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CHINA BREWERY ANALYIS

Anheuser Busch and Harbin Brewery Group of China


CASE ANALYSIS

Sajjad Ali Shaikh Khalid Yousuf Baqi bullah Farhan Aslam Arsalan Liaqat
5/4/2008

5458 3724 3614 6036 4714

Contents
Contents..................................................................................................................... 2 Executive summary ...................................................................................................3 Mission, objectives and strategies..............................................................................4 Strategic objectives:...................................................................................................4 Industry Analysis........................................................................................................5 PEST ANALYSIS ..........................................................................................................6 Political and legal........................................................................................................6 Economical.................................................................................................................6 Social..........................................................................................................................6 Technological.............................................................................................................. 6 Environmental ........................................................................................................... 6 Global Market............................................................................................................. 7 Key Success Factors...................................................................................................9 Driving Forces.............................................................................................................9 CPM..........................................................................................................................10 EFE (EXTERNAL ANALYSIS FACTORS)........................................................................10 IFE (INTERNAL ANALYSIS FACTORS).........................................................................11 TOWS........................................................................................................................13 SPACE MATRIX..........................................................................................................14 ISSUES FACED..........................................................................................................16 FINACIAL RATIOS......................................................................................................17 Alternative Strategies...............................................................................................17

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Executive summary
This case is about Anheuser Busch and Harbin Brewery Group of China. Anheuser Busch is one of the leading brands of beers. company was established in 1864 in St. Louis, Missouri, United States, Anheuser Busch has grown to be one of the worlds largest beer companies, Operating 12 breweries within and 15 breweries outside of the United States, It is best known for the worlds top two selling beers, Bud Light and our flagship brand Budweiser current market share of the company in the world is 10.8. Chinese Beer market is an increasing market with a huge potential. Ranked 1st for volume per year but 11th rank for litres per person. Low average price for beer. Huge foreign interest on this market but foreign investment usually failed. In 2004 company acquire Harbin brewery in china. Foreign companies tend to face problem as provincial regulation are there to protect local companies and furthermore to keep the tax revenues within province. Regulatory roadblocks were designed to keep tax revenues at home. Many recognized global brands were unable to make there mark because they didnt understand the customer taste and preference which is clearly visible as they hold 0.5 percent of Chinese market. Anheuser-Bush entry into China was in 1993 through a 5% participation to the capital of Tsingtao brewery, the internationally renowned Chinese brewer based on the East coast and later in February 1995, through a 140 Million $ acquisition of a 80% stake in Zhongde Brewery, a large brewery in Wuhan, in Hubei province, eastern China. The Company produced its global brand Budweiser in Wuhan and engaged a massive advertising campaign to build the name as a premium brand all over China. The results were not as expected due to the fragmented nature of the market, the severe competitive rivalry in the crowded premium segments and the difficult logistical problems in transportation, warehousing and distribution. The market share of Anheuser-Bush in China in 2003 was around 1%.

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Mission, objectives and strategies.


Vision: Through all of our products, services and relationships, we will add to
lifes enjoyment.

Mission:
Be the worlds beer company (Products and services; Self-concept) Enrich and entertain a global audience (Customers; Markets) Deliver superior returns to our shareholders (Concern for survival, growth and profitability)

Value: We believe in
Quality in everything we do. (Self-concept) Exceeding customer expectations. Trust, respect and integrity in all our relationships. (Philosophy) Continuous improvement, innovation and embracing change. (Philosophy) Teamwork and open, honest communication Each employees responsibility for contributing to the companys success Creating a safe, productive and rewarding work environment. (Concern for employees) Building a high-performing, diverse workforce. Promoting the responsible consumption of our products. Preserving and protecting the environment and supporting communities where we do business. (Concern for public image)

Strategic objectives:
Expansion production into China through acquisition of Chinese major beer companies reposition its brand by catering to elite and create perception of being a premium brand increase ownership by 27% by year 2009 expand there operation up to there central province in order to expand there market share In order to sustain growth and stability it needs to acquire smaller brands which would enable it to enhance its brand portfolio and expand its business under the umbrella of company name

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Industry Analysis
The China beer industry is the worlds largest by volume. Total domestic volume in 2005 was 307 million hectoliters, up 10.2% vs. 2004. Excellent growth has continued in 2006 with officially reported domestic volume increasing 13% through September vs. the same period, prior year. Chinas per capita beer consumption in 2005 was 23.4 liters, which was slightly lower than the estimated global average of 24.8 liters. However, Chinas per capita consumption already surpasses that of Hong Kong (21.5) and Taiwan (21.1). China beer industry volume growth will slow. The China beer market remains highly regionalized. Shares of national beer output, YoY growth, and per capita consumption by official China region in 2005 were as follows:

The chart below shows Chinas Top 10 brewers by output in the first half of 2006 and it specifies the foreign ownership of each Top 10 brewer, if any:

Foreign companies tend to face problem as provincial regulation are there to protect local companies and furthermore to keep the tax revenues within province. Regulatory roadblocks were designed to keep tax revenues at home. Many recognized global brands were unable to
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make there mark because they didnt understand the customer taste and preference which is clearly visible as they hold 0.5 percent of Chinese market.

