China Resources Enterprise
STRATEGIC ANALYSIS
AND
MARKETING PLAN
Prepared by Jessica Choi, Phoenix Tiu, Janet Poon, Cathy
Ho & Timothy Sargeant
Presentation Overview
 Problem
 SWOT Analysis –Overview
 Business Level Strategy
- Focused geographical
 Corporate Level Strategy
- Differentiation
- Related- linked
 Acquisition- based Strategy
 Recommendation
Problem
 Low margins
 CRE operating margin: 1.5% (2009 FY)
 Sector average: 3.1% (Source: Datamonitor)
 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?
CRE Limited, SWOT Overview
Strength
Weakness
Market leadership better equips Store productivity significantly
the company to effectively
lower than the competitors
participate in the vibrant Chinese
markets
Inorganic expansion to further
establish a dominant market
position
Good understanding of Chinese
Market
Lower margins
CRE Limited, SWOT Overview
Opportunity
Threat
China’s twelfth 5-year Plan
Rising minimum wages will increase
operational costs
Robust Chinese economy
Increasing competition (Both local
and foreign)
Business-level strategy
 Focused differentiation with related linked strategy
Business-level strategy
Source: CRE 2010 Annual Report
Business-level strategy
 Focused Geographical market: domestic Chinese
market

leverage its strength : good understand of Chinese Market

better serve the segment

local/regional competitors : focus on more narrowly defined
competitive segments: offer same source of differentiation at
lower price

cannot tap the advantages of using global strategy: increased
market size, ROI, economics of scales and learning
Beer Analysis
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
Beer Analysis
 -Strong Brand Awareness
Brand Promotion Campaign : “The Great Expedition”
(勇闖天涯)


more customer interaction
attracted many customers due to its story (not actual taste)
Beer Analysis
 SWOT –Weakness
- Thin profit margin (Chinese: price-sensitive)
[RMB$2 per hectoliter, compared with $50 to $80 in
Europe and the U.S]
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
Beer Analysis
 SWOT –Threat

cost of production: raw materials, rent, utilities

increasing M&A cost
Beer Analysis
 Five Forces
 Rivalry with existing competitors
“Tsingtao”: great brand recognition, 15% of domestic market share
[Snow: 20%]
“Bud Light”: “Snow” outsold [Source: Pluto Logic]

Bargaining power of customers
High market reputation and strong customer loyalty
“The Great Expedition” (“勇闖天涯”)

Bargaining power of suppliers
Raw materials + Packaging materials: hard to be replaced

Potential Entrants
Hard to gain a share in this competitive market

Product Substitutes
taste speciality
Beer Analysis
 Differentiation strategy

product
 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
Retail Analysis
 Regional leadership on a multi-format business
platform
Retail Analysis
Retail Analysis
Strength
Weakness
- 2nd largest retail
- Lower average sales per
store compare to competitors
Opportunity
Threat
- Increasing urbanization of
- Keen competition from
Carrefour, Tesco, Wal-Mart
organization in China in
Retail Asia Pacific top 500
awards
China has expanded the
consumption market
Retail Analysis
 Five Forces

Rivalry with existing competitors
Multinational retailers such as Wal-mart, Tesco, Carrefour
expand their operations in second and third tier cities
They are expected to open 12-20 new stores each year according
to PwC

Bargaining power of customers
 switching cost is moderate and is decreasing with growing experience
in the market
Retail Analysis

Bargaining power of suppliers
rather low for small suppliers such as small farming businesses
 higher for international brands like P&G as they have international
brand awareness

Potential Entrants
High cost to entry due to the need to set up new distribution
channels
 Competitors may retaliate with price war or bad publicity

Product Substitutes
Retailing could be bypassed by internet shopping therefore
eliminating hypermarkets and supermarkets
 Traditional stores offering human contact are an alternative
Beverage Analysis
C’estbon
Pacific Coffee
Beverage Analysis
Beverage Analysis
Strength
- Largest packaged water
brand in Guangdong
Weakness
- Insufficient production
capacity for launching new
products
Opportunity
Threat
- Fast-growing coffee market
- Emphasis on healthy diet
- 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 Entrants
China 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 suppliers
Pacific Coffee: HIGH

Product Substitutes
Carbonated drinks, energy drinks and tea
Food and Processing Distribution Analysis
Food and Processing Distribution Analysis
 Ng Fung Hong
Strength: premium food quality
 vertically integrated meat supply system
- lower operational costs
- Allow quality tracking : control both food quality &food
safety -- create value to customers
- brand building & consumer loyalty
- Widen operating margin ---higher investment return
- Build core competence to ensure continual growth
- Remain in competitive position in the market ( 5 forces)
Food and Processing 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
monopoly in live cattle market in HK
Food and Processing Distribution Analysis
Bargaining power of suppliers: Low
- Many product sources
Food and Processing Distribution Analysis
 Weakness:

increasing cost of production ( raw materials) - pressure to
raise the price of

risk of diluting perceived differentiated features:

customer’s dissatisfaction of price increase of meat price increase is not
justified by perceived increase in quality
Food and Processing Distribution Analysis
 Opportunities
- Economic growth in China: increasing pork
consumption--- demand increase
- market expansion in China: joint venture and
acquisition --- penetrate into production, retailing
and marine fishing
Food and Processing Distribution Analysis
 Threats

Hong Kong Pork Traders Call For End In Monopoly
Imports:buyers urged the government to open up the live
cattle market --- break Ng Fung Hong's monopoly
Business-level strategy
 Related linked: SBU Form of Multidivisional
Structure

share some resource: distribution channels in different
business units
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
Beverage and retail
 Holders of Pacific Club Card enjoy discount in
supermarkets operated by CRE
- sharing of marketing resources
Current Corporate Level Strategy
Restructuring Activities
Quality Expansion Platform
Leverage CRE`s existing core competences
to create synergistic combination
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
Vertical
Acquisitions
Vertical
Integration
Horizontal
Acquisitions
Market
Power
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
diversification
CRE may be
getting to big
Managers
overly focused
on acquisitions
Recommendation
 Highly fragmented Chinese retail market
 Great Opportunity for M&A to enhance market leadership
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: Beer
Raise avg. selling prices in certain strong regions to cover the
increase in beer production materials
divest non-core beer brands
Which
brands are non-core
increase product mix
What
kind of products
fine tune selling prices in certain regions
lift sales volume of premium beer
Needs a title
Recommendation: Retail
Retail:
 locating supermarkets in self-owned or partiallyowned property development projects
Recommendation: Beverage
 Develop healthy drinks

More people aware of healthy life style
Healthy drinks can be charged a higher premium
Estimation of juice sales from 2011 to 2015
20000
15000
$US mn

10000
5000
0
2011
2012
Source: China Food and Drink Report
2013
2014
2015
Recommendation: Food
 Product
 Product quality improvement and innovation
 Promotion
 Increase brand awareness : superior product quality
 Price
 Set a premium price
 Place:
 Market expansion in China
 Continue joint venture and acquisition with large food and
processing companies
Conclusion
Establishing Market
Leadership
Improving Profit
Margins
M&A is the growth
engine
Leverage supply chain
to generate efficiencies
Quality Expansion
R&D + Innovation to
drive cost efficiencies
• New Product Development
Regional expansion
Acquisitions to help
improve margins
Appendix I: Deal Activity (2007- 2011YTD)
Source: DataMonitor
Appendix II: Deal Activity Type