Anheuser-Busch and Harbin Brewery Group of China

I. Executive Summary Anheuser-Busch (AB) is once again pushing forward in their attempt to gain market share in China. Many major global brewing corporations over the last 10 years have failed to achieve any degree of success in the tough Chinese market. Many challenges exist for foreign entrants into the Chinese market and very few foreign companies have been able to gain market share. Our group has decided to first look at past mistakes foreign brewers have made when entering the Chinese market. Learning from others mistakes has allowed our group to determine what strategic plan to recommend to AB’s CEO.

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Our strategic plan will enable AB to grow their market share across all of China’s four main regions. We have determined that the strategic issue at hand is the challenge of gaining market share in a country mainly looking at cost and is dedicated to cultural tastes as well. The five major firms in the industry make up only 38% of the market. AB has purchased a 10% minority interest in the number one firm, Tsingtao. AB’s recent takeover of Harbin Brewery shows that AB believes it is the right time to start acquiring dominant players and further pursue China’s potential.

Finally, we outline three major strategies that AB could follow: multi-domestic, global, and transnational. Of these three strategies, we suggest that the transnational strategy be adopted by AB. The transnational strategy best deals with the issue of keeping prices low through increased economies of scale and the need for local responsiveness simultaneously. II. Introduction Anheuser-Busch (AB) is facing many difficult challenges competing in the Chinese beer market. In this case analysis, we will identify AB’s strategic issue. We will then analyze the financial statements while completing a SWOT analysis.

Following the analysis, we will present alternative strategies that relate to the strategic issue. Finally we will discuss our recommendations for moving forward and overcoming the strategic issue. III. The strategic issue challenging Anheuser Busch AB’s strategic issue is the need to increase overall market share in China. Increasing overall market share will not be easy. Chinese consumers are very price conscious and also demand a certain degree of local responsiveness from foreign firms such as AB. AB has several obstacles that need to be addressed in order for the company to have a fighting chance at gaining market share.

These obstacles are addressed and solutions are formulated in the Strategic Objectives/Goals section. IV. An analysis of the strategic objectives/goals China has huge market potential. There are over 926 million people in China’s four main regions. China possesses the largest growth potential, as well as the largest beer volume potential of any country in the world. Many Chinese are increasingly moving towards urbanization. The urbanized population is beginning to move towards the target population for beer as they are also experiencing increasing average incomes.

By targeting this section with AB’s products, AB will, over time, be able to pick up considerable market share. As average income rises and the Chinese will be more apt to go out to bars to drink standard and premium beer instead of drinking economy beer at home. Low end consumers will also see an increase in wages once the economic multiplier takes affect. These Chinese citizens who once could not afford to buy more than one or two beers at a time will have the funds available to purchase more volume at one time. There are many reasons why foreign entrance into the Chinese market is difficult.

Political and legal challenges are very difficult for foreigners to understand. To succeed in this environment, AB must respect all levels of authority and be granted the “red stamp”. Whoever bears the “red stamp”, controls all actions associated with the organization. AB’s must have control over the “red stamp” to fully take advantage of any opportunities to grow overall market share. Many organizations also failed to choose Wholly Foreign-Owned Enterprises (WFOE) over joint ventures. WFOE’s allow companies to maintain control of technology, culture, intangible assets as well as reduce potential lawsuits over intellectual property theft.

WFOE’s also allows better control over whoever may be hired to help navigate the terrain. AB must refrain from joint ventures and maintain control over the company’s tangible and intangible assets. AB must begin to start acquiring or taking over local brewers that are well known in their region and maintain local brand names in the process. Through acquisitions and takeovers of local brewers in China’s regions, AB may be able to combine these brewers into more efficient regional breweries. Once these local brewers are combined into one strategically placed location AB will be better positioned to perform cost and logistical analyses.

Once costs and logistics are controlled AB will be able to achieve economies of scale, reduce price and attain higher market share. Increasing customer awareness of AB and all of their products should also be a goal. AB can increase customer awareness through many different marketing tools. AB should develop television commercials, billboards, radio ads, and any other marketing avenues in China to help increase customer awareness. Most Chinese citizens drink local beers because there high levels of customer awareness and they are locally available. Once customer awareness is increase, market share will increase dramatically.

V. S-W-O-T analysis (Strengths) AB is one of the world’s largest breweries in terms of sales and overall market share. Appendix I outlines various financial ratios that illustrate AB’s overall financial health and potential. One of the most important pieces of financial strength that AB possesses is their free cash flow. This cash flow will allow AB to acquire local Chinese breweries which is a pivotal part of the strategies outlined in this analysis. In addition to large sums of free cash, AB already has a strong position in the Chinese market since its acquisition of Harbin Breweries.

