Asia Pacific Breweries Project for Strategic Management in China
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Asia Pacific Breweries Project for Strategic Management in China (2012)
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Asia Pacific Breweries Project for Strategic Management in China
- 1. Asia Pacific Breweries Restructuring APB’s China Business Liu Yu Hong Camelia Koh Zhi Hua Ng Li Ya Patrick John Lim Desiree Lim Sim Yee
- 2. Outline of Presentation Overview of APB Selection of Alcohol Industry in China Business Strategy model Entry Strategy Conclusion Re-alignment of APB’s strategy in China Overview Industry Business Strategy Entry Strategy Verdict 2
- 3. Overview of APB’s Business Over 40 brands Tiger Beer Anchor Heineken ABC Stout 4 geographies Industry Business Strategy Indochina / Thailand North Asia Overview South and South East Asia Oceania Entry Strategy Verdict 3
- 4. Overview of APB’s Business Latest acquisition & merger activity In China 3 August 2012 Acquisition (Completed) 52.43% stake in Mongolian Beverages 2012 Overview Industry Business Strategy 16 April 2013 Divestment (Announced) Shanghai Asia Pacific Brewery 2013 Entry Strategy Verdict 4
- 5. Business in China Subsidiaries in China Heineken-APB (China) 50%: Asia Pacific Investment Hainan Asia Pacific Brewery Guangzhou Asia Pacific Brewery 50% Asia Pacific Breweries Heineken-APB (Shanghai) Mongolian Beverages Company Pte Ltd Sales and distribution Overview Industry Business Strategy Production, distribution, marketing & sales Low capacity utilization at Shanghai brewery led to $10.9m loss in 2011 Restructuring of business to focus on premium brands Entry Strategy Verdict 5
- 6. RISA Analysis of APB Rare Imitate (Difficult to imitate?) Substitute (Difficult to substitute?) Appropriable Marketing / Branding Y N N N (Brand equity) Distribution / Network Y in SEA / Apac Y Y N Financial Strength Y Y Y Y Management team Y N N N Financial strength: Sustainable competitive advantage Overview Industry Business Strategy Entry Strategy Verdict 6
- 7. SWOT Analysis of APB Strengths Weaknesses • Extensive brand offering • Significant presence in Asia • Strong financial performance – Revenue and profit growth • Adherence to high quality brewery standards • Organization structure caters to localization • Restrictions on alcohol advertising • Weak presence in top beer consuming countries such as China and US Opportunities Threats • Rising disposable income & cultural shift towards alcoholic beverages in Asia • Positive growth in Asia Pacific spirits market • High competition • Stringent government regulation Strong position to tap growth of the Chinese alcohol market Overview Industry Business Strategy Entry Strategy Verdict 7
- 8. Objectives for APB in North Asia International premium brand strategy Sustainability Profitability Overview Industry Business Strategy Entry Strategy Verdict 8
- 9. Moving On Current situation • Loss of $10.9m in China / Mongolia geographic segment due to low utilization of Shanghai brewery • Low penetration in Chinese market Overview Industry Recommendations • Restructuring of China business • Entry into wine industry • JV with a wine manufacturer Changyu Business Strategy Future situation • Sustainability • Premium brand strategy • Profitability for China / Mongolia geographic segment Entry Strategy Verdict 9
- 10. Selection of Alcohol Industry 8.0% CAGR(P) 3.3% CAGR(P) 15.4% CAGR(P) Alcoholic beverages Overview Industry Business Strategy Beer Spirits Wine Fermented starch Alcohol content: 4-6% Distilling after fermentation Alcohol content: >20% Fermented grapes or other fruits Alcohol content: 10-20% Entry Strategy Verdict 10
- 11. Attractiveness of Beer Industry Threat of New Entrant • Low margins • High barriers to entry LOW • Stringent government regulations Supplier Power Competition • Breweries with degree of vertical integration • Few suppliers quality MODERATE raw materials • Suppliers can sell to alternative markets • Big 4 players with 58% of total market volume HIGH • Wider range of beers with low switching costs Buyers Power • Supermarkets negotiate on price • Strong product MODERATE differentiation • Low switching costs • Low beer loyalty Threat of Substitutes • Low switching costs to other substitutes MODERATE • Differences in consumption patterns Overview Industry Business Strategy Entry Strategy Verdict 11
