China Resources Enterprise

S T R AT E G I C A N A LY S I S A N D

M A R K E T I N G P L A N

P r e p a r e d b y J e s s i c a C h o i , P h o e n i x T i u , J a n e t P o o n , C a t h y H o & T i m o t h y S a r g e a n t

China Resources Enterprise

Presentation Overview

ProblemSWOT Analysis –OverviewBusiness Level Strategy

- Focused geographicalCorporate Level Strategy

- Differentiation - Related- linked

Acquisition- based StrategyRecommendation

Problem

Low margins CRE operating margin: 1.5% (2009 FY) Sector average: 3.1% (Source: Datamonitor)

Desire from investors for higher profit margin

Acquisitions currently a very important part of CRE’s strategy

Problem

CRE has yet to improve its margins through an acquisition

based strategy

Should CRE continue acquisition based growth strategy or focus on fine-tuning their core

business against the risks?

CRE Limited, SWOT Overview

Strength WeaknessMarket leadership better equips the company to effectively participate in the vibrant Chinese markets

Store productivity significantly lower than the competitors

Inorganic expansion to further establish a dominant market position

Lower margins

Good understanding of Chinese Market

CRE Limited, SWOT Overview

Opportunity Threat

China’s twelfth 5-year Plan Rising minimum wages will increase operational costs

Robust Chinese economy Increasing competition (Both local and foreign)

Business-level strategy

Focused differentiation with related linked strategy

Source: CRE 2010 Annual Report



Focused Geographical market: domestic Chinese market leverage its strength : good understand of Chinese

Market

better serve the segment

local/regional competitors : focus on more narrowly defined competitive segments: offer same source of differentiation at lower price

cannot tap the advantages of using global strategy: increased market size, ROI, economics of scales and learning

Beer Analysis

Beer Analysis

Beer - " 雪花 Snow“

SWOT – Strength China’s best-selling beer for 2009 in terms of sales volume Market leader position further consolidated by acquisition of

Kingway in Feb 2011 US $40m investment in Technology

Legend of quality: unified technological and

technical standards

Appointed again as the official beer for NPC and CPPCC

Beer Analysis

-Strong Brand Awareness Brand Promotion Campaign : “The Great Expedition” (勇闖天涯 ) more customer interaction attracted many customers due to its story (not actual

taste)

Beer Analysis

SWOT –Weakness- Thin profit margin (Chinese: price-sensitive)

[RMB$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]

Beer Analysis

SWOT –OpportunityEnlarged customer group :

younger, higher income, more urban customers high-end : Snow Draft, Snow Super Premium urban: Beijing

Chinese robust economy

Chinese twelfth five-year plan

Beer Analysis

SWOT –Threat

cost of production: raw materials, rent, utilities

increasing M&A cost

Beer Analysis

Five Forces Rivalry with existing competitors“Tsingtao”: great brand recognition, 15% of domestic market share [Snow: 20%]

“Bud Light”: “Snow” outsold [Source: Pluto Logic] Bargaining power of customersHigh market reputation and strong customer loyalty “The Great Expedition” (“勇闖天涯” )

Bargaining power of suppliersRaw materials + Packaging materials: hard to be replaced

Potential EntrantsHard to gain a share in this competitive market

Product Substitutestaste speciality

Beer Analysis

Differentiation strategy product

Customer-Focused

Royal- looking and extravagant

noble gold and jade inlaid and engraved vision

Focus shift from supply-driven to demand small bottles like imported beers

Retail Analysis

Regional leadership on a multi-format business platform

Retail Analysis

Retail Analysis

Strength- 2nd largest retail

organization in China in Retail Asia Pacific top 500

awards

Weakness- Lower average sales per

store compare to competitors

Opportunity- Increasing urbanization

of China has expanded the consumption market

Threat- Keen competition from Carrefour, Tesco, Wal-

Mart

Retail Analysis

Five Forces Rivalry with existing competitors Multinational retailers such as Wal-mart, Tesco,

Carrefour expand their operations in second and third tier cities

They are expected to open 12-20 new stores each year according to PwC

Bargaining power of customers switching cost is moderate and is decreasing with growing experience in the market

Retail Analysis

Bargaining power of suppliersrather low for small suppliers such as small farming businesses

higher for international brands like P&G as they have international brand awareness

Potential EntrantsHigh cost to entry due to the need to set up new distribution channels

Competitors may retaliate with price war or bad publicity Product SubstitutesRetailing could be bypassed by internet shopping therefore eliminating hypermarkets and supermarkets