PEST ANALYSIS
Political and legal
Decentralized power structure Unstated hierarchy of power High tax on transportation Big power of the local and provincial authorities Logistics laws

Economical
Important growth of China economy Huge and fragmented market Increase of urbanization rate

Social
Low income and standard of living

Technological
Poor level of infrastructure

Environmental
Development of urban areas Reduce emissions of carbon dioxide Recyclage of bottles Obligation to share technology and knowledge for foreign firms

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Global Market

STRATEGIC GROUPS:

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Porters Five Forces


Threats of new entrants: High barriers to entry: Fragmented market Distribution networks Government Regulations Economies of scale in marketing, production and distribution. Rivalry (price competition has been decreasing): Increasing competition from imported beers (however, national brewers own part of these breweries). 2,200 wholesalers and 560,000 retail establishments. Creative and enticing advertising by majors. Growing popularity of micro-breweries and other craft-beers. Alternative: expansion to super-premium beers and other segments with lower demand elasticity. Substitutes: Growth in: Premixed drinks Alternative malt beverage Alternative non-alcoholic drinks (from juices to mineral water) However, beer remains the largest drink sector. Buyers Bargaining Power: It changes from segment to segment, but in general: Low switching costs Brand loyalty Increasing health conscience However, for craft-beers, which are perceived as having higher quality, these characteristics may not always hold. Suppliers Bargaining Power: Most supplies come from competitive industries which are more fragmented than the beer industry. Farmers Labor (the case of unionized labor) The more consolidated supplier is that one supplying bottles/cans. Government Has the potential to change regulations/laws and taxation levels

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Key Success Factors


Low cost structure (Scale of economies and learning) Effective marketing & advertising strategy to expanded market share Successful brand loyalty and recognition Product innovation and production efficiency (packaging and automation) International expansion to countries with increasing consumption trends Strategic price increases and premium pricing

Driving Forces
Marketing innovation - thanks to a rather uniform character of the product, breweries are trying to find other possibilities of differentiation, which is based mainly on building the brand assisted by advertising. Long-term industry growth rate In the decade between 1988 and 1998 the 10 largest brewers hardly arose from 35.8% to 37.6%. Over the last five years this development has accelerated strongly, the 10 largest increased by nearly 20% and have now 57% of the global market. Consolidation led by major international brewers during recent years brewers like Heineken and Interbrew have started internationalizing their activities. Coors and Molson have merged within last couple of months. Volume growth in developing markets China: Second largest market (by sales) and growing. Largest market in total volume. Eastern Europe and Russia Cost efficiency The price of the beer does not grow respectively with the price of supplies, breweries are forced to develop more effective ways of operation. Therefore it becomes one of the most important keys of reaching profits.

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CPM
AnheuserBusch Rating Score 4 4 3 3 4 3 4 3.5 0.6 0.4 0.45 0.3 0.4 0.75 0.6 CRE (SABMiller) Rating Score 3 2 3 4 4 4 2 3.2 0.45 0.2 0.45 0.4 0.4 1 0.3 Tsingtao Rating Score 3 4 3 3 4 3 2 3.05 0.45 0.4 0.45 0.3 0.4 0.75 0.3

Critical Success Factors

Low cost structure Effective marketing Successful brand Strategic price


Organizational Culture Revenue Generation

Weigh t 0.15 0.1 0.15 0.1 0.1 0.25 0.15 1

International expansion
TOTAL

EFE (EXTERNAL ANALYSIS FACTORS)


KEY EXTERNAL FACTORS Opportunities 1. Emerging pub culture and positive trend to premium beer 2. Increase brand loyalty 3. Develop event sponsorships 4. Growing economy coupled with large market potential 5. Micro-brewery marketing through additional partnership Threats 1. Price sensitivity due to per capita income 0.1 2 0.2 0.05 3 0.15 WEIGHT RATING WEIGHTED SCORE

0.2 0.1 0.1

4 4 2

0.8 0.4 0.2

0.05

0.1

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2. Poor infrastructure as an obstacle for efficient distribution system 3. Corruption and political interference from government 4. Unstable energy and fuel cost 5. Lack of centralization in Chinas government TOTAL

0.15

0.3

0.05

0.1

0.1 0.1 1

1 1

0.1 0.1 2.45

IFE (INTERNAL ANALYSIS FACTORS)