- 12. Attractiveness of Beer Industry Threat of New Entrant • Low margins • High barriers to entry LOW • Stringent government regulations Supplier Power Overall: Moderate attractiveness • Breweries with degree of vertical integration • Few suppliers quality MODERATE raw materials • Suppliers can sell to alternative markets Buyers Power Competition • Big 4 players with 58% of total market volume HIGH • Wider range of beers with low switching costs • Supermarkets negotiate on price • Strong product MODERATE differentiation • Low switching costs • Low beer loyalty Threat of Substitutes • Low switching costs to other substitutes MODERATE • Differences in consumption patterns Overview Industry Business Strategy Entry Strategy Verdict 12
- 13. Attractiveness of Beer Industry Threat of New Entrant • Low margins • High barriers to entry • Stringent government regulations Supplier Power Competition • Breweries with degree of vertical integration • Few suppliers quality raw materials • Suppliers can sell to alternative markets • Big 4 players with 58% of total market volume • Wider range of beers with low switching costs Buyers Power • Supermarkets negotiate on price • Strong product differentiation • Low switching costs • Low beer loyalty Threat of Substitutes • Low switching costs to other substitutes • Differences in consumption patterns Overview Industry Business Strategy Entry Strategy Verdict 13
- 14. Attractiveness of Spirits Industry Threat of New Entrant • Well established basic distillation technologies • Steady growth Moderate prospects • Brand loyalty Supplier Power • Availability of alternative suppliers • Manufacturers with MODERATE backward integration • Input materials vary based on spirits Buyers Power Competition Many competitors in a fragmented market High • Sell different spirits to wide segments • High exit costs • • Significant tariff reductions • Driven by consumer MODERATE preferences • High buyer independence Threat of Substitutes • Ease of switching to other substitutes WEAK • Women are more health consciousness Overview Industry Business Strategy Entry Strategy Verdict 14
- 15. Attractiveness of Spirits Industry Threat of New Entrant • Well established basic distillation technologies • Steady growth Moderate prospects • Brand loyalty Supplier Power Overall: Moderate attractiveness • Availability of alternative suppliers • Manufacturers with MODERATE backward integration • Input materials vary based on spirits Buyers Power Competition Many competitors in a fragmented market High • Sell different spirits to wide segments • High exit costs • • Significant tariff reductions • Driven by consumer MODERATE preferences • High buyer independence Threat of Substitutes • Ease of switching to other substitutes WEAK • Women are more health consciousness Overview Industry Business Strategy Entry Strategy Verdict 15
- 16. Attractiveness of Spirits Industry Threat of New Entrant • Well established basic distillation technologies • Steady growth Moderate prospects • Brand loyalty Supplier Power • Availability of alternative suppliers • Manufacturers with MODERATE backward integration • Input materials vary based on spirits Buyers Power Competition Many competitors in a fragmented market High • Sell different spirits to wide segments • High exit costs • • Significant tariff reductions • Driven by consumer MODERATE preferences • High buyer independence Threat of Substitutes • Ease of switching to other substitutes WEAK • Women are more health consciousness Overview Industry Business Strategy Entry Strategy Verdict 16
- 17. Attractiveness of Spirits Industry Threat of New Entrant • Well established basic distillation technologies • Steady growth prospects • Brand loyalty Supplier Power Competition • Availability of alternative suppliers • Manufacturers with backward integration • Input materials vary based on spirits • Many competitors in a fragmented market • Sell different spirits to wide segments • High exit costs Buyers Power • Significant tariff reductions • Driven by consumer preferences • High buyer independence Threat of Substitutes • Ease of switching to other substitutes • Women are more health consciousness Overview Industry Business Strategy Entry Strategy Verdict 17
