Asia Pacific Breweries Project for Strategic Management in China

Asia Pacific Breweries Restructuring APB’s China Business

Liu Yu Hong Camelia Koh Zhi Hua Ng Li Ya Patrick John Lim Desiree Lim Sim Yee

Overview Industry Business Strategy Entry Strategy Verdict

Outline of Presentation

Overview of APB

Selection of Alcohol Industry in China

Business Strategy model

Entry Strategy

Conclusion

Re-alignment of APB’s strategy in China

2


Overview of APB’s Business

3

Over 40 brands

Tiger Beer

Heineken

Anchor

ABC Stout

4 geographies

South and South East

Asia

North Asia

Indochina / Thailand

Oceania


Overview of APB’s Business

4

(Announced) Shanghai

Asia Pacific Brewery

Divestment

Latest acquisition & merger activity In China

2012 2013

(Completed) 52.43% stake in

Mongolian Beverages

Acquisition

16 April 2013 3 August 2012


Business in China

5

Heineken-APB (China)

Hainan Asia Pacific Brewery

Guangzhou Asia Pacific

Brewery

Heineken-APB (Shanghai)

Sales and distribution

Mongolian Beverages

Company Pte Ltd

Production, distribution,

marketing & sales

50%: Asia Pacific

Investment

50% Asia Pacific Breweries

Subsidiaries in China

Low capacity utilization at

Shanghai brewery led to $10.9m loss in

2011

Restructuring of business to

focus on premium brands


RISA Analysis of APB

Financial strength: Sustainable competitive advantage

6

Rare Imitate (Difficult to imitate?)

Substitute (Difficult to substitute?)

Appropriable

Marketing / Branding

Y N N N (Brand equity)

Distribution / Network

Y in SEA / Apac

Y Y N

Financial Strength

Y Y Y Y

Management team

Y N N N


SWOT Analysis of APB

Strong position to tap growth of the Chinese alcohol market

Strengths Weaknesses

•  Extensive brand offering •  Significant presence in Asia •  Strong financial performance –

Revenue and profit growth •  Adherence to high quality brewery

standards •  Organization structure caters to

localization

•  Restrictions on alcohol advertising •  Weak presence in top beer

consuming countries such as China and US

Opportunities Threats

•  Rising disposable income & cultural shift towards alcoholic beverages in Asia

•  Positive growth in Asia Pacific spirits market

•  High competition •  Stringent government regulation

7


Objectives for APB in North Asia

8

Profitability

Sustainability

International premium brand

strategy


Moving On

9

• Loss of $10.9m in China / Mongolia geographic segment due to low utilization of Shanghai brewery

• Low penetration in Chinese market

Current situation

• Restructuring of China business

• Entry into wine industry

• JV with a wine manufacturer Changyu

Recommendations

• Sustainability • Premium brand strategy

• Profitability for China / Mongolia geographic segment

Future situation


Selection of Alcohol Industry

Alcoholic beverages

Beer

Spirits

Wine Fermented grapes or other fruits

Alcohol content: 10-20%

Fermented starch Alcohol content: 4-6%

Distilling after fermentation

Alcohol content: >20%

8.0% CAGR(P)

3.3% CAGR(P)

15.4% CAGR(P)