This acquisition has allowed AB to enter the Chinese market with a major customer base already established. These strengths will give AB the strategic advantages needed to succeed in the Chinese beer market. (Weaknesses) AB has to be conscious of how it is perceived by the Chinese market. Since AB is a US company they may have trouble getting Chinese consumers to buy their product. This is a weakness that AB has very little control over since consumer attitudes are hard to change. The best way for AB to remedy this problem would be through isguising themselves as a Chinese company by purchasing WFOE and operating under that Chinese guise. (Opportunities) The most prominent opportunity for AB, that is made available by entering the Chinese market, is the enormous size of the market itself. Without a doubt, the Chinese market is thirsty for alcohol and 1 billion beer consumers are sure to help AB achieve massive economies of scale. However, this opportunity has caught the attention of many alcohol distributors and it will need to be exploited swiftly before the market becomes even more diluted with new entrants.

This creates a time constraint that for the opportunity. In addition to an expansive market, AB also has the opportunity to acquire many Chinese local breweries that are currently struggling. By purchasing these local breweries, AB will be able to build on the strength they attained when they bought Harbin. (Threats) When dealing with China every foreign company needs to be aware of government intervention. There is political risk involved when operating in China and this is a major threat to companies like AB trying to do business there.

In addition to political risk, there is also the threat of local Chinese breweries, which already have a committed consumer base, taking market share away from AB. VI. Alternative Strategies (Multi-Domestic Strategy) The first strategy that we recommend is a multi-domestic strategy that will balance the informed knowledge of AB’s home organizational culture with that of China’s culture. This approach would give each AB regional director the ability to practice discretion in response to local culture, legal-political situations, and economic environments.

This approach would likely encourage local innovation and improve the likelihood of success for AB in China. Using the well structured management styles used by AB in the U. S. would allow them to closely look at the problems with management in breweries in China and collaborate with both teams to develop long term development and training techniques. Following a multi-domestic approach would lead to a competitive advantage in the production and efficiency of brewing plants and over time would dominate the market as competitors would not be able to meet the quality control and production standards that AB is capable to meeting.

A strategic plan for the production plants would include the following: •Training guidelines for new hires •Ongoing training for current employees •Quality control measures and training for a designated team of quality control specialists. •Ongoing collaborating with plant staff and home country management. •Allowing Regional Managers to tailor their product in response to local preferences This strategy would also allow local breweries to tailor their products in a way that satisfies the local consumers.

Therefore, the multi-domestic strategy would show that AB is a locally responsive company and Chinese consumers may look favorably on that. However, such a strategy would reduce AB’s ability to obtain high economies of scale because each production facility would possess their own types of overhead and variables cost inputs in order to achieve local responsiveness. Transportation logistics is another issue that AB is faced with in the Chinese market. According to the text, many issues related to keeping costs low and customers happy are closely related to the transportation and logistics problem faced by many Chinese brewers.

Customers expect beer that is fresh and with such a short shelf life, beer must be transferred immediately from the production plant to the distributor and finally the consumer. Following a multi-domestic approach would allow for AB to use similar tactics found in the U. S. , where the brewery simply eliminates the middleman and sells the beer to company-owned retail stores. This would involve a moderate investment, but would greatly decrease the amount of issues that other Chinese breweries are currently faced with. The strategic plan for dealing with transportation logistics under the multi-domestic strategy follows:

Use local transportation methods to deliver the beer in the quickest, most efficient way possible. It is likely that Chinese transportation companies already have established trade routes that would take time for AB to formulate on its own. Therefore, it makes sense to use local delivery methods such as trucks, trains, and even camelback to ensure quick delivery of their product. In conclusion, the multi-domestic strategy offers a great way for AB to obtain local responsiveness but fails to achieve the economies of scale needed to keep costs and prices low.

Therefore, the next strategy will better address the issue of lowering costs and prices. (Global Strategy) Since beer is a very price sensitive product in China it may be advantageous for AB to follow a global strategy rather than a multi-domestic one. A global strategy would allow AB headquarters to have ultimate control over the operations in China and would increase economies of scale because AB would not need to tailor their already established brewing operations to the new Chinese market. Our research suggests that Chinese beer consumers were more concerned with the price of the beverage rather than the quality or cultural authenticity.