- 18. Attractiveness of Wine Industry Threat of New Entrant • Attractiveness of market • Regulations increase barriers to entry MODERATE • Lack of adequate distribution infrastructure Supplier Power Buyers Power Competition • Sourcing from own harvests • Sourcing from MODERATE independent growers • Access to other markets • Fairly fragmented • High product differentiation MODERATE • High fixed costs • Marketing campaigns • • • • 50% price elastic Repeat customers Growing tourism MODERATE China opening up Threat of Substitutes • • • • Overview Industry Mainly beer, spirits Low switching costs STRONG Expensive to store On-trade demand Business Strategy Entry Strategy Verdict 18
- 19. Attractiveness of Wine Industry Threat of New Entrant • Attractiveness of market • Regulations increase barriers to entry • Lack of adequate distribution infrastructure Supplier Power Buyers Power Competition • Sourcing from own harvests • Sourcing from independent growers • Access to other markets • Fairly fragmented • High product differentiation • High fixed costs • Marketing campaigns • • • • 50% price elastic Repeat customers Growing tourism China opening up Threat of Substitutes • • • • Overview Industry Mainly beer, spirits Low switching costs Expensive to store On-trade demand Business Strategy Entry Strategy Verdict 19
- 20. Attractiveness of Wine Industry Threat of New Entrant • Attractiveness of market • Regulations increase barriers to entry MODERATE • Lack of adequate distribution infrastructure Supplier Power Overall: Moderate attractiveness Buyers Power Competition • Sourcing from own harvests • Sourcing from MODERATE independent growers • Access to other markets • Fairly fragmented • High product differentiation MODERATE • High fixed costs • Marketing campaigns • • • • 50% price elastic Repeat customers Growing tourism MODERATE China opening up Threat of Substitutes • • • • Overview Industry Mainly beer, spirits Low switching costs STRONG Expensive to store On-trade demand Business Strategy Entry Strategy Verdict 20
- 21. Key Findings from P5 Fragmented Government regulation • Consolidation of smaller firms • Explicit support for large domestic players Fragmented Highly dependent on consumer preferences Muted demand Overview Industry Business Strategy Entry Strategy Verdict 21
- 22. Choice of Industry: Wine Future prospects High projected growth Forecasted CAGR: 15.4% Rationale for choice of industry Rapid urbanization in China 8,000.00 Cross fertilization of cultures 7,000.00 6,000.00 Non-Grape Wine 5,000.00 4,000.00 Still Light Grape Wine 3,000.00 Wine Western tastes and local customs: Strong market demand for wine in China 2,000.00 1,000.00 2012 2013 2014 2015 2016 2017 Overview Industry Business Strategy Entry Strategy Verdict 22
- 23. Choice of Industry: Wine Increasing cooperation between domestic players and foreign producers Pertinent to enter wine industry before industry reaches saturation e.g. Beer market Overview Industry Business Strategy Entry Strategy Verdict 23
- 24. Choice of Business Strategy VERDICT Manufacturer Overview Industry Distributor Business Strategy Entry Strategy Verdict 24
- 25. Reasons for Manufacturing Fragmented wine market vs competitive distribution landscape High gross margins • Manufacturer vs. distributor margins: 37%vs10% • China’s entry into WTO will squeeze distribution margins Gross margins (%) 40 37 30 20 10 10 0 Wine Wine distributor manufacturer Overview Industry Strong gov support & favorable outlook • Domestic wine: 80% of local consumption • No single domestic producer accounts for >10% market share • 3 primary distributors in the market & renowned wine brands already have a distributor • 12th FYP: Aims to grow high quality domestic production • Infrastructure and R&D support for producers • Foreign imports: squeezed as domestic production increases Business Strategy Entry Strategy Verdict 25
- 26. Entry Strategies Merger & Acquisitions Joint Venture Overview Industry Business Strategy Representative Office Direct Investment Entry Strategy Verdict 26
- 27. Characteristics of Entry Modes Characteristics Considerations Merger & Acquisition • Equity / Assets acquisitions -Foreign entity > 25% • Subject to anti-monopoly investigations • Extensive and complex regulations • Slow to-market • Legal complications and costs Joint Venture Agreement • Shared risks • Take advantage of partner’s competitive advantage • Simplified application process • Ease of set up, favorable conditions Representative Office Overview • Not a legal entity • Purely marketing activity • No direct contracts / business dealings with local counterparts Industry Business Strategy • Limited reach and room for business operations Entry Strategy Verdict 27