10


Attractiveness of Beer Industry

Threat of New Entrant

•  Low margins •  High barriers to entry •  Stringent government

regulations

Competition

•  Big 4 players with 58% of total market volume

•  Wider range of beers with low switching costs

Supplier Power

•  Breweries with degree of vertical integration

•  Few suppliers quality raw materials

•  Suppliers can sell to alternative markets

Buyers Power

•  Supermarkets negotiate on price

•  Strong product differentiation

•  Low switching costs •  Low beer loyalty

MODERATE MODERATE

Threat of Substitutes

•  Low switching costs to other substitutes

•  Differences in consumption patterns

MODERATE

LOW

HIGH

11





regulations

Competition



Supplier Power




Buyers Power




MODERATE MODERATE




MODERATE

LOW

HIGH

Overall: Moderate

attractiveness

12





regulations

Competition



Supplier Power




Buyers Power







13


Attractiveness of Spirits Industry Threat of New Entrant

•  Well established basic distillation technologies

•  Steady growth prospects

•  Brand loyalty

Competition

•  Many competitors in a fragmented market

•  Sell different spirits to wide segments

•  High exit costs

Supplier Power

•  Availability of alternative suppliers

•  Manufacturers with backward integration

•  Input materials vary based on spirits

Buyers Power

•  Significant tariff reductions

•  Driven by consumer preferences

•  High buyer independence

MODERATE MODERATE


•  Ease of switching to other substitutes

•  Women are more health consciousness

WEAK

Moderate

High

14






Competition




Supplier Power




Buyers Power




MODERATE MODERATE




WEAK

Moderate

High

Overall: Moderate

attractiveness

Attractiveness of Spirits Industry

15






Competition




Supplier Power




Buyers Power




MODERATE MODERATE




WEAK

Moderate

High


16






Competition




Supplier Power




Buyers Power








17


Attractiveness of Wine Industry Threat of New Entrant

•  Attractiveness of market •  Regulations increase

barriers to entry •  Lack of adequate

distribution infrastructure

Competition

•  Fairly fragmented •  High product

differentiation •  High fixed costs •  Marketing campaigns

Supplier Power

•  Sourcing from own harvests

•  Sourcing from independent growers

•  Access to other markets

Buyers Power

•  50% price elastic •  Repeat customers •  Growing tourism •  China opening up

MODERATE


•  Mainly beer, spirits •  Low switching costs •  Expensive to store •  On-trade demand

STRONG

MODERATE MODERATE

MODERATE

18






Competition



Supplier Power




Buyers Power




19






Competition



Supplier Power




Buyers Power


MODERATE



STRONG

MODERATE MODERATE

MODERATE

Overall: Moderate

attractiveness

20


Key Findings from P5

21

Fragmented

Government regulation •  Consolidation of smaller firms

•  Explicit support for large domestic players

Fragmented

Highly dependent on consumer preferences

Muted demand


Choice of Industry: Wine

22

Rationale for choice of industry

Rapid urbanization in China

Cross fertilization of cultures

Western tastes and local customs: Strong market

demand for wine in China

Future prospects

High projected growth Forecasted CAGR: 15.4%

-

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

2012 2013 2014 2015 2016 2017

Non-Grape Wine

Still Light Grape Wine

Wine


Choice of Industry: Wine

23

Increasing cooperation between domestic players

and foreign producers

Pertinent to enter wine industry before industry reaches saturation e.g.

Beer market


Choice of Business Strategy

24

Manufacturer Distributor

VERDICT


Reasons for Manufacturing

25

Fragmented wine market vs competitive distribution landscape

• Domestic wine: 80% of local consumption

• No single domestic producer accounts for >10% market share

• 3 primary distributors in the market & renowned wine brands already have a distributor

Strong gov support & favorable

outlook

• 12th FYP: Aims to grow high quality domestic production

•  Infrastructure and R&D support for producers

•  Foreign imports: squeezed as domestic production increases

High gross margins

•  Manufacturer vs. distributor margins:37%vs10%

•  China’s entry into WTO will squeeze distribution margins

37

10

0

10

20

30

40

Wine manufacturer

Wine distributor

Gross margins (%)


