Grand Metropolitan plc (A)

Williamson and Rix (1993). European Cases in Strategic

Management. London: Chapman & Hill.

PRESENTATION BY:
ANGEL SHARMA
GITANJALI BISTA
DHIRENDRA SHRESTHA
ARJUN KUNWAR

Background
In four years prior to 1988, Grand Metropolitan had disposed of over 25
businesses. A chunk of 1.3 billion had gone.
Allen Sheppard, was the CEO who took over in Nov. 1986 (adding the
chairmanship in July 1987) thought it was new era : one of internally driven
growth and focus on four core activities.

Grand Met was selling but buying on the other hand. It was buying
undervalued property assets.
In 1987, it bought Hublein Incorporated and its Almaden wine interests for
855 million Smirnoff brand!
In the same year, 340 million (equivalent to 6% sales and 75% of pre-tax
profits) went into groups marketing budget for developing its existing
consumer franchise.

IN AND OUT OF CITY FAVOUR

Because of major portfolio shifts, the City financers assessments of Grand
Met had been mixed.
Despite good profitability in core business, the EPS steadily declined
between 1982 and 1986.
Sheppard had taken over as CEO at a time when people in the city thought
Grand Met would itself be soon taken over and broken up.
The challenge was to throw off the image of a loose conglomerate lacking
strategic direction and replace it with a conviction that the group could be
relied for consistent profitability and above average earnings growth.

The Asset Escalator

Despite market capitalization which ranked it number 14 in the UK by 1987, Grand Met
was only 25 years young.

It was founded by late Sir Max Joseph in 1962 as holding company for chain of hotels
he had been building since WWII.
Joseph was born in East End of London in 1910 and began his working life with local
firm of estate agents.

At the age of 20, he started his own agency backed by borrowed money.
His venture flourished and by 30 he owned a Rolls Royce and a house on Hampstead
Heath was a natural entrepreneur.
In 1947, purchased his first hotel Mandeville and despite high gearing, strong cash
flows and rising property values, he made a second purchase in 1950 The
Washington in Mayfair.
Purchased Mount Royal at Marble Arch with 712 bedrooms and 600 rooms (very
ambitious).

 Further, acquired Gordon Hotels in 1964, the May Fair; the Metropole in
Monte Carlo, the Carlton in Cannes; the Paris Lotti and Scribe hotels in
1966; the Manhattan in New York; the Castellana in Madrid; and three
properties in Amsterdam in 1970.
During 1960s, Grand Met had little corporate structure and absence of
finance department it was run by a triumvirate (Joseph, Grinstead and
Sharp) who were all appointed as Joint Managing Directors in 1967.
The basic strategy was to acquire trading property assets in exhange for
debt.
Inflation led to rising values of property while depreciating the real debt
burden.
Borrowing capacity was therefore automatically renewed, permitting the
next acquisition.

From Hotels to Foods and Drinks

Through experience in Hotels, Grinstead and Sharp felt that Grand Met had
acquired considerably skills in managing catering and food. It was a large buyer
of drinks and knew what made them sell.
The catering business of Levy & Franks was purchased in 1966 which included
pub-restaurants, grocery and off-license store backed chain of Chef & Brewer.
In July 1969, Joseph made a 32 million bid for Express Dairy only 48 hours
after learning that there was an opportunity to acquire.
Express daily served (1/4) of all households in Britain through door-to-door
distribution of milk and dairy products and also owned a portfolio of restaurants,
grocery stores and supermarkets.
The company had 18 million turnover and 16000 employees.
Berni Inns chain of 130 restaurants and hotel properties was acquired for 14
million in 1970. With Chef & Brewer chain, Grand Met was UKs largest hotel
and catering group ahead of arch rival Charles Forte who had pulled ooff a
merger with Trust Houses.

In for a penny; in for a pound

For a price of 33 million, Joseph acquired Mecca the gaming company
as Joseph felt bingo halls, dance halls and casinos brought new food, drink
and leisure operations.
Since Mecca had a network of high street betting shops, Grand Met had
netted a new catch of real estate assets,
All of the acquisitions had been on friendly terms except Express daily as
Joseph invited former owners to join Grand Met board which resulted in a
growth of main board to 18.

Buying into the BEERAGE

Joseph set his sights on Truman Hanbury Buxton, a medium sized brewery
with an extensive property portfolio in Lodon including 986 public houses, 138
off-licenses and 21small hotels and motels.
Joseph was seeking to buy into a conservative and tight-knit industry run by a
small group of families (known as the beerage).

The brewing unions, who favored Joseph were becoming stronger.

Grand Mets initial bid for Truman was blocked by one of its larger beerage
brethren Watney Mann acting as a white knight.
After 14 bids, Truman board recommended Grand Mets offer of 48 million.
Ironically, nine months down the line a banker offered Joseph a stake in
former white knight Watney Mann.

 As Britains 4th largest brewer, Watney Mann enjoyed a 12% share and a
massive portfolio of 4400 tenanted pubs.
Being determined to fight the bid to the last, the board of directors at
Watney Mann decided to increase their stakes.
Before the bid, they had only (1/3) shares in International Distillers and
Vintners (IDV), an amalgamation of some of the oldest and most
respected names in the wines and spirits business including Croft, W&A
Gilbey and Justerini & Brooks (J&B Scotch).
After Josephs attack, they purchased the other 67% of IDV.
To acquire Watney Mann, in 1972 Joseph would have to pull off the
largest even industrial acquisition in the Uk, doubling the size of Grand
Met.
115 days, 3 offers, 5 letters and a telegram to all 30000 of Watneys
shareholders. Grand Mets holding passed the critical 50.1% mark.
The total cost was estimated at 435 million (2000 million pints at the
prices then!)

