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
Business-level strategy
Business-level strategy
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
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)
Food and Processing Distribution Analysis
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
Food and Processing Distribution Analysis
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
Food and Processing Distribution Analysis
Food and Processing Distribution Analysis
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
Food and Processing Distribution Analysis
Business-level strategy
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
Pursuit of Market Power
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
Pursuit of Market Power
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
Pursuit of Market Power
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
Learn and Develop New Capabilities
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
Learn and Develop New Capabilities
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
Learn and Develop New Capabilities
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
Learn and Develop New Capabilities
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
Risks of Acquisition Based Strategy
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
Risks of Acquisition Based Strategy
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
Risks of Acquisition Based Strategy
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
Keys to a Successful Acquisition
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
Keys to a Successful Acquisition
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
Keys to a Successful Acquisition
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
Keys to a Successful Acquisition
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