Download China Resources Enterprise

China Resources Enterprise
Strategic Analysis&
Marketing Plan
By Group H
Jessica Choi, Phoenix Tiu, Janet Poon,
Cathy Ho & Timothy Sargeant
Content
 Problem
 Business Level Strategy
- Differentiation
- Focused geographical
- Recommendation
 Corporate Level Strategy
- Related- link
- Acquisition- based Strategy
- Recommendation
 Conclusion
Problem
 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?
Beverage Analysis
C’estbon
Pacific Coffee
Beverage Analysis
Strength
- Largest packaged water
brand in Guangdong
Weakness
- Insufficient production
capacity for launching new
products
Opportunity
Threat
- Fast-growing coffee market
- Emphasis on healthy diet
- 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 Entrants
China 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 suppliers
Pacific Coffee: HIGH

Product Substitutes
Carbonated drinks, energy drinks and tea
Beer Analysis
Market leader:
Weakness:
sales volume
acquisition of Kingway
investment in Technology($40m)
official beer for government
congress
Thin profit margin (Chinese:
price-sensitive)
[$2 per hectoliter, compared with
$50 to $80 in Europe and the U.S]
Snow
Opportunities:
younger, higher income, more
urban customers
high-end : Snow Draft, Snow
Super Premium
Threat:
cost of production
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
Rivalry with
existing
competitors
• “Tsingtao”: great brand recognition, 15% of domestic
market share
• “Bud Light”: “Snow” outsold [Source: Pluto Logic]
Bargaining power • High market reputation and strong customer loyalty
of customers
“The Great Expedition” (“勇闖天涯”)
Bargaining power
• Raw materials + Packaging materials: hard to be
of suppliers
replaced
Potential
Entrants
Product
Substitutes
• Hard to gain a share in this competitive market
• Taste speciality
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
Retail Analysis
Strength
- 2nd largest retail
organization in China in Retail
Asia Pacific top 500 awards
- Multi-format business
platform
Weakness
- Lower average sales per
store compare to competitors
Retail Analysis
Average sales per store for hypermarkets format in 2009
Market Average
CNY 163.4 million
CRE
CNY 78million
Carrefour’s Shanghai store
CNY364 million
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
- multi-format business
platform
Opportunity
Threat
- Increasing urbanization of
- Keen competition from
Carrefour, Tesco, Wal-Mart
China has expanded the
consumption market
Retail Analysis
• Multinational retailers such as Wal-mart, Tesco, Carrefour
Rivalry with existing expand their operations in 2nd and 3rd tier cities
competitors
• Will 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
• rather low for small suppliers such as small farming businesses
Bargaining power of • higher for international brands like P&G as they have
suppliers
international brand awareness
Potential Entrants
• High cost to entry due to the need to set up new distribution
channels
• Competitors may retaliate with price war or bad publicity
• Traditional stores offering human contact are an alternative
Product Substitutes • Internet shopping may eliminate hypermarkets and
supermarkets
Food Processing and Distribution Analysis
Strength:
Premium quality of food( integrated
supply chain system)
High brand recognition (awards)
competitive position in the market
(5 forces)
Ng Fung
Hong
Awards in Food processing and distribution
 Shanghai Ng Fung Shangshi Food limited Company
2009
"China's meat industry influence brand"
2010 2010
Shanghai World Expo Shanghai World Expo Park
fresh pork supplier recommended by the government
 Henan Cereals, Oils and Ng Fung Food Co., Ltd
2009
2009
2010
The top ten livestock enterprises
The industrial management of agriculture leading
enterprise (Zhengzhou Municipal People's
Government of Zhengzhou )
The export of key enterprises in Henan Province
Food Processing and 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: low
- Monopoly in live cattle market in HK
Food Processing and Distribution Analysis
Bargaining power of suppliers: Low
- Numerous product sources(stable supply)
Food Processing and Distribution Analysis
Weakness:
Strength:
premium food quality
competitive position in the
market (5 forces)
Branding strategy: not effective
enough
(actual VS perceived quality)
Customer dissatisfaction
(price sensitive)
Ng Fung
Hong
Opportunities:
economic growth in China
(increases demand for premium
food products)
Threats:
Hong Kong Pork Trader: urge the
government to open up the live
cattle market
break Ng Fung Hong's monopoly
Recommendation
Integrated cost leadership and differentiation
strategy :
Increase efficiency+ further differentiation
Increase efficiency:
 Integrated value chain system:
- Beverage: Manufacture the products by themselves rather than by
OEM factories

Focus on core brand:
-
Beer: divest non-core beer brands (e.x 扎西德勒, Singo) --- investing
in core brand----efficient use of resource

