China Resources Enterprise

1. China Resources Enterprise ANALYSIS OF CORPORATE STRATEGY Prepared by Jessica Choi, Phoenix Tiu, Janet Poon, Cathy Ho & Timothy Sargeant

2. Content • Problem • Business Level Strategy -Differentiation - Focused geographical - Recommendation • Corporate Level Strategy - Related- link - Acquisition- based Strategy - Recommendation • Conclusion

3. 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

4. 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?

5. Beverage Analysis C’estbon Pacific Coffee

6. Beverage Analysis

7. Beverage Analysis

8. Beverage Analysis • Five Forces • Rivalry with existing competitors “C’estbon”: Master Kong, Wahaha, Nongfu & Coca-Cola Pacific Coffee: Starbucks and Gourmet Master (Taiwan brand)

9. Beverage Analysis • Potential Entrants China beverage industry is attractive to the potential entrants Source: Canadean

10. 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

11. Beer Analysis • “ Snow” Advertisement http://www.snowbeer.com.cn/

12. Beer Analysis

13. 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

14. Beer Analysis • Customer-Focused • Royal- looking and extravagant • noble gold and jade inlaid and engraved vision • Focus shift from supply-driven to demandsmall bottles like imported beers

15. 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)

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

17. Beer Analysis • SWOT –Opportunity • Enlarged 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

18. Beer Analysis • SWOT –Threat • cost of production: raw materials, rent, utilities • increasing M&A cost

19. Beer Analysis

20. Strength • - 2ndlargest retail organization in China in Retail Asia Pacific top 500 awards • - Multi-format business platform Retail Analysis

21. Retail Analysis • Regional leadership on a multi-format business platform

22. Weakness • - Lower average sales per store compare to competitors Retail Analysis • Strength • - 2ndlargest retail organization in China in Retail Asia Pacific top 500 awards • - Multi-format business platform

23. Retail Analysis

24. Weakness • - Lower average sales per store compare to competitors Retail Analysis • Strength • - 2ndlargest 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

25. Retail Analysis

26. Food Processing and Distribution Analysis

27. Food Processing and Distribution Analysis

28. 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 - Monopolyin live cattle market in HK

29. Food Processing and Distribution Analysis Bargaining power of suppliers: Low • Many product sources

30. Food Processing and Distribution Analysis

31. 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

32. 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

33. Recommendation • Locating supermarkets in self-owned or partially-owned property development projects

34. Recommendation 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

35. Recommendation - Beverage: Develop healthy drinks--- strength product portfolio --- offer health-conscious customers a wide range of products Source: China Food and Drink Report

37. Recommendation

38. Recommendation • Benefits: • Customer loyalty: superior quality • Set a premium price • Food: justify high price • Drawback: • High cost : marketing research, new product development

39. Focused Geographical market: domestic Chinese market

40. Recommendation

41. Growing urbanization

42. Increasing GDP per capita

43. Recommendation

44. Business-level strategy • Related linked: SBU Form of Multidivisional Structure - share some resource: distribution channels in different business units

45. Beverage and Retail • Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE - sharing of marketing resources

46. 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

47. 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

48. Current Corporate Level Strategy

49. 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

50. Acquisition-Based Strategy