China Resources Enterprise

ANALYSIS OF CORPORATE STRATEGY

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

China Resources Enterprise

Content

ProblemSWOT Analysis –OverviewBusiness Level Strategy

- Focused geographical- Differentiation

Corporate Level Strategy- Related- link

- Acquisition- based StrategyRecommendation

Problem

Recently restructured companies assets

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

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?

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

“ Snow” Advertisement http://www.snowbeer.com.cn/

Beer Analysis

http://www.snowbeer.com.cn/



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

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

Beer Analysis

-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)

[$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

• “Tsingtao”: great brand recognition, 15% of domestic market share

• “Bud Light”: “Snow” outsold [Source: Pluto Logic]

Rivalry with existing

competitors

• High market reputation and strong customer loyalty“The Great Expedition” (“勇闖天涯” )

Bargaining power of

customers

• Raw materials + Packaging materials: hard to be replaced

Bargaining power of suppliers

• Hard to gain a share in this competitive marketPotential Entrants

• Taste specialityProduct Substitutes

Beer Analysis

Retail Analysis

Strength- 2nd largest retail

organization in China in Retail Asia Pacific top 500

awards- Multi-format business

platform

Retail Analysis

Regional leadership on a multi-format business platform

Weakness- Lower average sales per

store compare to competitors



awards- Multi-format business

platform

Retail Analysis

Average sales per store for hypermarkets format in 2009

Market Average CNY 163.4 millionCRE CNY 78million Carrefour’s Shanghai store CNY364 million

Retail Analysis

Weakness- Lower average sales per

store compare to competitors



awards- multi-format business

platform

Opportunity- Increasing urbanization

of China has expanded the consumption market

Threat- Keen competition from Carrefour, Tesco, Wal-

Mart

Retail Analysis

Retail Analysis• Multinational retailers such as Wal-mart, Tesco,

Carrefour expand their operations in 2nd and 3rd tier cities

• Will open 12-20 new stores each year according to PwC

Rivalry with existing

competitors

• switching cost is moderate and is decreasing with growing experience in the marketBargaining power

of customers

• rather low for small suppliers such as small farming businesses

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

Bargaining power of suppliers

• High cost to entry due to the need to set up new distribution channels

• Competitors may retaliate with price war or bad publicity

Potential Entrants

• Traditional stores offering human contact are an alternative

• Internet shopping may eliminate hypermarkets and supermarkets

Product Substitutes

Food and Processing Distribution Analysis


Ng Fung HongStrength: premium food qualityvertically integrated meat supply system- 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

Recommendation

1. Integrated cost leadership and differentiation strategy

Increase efficiency: Integrated value chain system:- Beverage: Manufacture the products by

themselves rather than by OEM factories- Beer: divest non-core beer brands (e.x 扎西德勒 ,

Singo) --- focus investing in core brand Flexible manufacturing system(FMS): Computer

controlled process--- flexible quantities--- product variety with low cost

- Food, Beverage and beer

Locating supermarkets in self-owned or partially-owned property development projects

Recommendation

Benefits:- Lower operational costs- Allow quality tracking --- create value to

customers - Widen operating margin ---higher

investment return- Build core competence to ensure continual

growth

Recommendation

2. Differentiation Product quality improvement and innovation

- Food: emphasis on its safe and high quality food products

- Beer: increase product mix to meet variety seeking of customers

Recommendation

- Beverage: Develop healthy drinks--- strength product portfolio --- offer health-conscious customers a wide range of products

2011 2012 2013 2014 20150

5000

10000

15000

20000

Estimation of juice sales from 2011 to 2015

$US

mn

Recommendation

Source: China Food and Drink Report

e.g. Co-location of CRE’s existing and expanding retail network and Pacific Coffee

More sophisticated lifestyle experience for customers

Increase profit margins

Recommendation

Benefits:- Customer loyalty: superior quality- Set a premium price- Food: justify high price

Drawback:- High cost : marketing research, new product

development

Recommendation

Focused Geographical market: domestic Chinese market

• leverage its strength : good understanding of Chinese Market

• better serve the segment• Less risky • ally with mission: China’s largest consumer

goods company

Benefits

• local competitors : focus on more narrowly defined competitive segments (same differentiation at lower price)

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

Drawbacks

Recommendation

External environment •Increasing urbanization, GDP in China

•China’s twelfth 5-year Plan: boost domestic consumption ( minimum wage)

Attractive industry

•Retail, food, beverage (increasing demand)

Strategy formulation •Focus on regional Chinese market

•Expand in profitable 2nd tier markets substantially

Asserts and skills •Market leadership : better equips the company to effectively participate in the vibrant Chinese

markets•Good understanding of Chinese Market

Strategy implementatio

n

•Products: the famous •Price : premium price•Place: 2nd tier area •Promotion: advertisements---riase brand awareness

Growing urbanization

Increasing GDP per capita

Business-level strategy

Related linked: SBU Form of Multidivisional Structure

- share some resource: distribution channels in different business units

Beverage and Retail

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

- sharing of marketing resources

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

Recommendation

Development of centralized customer base system

retail: membership card--- get customer profile & preference---used in product development for food and beverage

Centralized IT system - sharing of updated information and

technology: R&D - monitor IT system: drive cost efficiency - economies of scope

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

Examples of Key Acquisitions in 2010

Acquisition of the Jialinshan project marked the Group’s expansion into the mineral water sector Synergy: Diversifying product offerings

Acquired 80% interest in Pacific Coffee (Holdings) Limited from Chevalier Pacific Holdings Limited Synergy: Differentiating retail markets

Acquisitions in meat processing sector Synergy: Expanded operations in slaughtering,

storage, trading and increased CRE market power

Acquisition-Based Strategy

Value Creating Drivers

Pursuit of Market Power

Learn and Develop

New Capabilities

Pursuit of Market Power

Market

Power

Vertical Integratio

n

Vertical Acquisitio

nsHorizontal Acquisitio

ns

Learn and Develop New Capabilities

Exploit economies of scope

Leverage CRE’s Core Competenc

es

Operational and

corporate related

acquisition


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

Inability to achieve synergy

Too much diversificatio

nCRE may be

getting to big

Managers overly

focused on acquisitions

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

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

Source: CRE 2010 Annual Report

Appendix III: Turnover by Segment

Appendix IV: Geographical distribution of the group’s retail network

Appendix V: GDP by province

Rank Province/ municipality Per capita consumption expenditure of urban

households1 Shanghai 20,9922 Beijing 178933 Guangdong 16,8584 Zhejiang 16,6835 Tianjin 14,8016 Fujian 13,4517 Jiangsu 13,1538 Inner Mongolia 12,3709 Liaoning 12,32510 Chongqing 12,144

Source: National Bureau of Statistics, PRC

Appendix VI: Top 10 provinces/ municipalities in terms of per capita consumption expenditure of urban households, 2009

Documents

China Resources Enterprise