China Resources Enterprise

China Resources Enterprise ANALYSIS OF CORPORATE STRATEGY

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?

Business-level strategy • Focused differentiation with related linked 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

Business-level strategy • Differentiation strategy in each business unit

Beer Analysis • Beer - "雪花 Snow“ • SWOT – Strength-Single largest beer brand in Chinese Mainland- Market leader position further consolidated by acquisition of Kingway in Feb 2011- US $40m investment in Technology-Marketing Campaign “The Great Expedition” (“勇闖天涯”)

SWOT –Weakness- Thin profit margin (Chinese: price-sensitive)[$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]

SWOT –Opportunity -focus from supply-driven to demand small bottles like imported beers - enlarge customer group : younger, higher imcome, more urban customers - Chinese robust economy - Chinese twelfth five-year plan

SWOT –Threat- cost of production: raw materials, rent, utilities

Five Forces • Rivalry with existing competitors “Tsingtao”: 15% of domestic market share “Yanjing”: sales volume (5m tons target) lower than “Snow” • Bargaining power of customers High market reputation and strong customer loyalty“The Great Expedition” (“勇闖天涯”) • Bargaining power of suppliers Many breweries in China • Potential Entrants Hard to gain a share in this competitive market • Product Substitutes each brand is different

Retail Analysis • Retail • N0. 1 in the supermarket in the Chinese Mainland • National retailer • Generated 51% of revenues • Acquired a hypermarket chain in northern, north-western, north-eastern and central China • multi-format retailer and operates supermarkets, hypermarkets and convenience stores • Vanguard, Suguo, Ole, Vango, CR Care, VivoPlus, Voi_la!, Chinese Arts and Crafts

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 suppliers rather low for small suppliers such as small farming businesses  higher for international brands like P&G as they have 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 • Product Substitutes Retailing could be bypassed by internet shopping therefore eliminating hypermarkets and supermarkets  Traditional stores offering human contact are an alternative

Beverage Analysis • C’estbon • C’estbon means ‘it is good’ in French • 3 product lines: purified water, mineral water and nutrition fruit juice • Bottled water is famous for its safety  Enjoys a leading position in Guangdong province • Fruit juice ‘O PA’ is the first stress-relieving drink in mainland  Satisfies the need of specific segment of customers

Beverage Analysis • Pacific Coffee • Acquired by CRE in 2010 • Provides great quality coffee and beverages, a comfortable environment and plenty of complementary food choices • Provides addition value by pay attention to every details • Targets customers with higher income

Beverage Analysis • Five Forces • Rivalry with existing competitors “C’estbon”: Master Kong, Wahaha, Coca-Cola and Nestle Pacific Coffee: Starbucks and Gourmet Maste • Bargaining power of customers “C’estbon”: Low Pacific Coffee: High • Bargaining power of suppliers Pacific Coffee: High • Potential Entrants China beverage industry is attractive to the potential entrants • Product Substitutes Carbonated drinks, energy drinks and tea

Food and Processing Distribution Analysis • Ng Fung Hong • vertically integrated high quality meat supply system • control both food quality and food safety from upstream to downstream segments of the supply chain • Value chain system create value to customers • Remain in competitive position

Food and Processing Distribution Analysis • Five Forces • Rivalry with existing competitors strong brand recognition --- raised the reputation • Bargaining power of customers  monopoly in live cattle market in HK  low Bargaining Power of Customers and product substitutes • Potential Entrants monopoly in live cattle market in HK  low Potential Entrances

Food and Processing Distribution Analysis • risk of diluting perceived differentiated features - customer’s dissatisfaction of price increase of beef - price increase is not justified by perceived increase in quality

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 launchedmore than 120 meat counters and stores • Shanghai, Hangzhou, Nanning, Shenzhen and Ningbo, etc, • Leveraging the strong “Ng Fung” brand name and efficient supply chain

Acquisition-Based Strategy

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

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China Resources Enterprise