Traditional stores offering human contact are an alternative

C’estbon Pacific Coffee

Beverage Analysis

Beverage Analysis

Beverage Analysis

Strength- Largest packaged water

brand in Guangdong

Weakness- Insufficient production capacity for launching

new products

Opportunity- Fast-growing coffee

market- Emphasis on healthy

diet

Threat- High development Cost

- Keen competition

Beverage Analysis

Five Forces Rivalry with existing competitors

“C’estbon”: Master Kong, Wahaha, Nongfu & Coca-Cola

Pacific Coffee: Starbucks and Gourmet Master (Taiwan brand)

Beverage Analysis

Potential EntrantsChina beverage industry is attractive to the potential entrants

Source: Canadean

Beverage Analysis

Bargaining power of customers“C’estbon”: HIGH Pacific Coffee: LOW

Bargaining power of suppliersPacific Coffee: HIGH

Product SubstitutesCarbonated drinks, energy drinks and tea

Food and Processing Distribution Analysis


Ng Fung HongStrength: premium food qualityvertically integrated meat supply system- lower operational costs- Allow quality tracking : control both food quality

&food safety -- create value to customers - brand building & consumer loyalty- Widen operating margin ---higher investment return- Build core competence to ensure continual growth- Remain in competitive position in the market ( 5 forces)


Five Forces Rivalry with existing competitors: medium- the monopoly live cattle importer from China- strong brand recognition & reputation- Competitors: Local farms(limited supply), frozen meat

suppliers all over the world Bargaining power of customers & product

substitutes : medium to low monopoly in live cattle market in HK Substitutes: local meats, chilled/ frozen meats Potential Entrants monopoly in live cattle market in HK

Bargaining power of suppliers: Low- Many product sources


Weakness:

increasing cost of production ( raw materials) - pressure to raise the price of

risk of diluting perceived differentiated features:- customer’s dissatisfaction of price increase of meat price increase

is not justified by perceived increase in quality



Opportunities- Economic growth in China: increasing pork

consumption--- demand increase- market expansion in China: joint venture and

acquisition --- penetrate into production, retailing and marine fishing

Threats

Hong Kong Pork Traders Call For End In Monopoly Imports:buyers urged the government to open up the live cattle market --- break Ng Fung Hong's monopoly


http://hk.wrs.yahoo.com/_ylt=Axt7wJQyWptNUncA36DwzAt.;_ylu=X3oDMTEzYXA2amluBHNlYwNzcgRwb3MDOARjb2xvA2hrMgR2dGlkA2hrYzAwNV8z/SIG=13ku0n5n5/EXP=1302048402/**http:/www.thepigsite.com/swinenews/7362/hong-kong-pork-traders-call-for-end-in-monopoly-imports

http://hk.wrs.yahoo.com/_ylt=Axt7wJQyWptNUncA36DwzAt.;_ylu=X3oDMTEzYXA2amluBHNlYwNzcgRwb3MDOARjb2xvA2hrMgR2dGlkA2hrYzAwNV8z/SIG=13ku0n5n5/EXP=1302048402/**http:/www.thepigsite.com/swinenews/7362/hong-kong-pork-traders-call-for-end-in-monopoly-imports


Related linked: SBU Form of Multidivisional Structure

share some resource: distribution channels in different business units

Food and retail

Development of self-owned retail stores and launched more than 120 meat counters and stores

Shanghai, Hangzhou, Nanning, Shenzhen and Ningbo, etc,

Leveraging the strong “Ng Fung” brand name and efficient supply chain

Beverage and retail

Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE

- sharing of marketing resources

Current Corporate Level Strategy

Restructuring Activities

Quality Expansion Platform

Leverage CRE`s existing core competences to create synergistic combination

Market leadership and improved profit margins

Key Acquisitions in 2010

Acquisition of the Jialinshan project marked the Group’s expansion into the mineral water sector.

Acquired 80% interest in Pacific Coffee (Holdings) Limited from Chevalier Pacific Holdings Limited.

Ng Fung Hong won the bid to acquire a 60% stake in Jiaxing Food & Meat Co., Ltd.

Acquisition-Based Strategy

Value Creating Drivers

Pursuit of Market Power

Learn and Develop

New Capabilities


CRE has potential to further increase market power as a result of their related linked strategy

Proper execution will allow CRE to reduce the costs of its primary and support activities

CRE can further employ vertical integration via vertical acquisitions


Vertical Integration Food, beer and beverage divisions provide inputs for CRE’s

retail business segment

CRE can increase their market power using an integrated model R&D, processing & distributing, storage, wholesaling,

retailing

Limitations of vertical integration Outside supplier may produce the input at a lower cost Changes in consumer demands create capacity imbalance

and coordination problems


Horizontal Acquisitions CRE can integrate its own assets that complement

their core competency Key driver to top-line growth and market share Ex. Strengthening retail position by acquiring

supermarkets

Expand geographical coverage in the northern and central areas of mainland China Help CRE further establish its network of primary

activities Ex. CRE recent push to acquire breweries in these

locations

Learn and Develop New Capabilities

Goal: Develop and exploit economies of scope between CRE’s businesses

Broaden knowledge base and leverage CRE’s core competences

Create value by pursuing Operational and corporate related acquisitions


Acquisitions to create operational relatedness CRE can leverage its existing primary activities

