Strategic Analysis& Marketing Plan By Group H Jessica Choi, Phoenix Tiu, Janet Poon, Cathy Ho & Timothy Sargeant China Resources Enterprise
Feb 25, 2016
Strategic Analysis& Marketing Plan
By Group H
Jess ica Choi , Phoenix Tiu, Janet Poon, Cathy Ho & Timothy Sargeant
China Resources Enterprise
Content
ProblemBusiness Level Strategy - Differentiation - Focused geographical - RecommendationCorporate Level Strategy
- Related- link - Acquisition- based Strategy - RecommendationConclusion
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?
C’estbon Pacific Coffee
Beverage Analysis
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
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 EntrantsChina 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 suppliersPacific Coffee: HIGH
Product SubstitutesCarbonated drinks, energy drinks and tea
Beer Analysis
Market leader:sales volume
acquisition of Kingwayinvestment in
Technology($40m)official beer for government
congress
Weakness:Thin profit margin (Chinese:
price-sensitive)
[$2 per hectoliter, compared with $50 to $80 in Europe
and the U.S]Opportunities:
younger, higher income, more urban customers
high-end : Snow Draft, Snow Super Premium
Threat:cost of production
Snow
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
• “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
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
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
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
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
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
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 The top ten livestock enterprises
2009 The industrial management of agriculture leading
enterprise (Zhengzhou Municipal People's
Government of Zhengzhou )2010 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
Bargaining power of suppliers: Low- Numerous product sources(stable supply)
Food Processing and Distribution Analysis
Food Processing and Distribution Analysis
Strength:premium food quality
competitive position in the market (5 forces)
Weakness:Branding strategy: not
effective enough(actual VS perceived quality)
Customer dissatisfaction(price sensitive)
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
Ng Fung Hong
Recommendation
Integrated cost leadership and differentiation strategy :
Increase efficiency+ further differentiationIncrease 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)
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
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
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
- Retail:
Benefits:- Customer loyalty: superior quality- Set a premium price- Food: justify high price
Drawback:- High cost : marketing research, new product
development
Recommendation
Focused Geographical market: domestic Chinese market
• leverage its strength : good understanding of Chinese Market
• better serve the segment• Less risky • align 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
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---raise brand awareness
Growing urbanization
Increasing GDP per capita
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 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 StrategyRestructuring Activities
Quality Expansion Platform
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
Market Power
Vertical Integration
Vertical AcquisitionsHorizontal
Acquisitions
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 diversificatio
n
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
M&A is the growth engine
Quality Expansion• New Product Development
Regional expansion
Improving Profit Margins
Leverage supply chain to generate efficiencies
R&D + Innovation to drive cost efficiencies
Acquisitions to help improve margins
Appendix I: Deal Activity (2007- 2011YTD)
Source: DataMonitor
Appendix II: Deal Activity Type
Source: CRE 2010 Annual Report
Appendix III: Turnover by Segment
Appendix IV: Geographical distribution of the group’s retail network
Appendix V: GDP by province
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
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 The top ten livestock enterprises
2009 The industrial management of agriculture leading
enterprise (Zhengzhou Municipal People's
Government of Zhengzhou )2010 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