- 28. Characteristics of Entry Modes Characteristics Merger & Acquisition Considerations • Equity / Assets acquisitions -Foreign entity > 25% • Subject to anti-monopoly investigations • Extensive and complex regulations • Slow to-market • Legal complications and costs VERDICT Joint Venture Agreement Representative Office Overview • Shared risks • Take advantage of partner’s competitive advantage • Simplified application process • Not a legal entity • Purely marketing activity • No direct contracts / business dealings with local counterparts Industry Business Strategy • Ease of set up, favorable conditions • Limited reach and room for business operations Entry Strategy Verdict 28
- 29. Types of Joint Venture VERDICT Cooperative JV • May operate as separate entities • Limited liability possible • No min. contribution • Can withdraw registered capital during contract • Trade union must be allowed to represent employees Overview Industry Business Strategy Equity JV • Min. 25% by foreign investor • Shared profit & risk • Abide by Chinese company and labor law • Able to purchase land • Withdrawal of registered capital restricted Entry Strategy Verdict 29
- 30. Risk factors for entry into China Knowledge & Expertise • Limited knowledge on regulatory procedures • Familiarity with local preferences and marketing channels Overview Industry Dispute / Exit Resolution Risk vs Returns • Ownership = high capital outlay • Share of partnership • Legal costs • Labor and union laws • Intellectual property, business laws Business Strategy • Discourse for disputes • Exit strategies • Cashing out options Entry Strategy Verdict 30
- 31. Overcoming Risks Associated with JV 1. Due diligence conducted before entering contractual agreement: -Understanding legal, regulatory frameworks -Consider dispute resolution channels -Plan exit strategies ahead 2. Managing conflicts of interests and partner’s reluctance to adopt new practices -Communication of plans, corporate culture Overview Industry Business Strategy Entry Strategy Verdict 31
- 32. Potential JV Partners Shortlisted based on Changyu (Scale – Largest winery in China) Overview Industry Helan mountains (Awardwinning – Decanter World Awards 2011) Business Strategy Xi Xia King (Strategic alliance – JV partner with LVHM) Entry Strategy Verdict 32
- 33. Potential JV Partners Shortlisted based on Changyu (Scale – Largest winery in China) Overview Industry Helan mountains (Awardwinning – Decanter World Awards 2011) Business Strategy Xi Xia King (Strategic alliance – JV partner with LVHM) Entry Strategy Verdict 33
- 34. JV With Changyu Joint Venture with Changyu manufacturer Possible synergies created: To tap on Heineken-APB’s 1. Capital strength 2. Expertise in marketing 3. Distribution network in SEA To tap on Changyu’s 1. Reputation in China 2. Long production history of 70 years in China 3. Local distribution networks 4. Scale For growth in China and globally Overview Industry Business Strategy Entry Strategy Verdict 34
- 35. Conclusion Objectives of restructuring Joint Venture with Changyu manufacturer Sustainable profits Possible synergies created: To tap on Heineken-APB’s 1. Capital strength 2. Expertise in marketing 3. Distribution network in SEA Premium brand strategy Wine Industry To tap on Changyu’s 1. Reputation in China 2. Long production history of 70 years in China 3. Local distribution networks 4. Scale High margins Fragmented competitive landscape Overview Industry For growth in China and globally Business Strategy Entry Strategy Verdict 35
- 36. Future Steps [ Selecting a JV partner ] Announced: Sale of HAPB(Shanghai) [ Negotiations ] Sale of HAPB finalized Negotiations begin Test batch Early 2014 Apr 2013 Mid 2015 Mid2014 Dec 2013 Carrying out due diligence Measuring ROI of project Selection of JV partner Overview [ Operations ] Industry End 2015 2015 Grand Opening First batch Finalizing partnership Business Strategy Entry Strategy Verdict 36
- 37. Questions? Current situation • Loss of $10.9m in China / Mongolia geographic segment due to low utilization of Shanghai brewery • Low penetration in Chinese market Overview Industry Recommendations • Restructuring of China business • Entry into wine industry • JV with a wine manufacturer Changyu Business Strategy Future situation • Sustainability • Premium brand strategy • Profitability for North Asia segment Entry Strategy Verdict 37