Entry Strategies

Merger & Acquisitions

Representative Office

Joint Venture Direct Investment

26


•  Equity / Assets acquisitions -Foreign entity > 25%

•  Subject to anti-monopoly investigations

•  Extensive and complex regulations

Characteristics of Entry Modes

Merger & Acquisition

Joint Venture

Agreement

•  Slow to-market •  Legal complications

and costs

Characteristics Considerations

•  Shared risks •  Take advantage of partner’s

competitive advantage •  Simplified application process

•  Not a legal entity •  Purely marketing activity •  No direct contracts / business

dealings with local counterparts

•  Ease of set up, favorable conditions

•  Limited reach and room for business operations


27


•  Equity / Assets acquisitions -Foreign entity > 25%

•  Subject to anti-monopoly investigations

•  Extensive and complex regulations

Characteristics of Entry Modes

Merger & Acquisition

Joint Venture

Agreement

•  Slow to-market •  Legal complications

and costs

Characteristics Considerations

•  Shared risks •  Take advantage of partner’s

competitive advantage •  Simplified application process

•  Not a legal entity •  Purely marketing activity •  No direct contracts / business

dealings with local counterparts

•  Ease of set up, favorable conditions

•  Limited reach and room for business operations

VERDICT


28


Types of Joint Venture

•  May operate as separate entities

•  Limited liability possible •  No min. contribution •  Can withdraw registered

capital during contract •  Trade union must be

allowed to represent employees

•  Min. 25% by foreign investor

•  Shared profit & risk •  Abide by Chinese

company and labor law •  Able to purchase land •  Withdrawal of registered

capital restricted

Cooperative JV Equity JV

29

VERDICT


Risk factors for entry into China

Knowledge & Expertise

•  Limited knowledge on regulatory procedures

•  Familiarity with local preferences and marketing channels

Risk vs Returns

• Ownership = high capital outlay

•  Share of partnership

•  Legal costs •  Labor and union

laws •  Intellectual

property, business laws

Dispute / Exit Resolution

• Discourse for disputes

• Exit strategies

• Cashing out options

30


Overcoming Risks Associated with JV

31

1. Due diligence conducted before entering contractual agreement: -Understanding legal, regulatory frameworks -Consider dispute resolution channels -Plan exit strategies ahead

2. Managing conflicts of interests and partner’s reluctance to adopt new practices -Communication of plans, corporate culture


Potential JV Partners

32

Changyu (Scale – Largest

winery in China)

Shortlisted based on

Xi Xia King (Strategic

alliance – JV partner with

LVHM)

Helan mountains

(Award-winning – Decanter

World Awards 2011)


Potential JV Partners

33

Changyu (Scale – Largest

winery in China)

Shortlisted based on

Xi Xia King (Strategic

alliance – JV partner with

LVHM)

Helan mountains

(Award-winning – Decanter

World Awards 2011)


JV With Changyu

34

Joint Venture with Changyu manufacturer

To tap on Heineken-APB’s 1. Capital strength

2. Expertise in marketing 3. Distribution network in SEA

Possible synergies created:

To tap on Changyu’s 1. Reputation in China

2. Long production history of 70 years in China 3. Local distribution networks

4. Scale

For growth in China and globally


Wine Industry

High margins

Sustainable profits

Premium brand strategy

Fragmented competitive landscape

Objectives of restructuring

Conclusion

35

Joint Venture with Changyu manufacturer

To tap on Heineken-APB’s 1. Capital strength

2. Expertise in marketing 3. Distribution network in SEA

Possible synergies created:

To tap on Changyu’s 1. Reputation in China

2. Long production history of 70 years in China

3. Local distribution networks 4. Scale

For growth in China and globally


Future Steps

36

Apr 2013 Early 2014

Mid- 2014

Announced: Sale of HAPB(Shanghai)

Dec 2013

Carrying out due diligence Measuring ROI of project Selection of JV partner

Sale of HAPB finalized Negotiations begin

Finalizing partnership

2015

Grand Opening

[ Selecting a JV partner ] [ Negotiations ] [ Operations ]

Mid 2015

Test batch

End 2015

First batch


Questions?

37

• Loss of $10.9m in China / Mongolia geographic segment due to low utilization of Shanghai brewery

• Low penetration in Chinese market

Current situation

• Restructuring of China business

• Entry into wine industry

• JV with a wine manufacturer Changyu

Recommendations

• Sustainability • Premium brand strategy

• Profitability for North Asia segment

Future situation

Asia Pacific Breweries Project for Strategic Management in China

Business

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