.6 2 0.3 2 0.3

TOTAL 1 3.5 3.2 3.05

EFE (EXTERNAL ANALYSIS FACTORS)

KEY EXTERNAL FACTORS WEIGHT RATING WEIGHTED SCORE

Opportunities

1. Emerging pub culture and positive trend to premium beer

0.05 3 0.15

2. Increase brand loyalty 0.2 4 0.8

3. Develop event sponsorships 0.1 4 0.4

4. Growing economy coupled with large market potential

0.1 2 0.2

5. Micro-brewery marketing through additional partnership

0.05 2 0.1

Threats

1. Price sensitivity due to per capita income

0.1 2 0.2

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2. Poor infrastructure as an obstacle for efficient distribution system

0.15 2 0.3

3. Corruption and political interference from government

0.05 2 0.1

4. Unstable energy and fuel cost 0.1 1 0.1

5. Lack of centralization in China’s government

0.1 1 0.1

TOTAL 1   2.45

IFE (INTERNAL ANALYSIS FACTORS)KEY INTERNAL FACTORS WEIGHT RATING WEIGHTED

SCORE

Internal Strengths

1. High level of Expertise in the beer industry coupled with financial strength

0.20 4 0.80

2. Global reputation through brand recognition and uniqueness in taste

0.05 4 0.20

3. High level of operating efficiency and quality consistency

0.15 4 0.60

4. Recruitment policy focusing on highly capable employees

0.05 3 0.15

5. Ability to select partners in joint-venture business

0.10 3 0.30

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Internal Weaknesses

1. Language barrier and lack of understanding of culture

0.10 2 0.20

2. Lack of decentralization is an obstacle for expedient decision-making in regional market

0.05 1 0.05

3. Limited brand awareness among Chinese beer consumers

0.10 2 0.20

4. Inability to distribute fresh beer across the country

0.10 1 0.10

5. Lack of emphasis on economy beer segment

0.10 1 0.10

TOTAL 1.00 2.70

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TOWS

Strengths- S

1. High level of expertise in the beer industry coupled with financial strength

2. High level of operating efficiency and quality consistency

3. Ability to select partners in joint- venture business

Weaknesses- W

1. Language barrier and lack of understanding of culture

2. Limited brand awareness among Chinese beer customers

3. Lack of emphasis on economy beer segment

Opportunities- O

1. Increase brand loyalty 2. Develop event

sponsorship3. Growing economy

coupled with large market potential

SO Strategies

1. Build beer factories in major Chinese markets (S1 , O3 )

2. Increase market share ( S 3, O2 )

WO Strategies

1. Increase brand recognition ( W 2, O 1, O2)

Threats – T

1. Poor infrastructure as an obstacle for efficient distribution system

2. Price sensitivity per capita income

3. Corruption and political interference from government

ST Strategies

1. Implement optimal production techniques to meet market requirements ( S2, T2 )

2. Develop partnership with local manufacturers ( S 3, T 3)

WT Strategies

1. Employ local managers ( W 1, T 3)

2. Acquire small local beer manufactures ( W 3, T 1)

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SPACE MATRIX

Financial Strength ( FS) Ratings

   Return on Investment 6Leverage 4Liquidity 4Working Capital 5Cash Flow 5Ease of exit from market 3Risk involved in business 3

     Total 30

Industry Strength ( IS)  

   Growth Potential 4Profit Potential 5Technological Know- how 6Resource Utilization 5Capital Intensity 5Ease of entry into market 2Productivity, Capacity utilization 5

    Total 32

Environmental Stability ( ES )  

   Technological Changes -2Rate of Inflation -4Demand Variability -3Price range of competition products -4Barriers to entry into market -5Competitive pressure -5 Price elasticity of demand -3

   

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  Total -26

Competitive Advantage ( CA)

 

   Market Share -3Product quality -1Product life cycle -3Customer loyalty -2Competition’s capacity utilization -5Technological Know- how -1Control over suppliers and

distribution-2

     Total -17

Conclusion  

 

See below

FS Average is 30/7 = 4.29

IS Average is 32/7 = 4.57

ES Average is -26/ 7 =-3.71

CA Average is -17/ 7 =-2.43

Directional Vector Coordinates:

x-axis: CA Average + IS Average

=-2. 43 + 4.47 = 2.04

y-axis: FS Average + ES Average

=4.29-3.71= 0.58

Anheuser- Busch should pursue on ‘Aggressive Strategy’

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ISSUES FACED Fragmented Market

Price wars

Regulations

Distribution problem

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AggressiveConservative

1

CompetitiveDefensive

2 3-3 -2 -1

(2.04, 0.58)

FS

ES

ISCA

FINACIAL RATIOS

Financial Strength  Company Industry S&P 500

Quick Ratio (MRQ) 0.57 0.57 1.12

Current Ratio (MRQ) 0.89 1.09 1.63

LT Debt to Equity (MRQ) 2.95 1.94 0.60

Total Debt to Equity (MRQ) 2.95 2.01 0.78

Interest Coverage (TTM) 6.25 6.50 14.52

Management Effectiveness  Company Industry S&P 500

Return On Assets (TTM) 8.57 7.38 8.51

Return On Assets - 5 Yr. Avg. 9.47 8.46 8.02

Return On Investment (TTM) 9.97 9.24 12.13

Return On Investment - 5 Yr. Avg. 10.85 10.30 11.65

Return On Equity (TTM) 60.54 39.40 20.38

Return On Equity - 5 Yr. Avg. 62.23 43.37 19.46

Efficiency  Company Industry S&P 500

Revenue/Employee (TTM) 548,689 584,575 980,385

Net Income/Employee (TTM) 47,966 56,759 119,421

Receivable Turnover (TTM) 17.35 13.08 10.33

Inventory Turnover (TTM) 13.56 11.15 12.44

Asset Turnover (TTM) 0.98 0.87 0.96

Alternative Strategies Build beer factories in major Chinese markets Increase market share Develop partnership with local manufacturers Acquire small local beer manufactures

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