Flexible manufacturing system(FMS):
-
Computer controlled process--- flexible quantities--- product variety
with low cost ( production in Food, Beverage and Beer)
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
 Locating supermarkets in self-owned or partially-
owned property development projects
Recommendation
Further 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
Estimation of juice sales from 2011 to 2015
20000
$US mn
15000
10000
5000
0
2011
2012
Source: China Food and Drink Report
2013
2014
2015
Recommendation
- Retail:
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
Focused Geographical market: domestic
Chinese market
Benefits
• leverage its strength : good understanding of Chinese
Market
• better serve the segment
• Less risky
• align with mission: China’s largest consumer goods
company
• local competitors : focus on more narrowly defined
competitive segments (same differentiation at lower
price)
Drawbacks
• cannot tap the advantages of using global strategy:
(market size, ROI, economics of scales and learning)
Recommendation
External
environment
Attractive
industry
Strategy
formulation
Asserts and skills
Strategy
implementation
• Increasing urbanization, GDP in China
• China’s twelfth 5-year Plan: boost domestic consumption ( minimum wage)
• Retail, food, beverage (increasing demand)
• Focus on regional Chinese market
• Expand in profitable 2nd tier markets substantially
• Market leadership : better equips the company to effectively participate in the vibrant Chinese markets
• Good understanding of Chinese Market
•
•
•
•
Products: the famous
Price : premium price
Place: 2nd tier area
Promotion: advertisements---raise brand awareness
Growing urbanization
Increasing GDP per capita
Recommendation
External
environment
Attractive
industry
• Increasing urbanization, GDP in China
• China’s twelfth 5-year Plan: boost domestic consumption ( minimum wage)
• Retail, food, beverage (increasing demand)
• Focus on regional Chinese market
• Expand in profitable 2nd tier markets substantially
Strategy
formulation
Asserts and skills
Strategy
implementation
• Market leadership : better equips the company to effectively participate in the vibrant
Chinese markets
• Good understanding of Chinese Market
• Products: the famous and core brand
• Price : premium price
• Place: 2nd tier area
• Promotion: advertisements---raise brand awareness
Corporate-level strategy
 Related linked: SBU Form of Multidivisional
Structure
- share some resource 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
Vertical
Acquisitions
Vertical
Integration
Horizontal
Acquisitions
Market
Power
Learn and Develop New Capabilities
Exploit
economies of
scope
Leverage
CRE’s Core
Competences
Operational
and corporate
related
acquisition
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
Inability to
achieve synergy
Too much
diversification
CRE may be
getting to big
Managers
overly focused
on acquisitions
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
 Highly fragmented Chinese retail market
 Great Opportunity for M&A to enhance market leadership
Conclusion
Establishing Market
Leadership
Improving Profit
Margins
M&A is the growth
engine
Leverage supply chain
to generate efficiencies
Quality Expansion
R&D + Innovation to
drive cost efficiencies
• New Product Development
Regional expansion
Acquisitions to help
improve margins
Appendix I: Deal Activity (2007- 2011YTD)
Source: DataMonitor
Appendix II: Deal Activity Type
Appendix III: Turnover by Segment
Source: CRE 2010 Annual Report
Appendix IV: Geographical distribution of the
group’s retail network
Appendix V: GDP by province
Appendix VI: Top 10 provinces/ municipalities in terms of per
capita consumption expenditure of urban households, 2009
Rank
Province/ municipality
1
Shanghai
20,992
2
Beijing
17893
3
Guangdong
16,858
4
Zhejiang
16,683
5
Tianjin
14,801
6
Fujian
13,451
7
Jiangsu
13,153
8
Inner Mongolia
12,370
9
Liaoning
12,325
10
Chongqing
12,144
Source: National Bureau of Statistics, PRC
Per capita consumption
expenditure of urban
households
Awards in Food processing and distribution
 Shanghai Ng Fung Shangshi Food limited Company
2009
2010 2010
"China's meat industry influence brand"
Shanghai World Expo Shanghai World Expo Park
fresh pork supplier recommended by the government
 Henan Cereals, Oils and Ng Fung Food Co., Ltd
2009
2009
2010
The top ten livestock enterprises
The industrial management of agriculture leading
enterprise (Zhengzhou Municipal People's
Government of Zhengzhou )
The export of key enterprises in Henan Province
Food processing and distribution
Large nation-wide source of supply:
- China: joint venture with food processing companies---operate the
breeding, slaughtering and meat processing, food products
- the three pig breeding base model (the slaughter of 400,000), five meat
processing center ( annual slaughter capacity of 1,000 million head);
cold frozen business has four modern processing plants, with an annual
capacity of 1.5 million tons, the largest cold Zhejiang enterprises
- West Africa: operators ocean fishing company, with 130 types of
fishing, all types of fishing more than 10 million tons of aquatic
products,
Beverage Analysis
Beer Analysis
Food Processing and Distribution Analysis