KEY INTERNAL FACTORS WEIGHT RATING WEIGHTED SCORE

Internal Strengths
1. High level of Expertise in the beer industry coupled with financial strength 2. Global reputation through brand recognition and uniqueness in taste 3. High level of operating efficiency and quality consistency 4. Recruitment policy focusing on highly capable employees 5. Ability to select partners in joint11 | P a g e 0.20 4 0.80

0.05

0.20

0.15

0.60

0.05

0.15

0.10

0.30

venture business

Internal Weaknesses
1. Language barrier and lack of understanding of culture 2. Lack of decentralization is an obstacle for expedient decision-making in regional market 3. Limited brand awareness among Chinese beer consumers 4. Inability to distribute fresh beer across the country 5. Lack of emphasis on economy beer segment TOTAL 0.10 2 0.20

0.05

0.05

0.10

0.20

0.10

0.10

0.10

0.10

1.00

2.70

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TOWS
Strengths- S High level of expertise in the beer industry coupled with financial strength 2. High level of operating efficiency and quality consistency 3. Ability to select partners in joint- venture business SO Strategies 1. 2. Build beer factories in major Chinese markets (S1 , O3 ) Increase market share ( S 3, O2 ) 1. Weaknesses- W Language barrier and lack of understanding of culture 2. Limited brand awareness among Chinese beer customers 3. Lack of emphasis on economy beer segment WO Strategies 1. Increase brand recognition ( W 2, O 1, O2) 1.

Opportunities- O 1. 2. 3. Increase brand loyalty Develop event sponsorship Growing economy coupled with large market potential

Threats T 1. 2. 3. Poor infrastructure as an obstacle for efficient distribution system Price sensitivity per capita income Corruption and political interference from government

ST Strategies 1. Implement optimal production techniques to meet market requirements ( S2, T2 ) Develop partnership with local manufacturers ( S 3, T 3)

WT Strategies 1. 2. Employ local managers ( W 1, T 3) Acquire small local beer manufactures ( W 3, T 1)

2.

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SPACE MATRIX
Financial Strength ( FS) Ratings

Return on Investment Leverage Liquidity Working Capital Cash Flow Ease of exit from market Risk involved in business

6 4 4 5 5 3 3 Total 30

Industry Strength ( IS)


Growth Potential Profit Potential Technological Know- how Resource Utilization Capital Intensity Ease of entry into market Productivity, Capacity utilization 4 5 6 5 5 2 5 Total 32

Environmental Stability ( ES )

Technological Changes Rate of Inflation Demand Variability Price range of competition products Barriers to entry into market Competitive pressure Price elasticity of demand

-2 -4 -3 -4 -5 -5 -3 Total -26

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Competitive Advantage ( CA)


Market Share Product quality Product life cycle Customer loyalty Competitions capacity utilization Technological Know- how Control over suppliers and distribution -3 -1 -3 -2 -5 -1 -2

Total

-17

Conclusion

FS Average is 30/7 = 4.29 IS Average is 32/7 = 4.57 ES Average is -26/ 7 =-3.71 CA Average is -17/ 7 =-2.43 Directional Vector Coordinates: x-axis: CA Average + IS Average =-2. 43 + 4.47 = 2.04 y-axis: FS Average + ES Average =4.29-3.71= 0.58

Anheuser- Busch should pursue on Aggressive Strategy

See below

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FS Aggressiv e
(2.04, 0.58)

Conservativ e CA
-3 -1 -2 1

IS
2 3

Defensive ES

Competitiv e

ISSUES FACED
Fragmented Market Price wars Regulations Distribution problem

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FINACIAL RATIOS
FINANCIAL STRENGTH Company Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM) MANAGEMENT EFFECTIVENESS Return On Assets (TTM) Return On Assets - 5 Yr. Avg. Return On Investment (TTM) Return On Investment - 5 Yr. Avg. Return On Equity (TTM) Return On Equity - 5 Yr. Avg. EFFICIENCY Revenue/Employee (TTM) Net Income/Employee (TTM) Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM) 0.57 0.89 2.95 2.95 6.25 Company 8.57 9.47 9.97 10.85 60.54 62.23 Company 548,689 47,966 17.35 13.56 0.98 Industry 0.57 1.09 1.94 2.01 6.50 Industry 7.38 8.46 9.24 10.30 39.40 43.37 Industry 584,575 56,759 13.08 11.15 0.87 S&P 500 1.12 1.63 0.60 0.78 14.52 S&P 500 8.51 8.02 12.13 11.65 20.38 19.46 S&P 500 980,385 119,421 10.33 12.44 0.96

Alternative Strategies
Build beer factories in major Chinese markets Increase market share Develop partnership with local manufacturers Acquire small local beer manufactures

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