 As part of the Watney takeover, Joseph had been negotiating with Sir
John Davis of the Rank Group to dispose of IDV.
The deal fell through because of that.

This added to huge quantity of paper Grand Met was forced to issue
to finance the move.
In addition to 220 million of convertibles, its debt equity ratio was
pushed to the limit.

UK brewing and retailing

UK beer market declined sharply.

A radical reassessment of cost structures, capacity, and the returns

on the brand and retail property assets became necessary.
Since his appointment as the head of Watney's in 1975, Sheppard
had been strengthening the management team.
The brewing and wholesaling functions (WMTB) were separated from
the pub retailing business.

Contd.
The production and wholesaling divisions began to implement an
aggressive rationalization programme to put costs in line with
revenue.
WMTB cut its workforce by 5000 (50% of the former total).
The early 1980s also saw major innovation and expansion of
WMTB's brand portfolio.
Returns on the pub real estate portfolio were carefully analysed and
improved.

Contd.
These moves culminated in 1987 with the complete managerial
separation of three distinct activities:
Grand Met Brewing and Branding (responsible for production and
marketing)
Grand Met Estates (which owns the entire estate portfolio)
Grand Met Retailing (which is responsible for running the non-tenanted
pubs).

Specialist management is employed in each company:

a 'property man' runs Grand Met Estates
a 'retailer' manages Grand Met Retailing.

This permits a clarity of separate objectives.

Express Foods
Revenues dropped by more than half from
1980/1981 to 1983/1984.
Morale was low, the management structure
highly centralized, and distribution systems
failing.
A four-part plan was put into action by the
new team.
Firstly, improved product quality and cost reductions.
Secondly, new computer systems with a customer service orientation were
introduced.
Thirdly, the peripheral businesses were disposed of.
Lastly, a far-reaching product development and marketing programme.

Contd.
Express became a leader in additive-free products following the trend
to more healthy, natural products.
By 1985/86 profits had recovered to 39 million with a further 100
million cash contribution to the group flowing from disposals and
reduced working capital.

THE LIGGETT AND MECCA DISPOSALS

The UK brewing and food operations had been the first to undertake
a systematic disposal of businesses aimed at focusing the portfolio
and concentrating development effort.
Mecca Leisure, which operated bingo halls, catering, entertainment,
and UK holidays, was also sold off.

The rationale here was twofold.

First, the nature of its markets and expertise.

Second, its success depended largely on hands-on,

entrepreneurial style.

DEVELOPMENTS WITHIN IDV

After acquisition, as the part of Watney mann
(1972) there was increase in trading profits
from 12 million to 147 million(1985) on
turnover of one Billion pounds. Despite ,world
major spirit market was declining but IDV
showed the strong performance.

IDV success derivation

Several key policies IDV launched
Firstly emphasis in direct sales to retailers in
contrast to the industry standard policy.
Benefits:
Improved assess to market
intelligence and aiding launch of new brands.

Second key policy: Stronger

commitment to new product
development
55 new products(1980-1986)
Among seven world leading spirits they are
accounted for 32%
Company had developed the strong culture
of discounting as anathema connected to
strong belief market analyst and customers.

Other key policies

They sped more on brand marketing that was
above 33% of industry norms
Segmentation of products
Vodka
Tequila
Liqueurs and cocktails

Forming alliances as the success

factor
This was the way to assess to the powerful
brands Amaretto di saronno and cinzano .
Purchasing marketing rights ,equity as well
as forming joint marketing companies

The Sheperd era

A J G sheperd appointed as CEO in 1986
Executive directors 4 members
Tagg-uk divisions

Halford-publicaffairs
Strowger finance director

They were supported by the strong group o f

non executive directors like,
Chairman and CEO of BOC group
Chairman of ICI
Chairman of British airways

Operation declutter
Under the management of sheperd they
undergo different disposals:named as decluteer
.
Disposal of US branded services were major
and it was rationalized.
For instance: Quality care(purchased in $115
million and sold for $102 million including
children world was sold for $117 million

Reasons for disposal according to sheperd

Doubted in brands ability in strong franchise and
sustained profitability

Managers if those disposed brands divert the core

business activities and he doubts in strategic fit in his
organization.
Contract services-largest disposal(1987) 160 million
despite money making business reason;he doubted for
scope for true consumer branding
In 19988 with disposal of us pepsi bottling they
successfully completed the declutter process.

The Heublein acquisition

$1.3 billion acquisition which was larger acquisition where Grand
mets showed its ability by acquiring Heublein.
IDV held license with Heublein brand over 30 years ,where
management have strong rapport with each other .
Heyblein had similar operating strategies at opertting level as
IDV like product divisions ,product lines ,no discounting .
The fit between this two bussiness have been highly
complementary.

Benefit to IDV because of this acquisition

Idv had avoided the US market but this
collaboration leads to 11.5% US wine market.
Because of trade difficulty in US ,number of
major players like national distillers and
chemicals and seagrams withdrew from market
where IDV acts as cost leader in the market .

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