If this holds true, then a global strategy would be a successful strategy because it would keep the cost per unit low and allow AB to sell their product at a very competitive price. The details of the global strategy would include the following: •AB Main headquarters would handle all support activities including marketing, accounting, human resources, etc. •AB breweries in China would operate to the strict standards outlined by the main hub. This would alleviate some of the quality problems that other Chinese breweries deal with. AB would acquire already established local breweries through Wholly Foreign-Owned Enterprise (WFOE) takeovers rather than Joint Ventures. By doing this, AB would maintain control of important operating decisions. • Maintain standard operating procedures throughout the company pertaining to machinery, brewing, bottling, packaging, and end-product presentation. By following these standards AB will be able to obtain great economies of scale which will keep their per-unit costs low and allow them to competitively price their product.

In regards to transportation logistics, AB would implement the following strategy: Place company-owned retail stores in strategic positions around the plant and use company vehicles and company staff to deliver the beer. This would effectively allow for the cost of the beer to remain low and allow for Anheuser Busch to strategically position price for economy beer to gain the needed market share from competitors. Placing the stores just outside of congested areas will ensure that customers can access the retail stores easily and that the products will be fresh and well stocked.

The global strategy effectively addresses the issue of unit cost and allows AB to price their product low. However, it fails to consider local responsiveness and consumer preference. Therefore, this global strategy has limitations as well. Consequently, a strategy that addresses both economies of scale and local responsiveness should be considered and to that we now turn. (Transnational Strategy) In order for AB to succeed in the Chinese market they will need to achieve two things: keep their prices low through economies of scale and respond to local preferences.

The best way for AB to achieve these two objectives is through a transnational strategy. The transnational strategy is best suited for companies that face huge pressure for price reductions as well a local responsiveness pressures. Our analysis has shown that AB faces these specific obstacles as they consider building operations in China. A transnational strategy will allow AB to not only exploit location economies, leverage their core competencies effectively and achieve economies of scale, but also deal directly with the pressures for local responsiveness.

In order for this strategy to be successful AB will need to practice what is known as “global learning” which will help AB develop worldwide operation skills, thus building on their core competencies. By applying global learning to their operations AB will be able to standardize many of their operations which will maximize efficiency and keep their costs low without sacrificing local responsiveness. This is achieved by tailoring the operations only to the extent that international consumers will notice.

For example, AB would place region-specific labels on their bottles in order to satisfy the local consumers but would standardize the brewery process and bottling machinery across regions. Transportation logistics would be performed as follows: Similar to the multi-domestic strategy, AB would still use whatever transportation method necessary to deliver their beer quickly and efficiently. However, transportation efficiency could often times involve using AB trucks and personnel to adequately deliver the product to consumers.

Ultimately, the transnational strategy would mix the best elements of the multi-domestic strategy and the global strategy. However, achieving this type of “best of both worlds” strategy is very difficult and requires a massive amount of global learning and balance between local responsiveness and standardization. AB will need to clearly identify which operations they will standardize and which ones they will hand over to the local managers. VII. Recommendations After considering the three strategies presented in this analysis we suggest that the transnational strategy be adopted by AB.

This strategy best deals with the strategic issue at hand by keeping prices low through standardization and economies of scale as well as giving local consumers the differentiated product they desire. VIII. Conclusion Anheuser-Busch has made a large commitment to the Chinese market. Many foreign brewers have failed to correctly navigate the tough Chinese market and become profitable. This analysis identified AB’s strategic issue, analyzed the market and conducted a SWOT analysis and presented alternative strategies that relate to the strategic issue.

Finally we discussed our recommendation for moving forward and overcoming the strategic issue. Appendix I Anheuser Busch Financial Ratios Financial Strength Financial Leverage Retained Earnings Growth Profits and Revenue Growth Profitability and Productivity Growth Financial Strength Year20002001200220032004E Cash Ratio0. 180. 090. 260. 380. 25 Quick Ratio0. 260. 300. 460. 550. 21 Current Ratio0. 650. 651. 021. 141. 07 Financial Leverage Year20002001200220032004E Debt to Asset0. 600. 810. 650. 600. 41 Debt to Equity1. 474. 221. 821. 501. 47

Times Interest Earned6. 824. 584. 293. 786. 40 Retained Earnings Growth Year20002001200220032004E Retained Earnings 334340462577722 Profit and Revenue Growth Year20002001200220032004E Net Sales586845114714131867 Gross Profit282389503622823 Operating Profit116151210189301 Profitability Year20002001200220032004E GP%48. 12%46. 04%43. 85%44. 02%44. 08% ROA16. 89%13. 96%14. 04%9. 84%13. 60% ROE25. 45%23. 53%13. 75%10. 99%15. 31% Productivity Year20002001200220032004E ROS14. 51%9. 47%9. 68%8. 07%9. 69% Fixed Asset Turnover1. 100. 720. 830. 871. 02

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