China Resources Enterprise
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Transcript of China Resources Enterprise
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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
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Content
ProblemSWOT Analysis –OverviewBusiness Level Strategy
- Focused geographical- Differentiation
Corporate Level Strategy- Related- link
- Acquisition- based StrategyRecommendation
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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
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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?
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C’estbon Pacific Coffee
Beverage Analysis
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Beverage Analysis
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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
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Beverage Analysis
Five Forces Rivalry with existing competitors
“C’estbon”: Master Kong, Wahaha, Nongfu & Coca-Cola
Pacific Coffee: Starbucks and Gourmet Master (Taiwan brand)
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Beverage Analysis
Potential EntrantsChina beverage industry is attractive to the potential entrants
Source: Canadean
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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
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“ Snow” Advertisement http://www.snowbeer.com.cn/
Beer Analysis
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Beer Analysis
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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
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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
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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)
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Beer Analysis
SWOT –Weakness- Thin profit margin (Chinese: price-sensitive)
[$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]
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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
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Beer Analysis
SWOT –Threat
cost of production: raw materials, rent, utilities
increasing M&A cost
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• “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
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Retail Analysis
Strength- 2nd largest retail
organization in China in Retail Asia Pacific top 500
awards- Multi-format business
platform
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Retail Analysis
Regional leadership on a multi-format business platform
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Weakness- Lower average sales per
store compare to competitors
Strength- 2nd largest retail
organization in China in Retail Asia Pacific top 500
awards- Multi-format business
platform
Retail Analysis
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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
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Weakness- Lower average sales per
store compare to competitors
Strength- 2nd largest retail
organization in China in Retail Asia Pacific top 500
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
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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
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Food and Processing Distribution Analysis
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Food and Processing Distribution Analysis
Ng Fung HongStrength: premium food qualityvertically integrated meat supply system- Remain in competitive position in the market ( 5 forces)
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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
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Bargaining power of suppliers: Low- Many product sources
Food and Processing Distribution Analysis
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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
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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
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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
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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
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Locating supermarkets in self-owned or partially-owned property development projects
Recommendation
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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
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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
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- 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
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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
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Benefits:- Customer loyalty: superior quality- Set a premium price- Food: justify high price
Drawback:- High cost : marketing research, new product
development
Recommendation
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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
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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
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Growing urbanization
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Increasing GDP per capita
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Business-level strategy
Related linked: SBU Form of Multidivisional Structure
- share some resource: distribution channels in different business units
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Beverage and Retail
Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE
- sharing of marketing resources
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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
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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
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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
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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
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Acquisition-Based Strategy
Value Creating Drivers
Pursuit of Market Power
Learn and Develop
New Capabilities
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Pursuit of Market Power
Market
Power
Vertical Integratio
n
Vertical Acquisitio
nsHorizontal Acquisitio
ns
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Learn and Develop New Capabilities
Exploit economies of scope
Leverage CRE’s Core Competenc
es
Operational and
corporate related
acquisition
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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
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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
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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
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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
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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
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Recommendation
Highly fragmented Chinese retail market Great Opportunity for M&A to enhance market
leadership
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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
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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
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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
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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
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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
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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
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Appendix I: Deal Activity (2007- 2011YTD)
Source: DataMonitor
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Appendix II: Deal Activity Type
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Source: CRE 2010 Annual Report
Appendix III: Turnover by Segment
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Appendix IV: Geographical distribution of the group’s retail network
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Appendix V: GDP by province
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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