- Distribution systems- Sales networks

Also facilitate their support activities- Purchasing practices- Bargaining power

Has potential to improve existing profit margin Increased revenues Decreased costs


Limitations to acquisitions to further operational relatedness Organizational integration may fail to create synergies

Success is dependent on CRE’s ability to integrate acquisitions into a cohesive structure that will allow sharing of activities to take place efficiently

Important that HQ implements controls to foster sharing of activities between related divisions


Enhancing corporate relatedness through acquisitions

Transferring CRE’s core competences to an acquired business- CRE has expert local market knowledge and a

sophisticated distribution system

Transferring core competences of core business to CRE- Possible targets should include companies that can

transfer cost saving related core competences to CRE


Downside of pursuing a combination operational relatedness and corporate relatedness acquisition based strategy

Cost of organization and compensation structure could be expensive leading to further decrease in CRE’s profit margins

Risks of Acquisition Based Strategy

Integration Challenges

Financial systems

Control systems

Building effective working relationships


Inability to achieve synergy Ideally want acquisitions to create economies of scope

and share resources to benefit the company

Must focus on rational evaluation of private synergies- Business is worth more managed by CRE than by itself

Transaction costs- Due diligence fees (lawyers, investment banks,

accountants, etc)- Managerial time to evaluate target firms, complete

transaction- Transaction costs < expected synergies


Too much diversification CRE could begin to rely on acquisition activities to replace

innovation

Managers may focus solely on financial performance of a business segment rather than strategic controls to evaluate business performance

CRE may be getting to big Managers may implement more bureaucratic control to

manage combined firm’s operations

Hinders innovation


Managers overly focused on acquisitions Large managerial cost associated with acquisitions

- Searching for viable acquisitions- Completing due diligence process- Preparing for negotiations- Managing the integration process

Diverts attention from other matters that are necessary for long-term competitive success, such as identifying ways to drive cost-efficiencies

Recommendation

Highly fragmented Chinese retail market Great Opportunity for M&A to enhance market

leadership

Keys to a Successful Acquisition

Complementary Assets

• Target firm has complementary assets to leverage CRE`s business

• High probability of synergy and competitive advantage by maintaining strengths

• Ex. Acquisitions to enhance product new development, leverage CRE`s distribution network

• Acquire firms who have a core competence in maintaining high profit margin


Acquisition is Friendly

• Leads to faster and more effective integration and lower premiums

• Targets should be selected and groomed by establishing a working relationship prior to acquisition

• Use cooperative strategies before acquisition to see if `fit` is right

• Use of JV`s and competitive strategic alliances


Avoid Paying too high of a premium

• Rational M&A

• Only acquire firms with strongest complementary assets

• This will avoid expensive restructuring in the future

• Use strong bargaining power to drive down the cost of M&A


CRE Maintains emphasis on R&D and innovation

• Maintains long-term competitive advantage

• Maintain CAPEX program in R&D and innovation

• Do not let acquisition replace innovation

• Continue to invest in supply chain management initiatives to improve profit margins


CRE manages change well and is flexible and adaptable

• Faster and more effective integration facilitates achievement of synergy

• Facilitate merging of two corporate cultures

• Friendly acquisition is vital

• Retrain target firm`s human capital by CRE in an effort for the target firm to fully understand CRE`s operations and capabilities

Recommendation: Beer

Raise avg. selling prices in certain strong regions to cover the increase in beer production materials

divest non-core beer brandsWhich brands are non-core

increase product mixWhat kind of products

fine tune selling prices in certain regions

lift sales volume of premium beer

Needs a title

Recommendation: Retail

Retail:locating supermarkets in self-owned or

partially-owned property development projects

Recommendation: Beverage

Develop healthy drinks More people aware of healthy life style Healthy drinks can be charged a higher premium

2011 2012 2013 2014 20150

5000

10000

15000

20000

Estimation of juice sales from 2011 to 2015

$US

mn

Source: China Food and Drink Report

Recommendation: Food

Product Product quality improvement and innovation

Promotion Increase brand awareness : superior product quality

Price Set a premium price

Place: Market expansion in China Continue joint venture and acquisition with large food

and processing companies

Conclusion

Establishing Market

LeadershipM&A is the growth

engine

Quality Expansion• New Product

Development

Regional expansion

Improving Profit Margins

Leverage supply chain to generate

efficienciesR&D + Innovation

to drive cost efficiencies

Acquisitions to help improve margins

Appendix I: Deal Activity (2007- 2011YTD)

Source: DataMonitor

Appendix II: Deal Activity Type

Documents

China Resources Enterprise