Anheuser-Busch (AB) is making another effort to gain market share in China, a market that has proven challenging for many global brewing corporations over the past decade. Foreign companies have struggled to achieve success in China, and our group has studied the mistakes made by these brewers to identify the best strategic plan to recommend to AB’s CEO.
Our strategic plan aims to help AB expand its market share in all four regions of China. We have identified the main challenge as gaining market share in a country that prioritizes cost and cultural preferences. Currently, the top five companies in the industry only account for 38% of the market. AB has acquired a 10% minority stake in the leading firm, Tsingtao. Furthermore, AB’s recent acquisition of Harbin Brewery indicates their belief in the opportune moment to acquire key players and further tap into 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 AB adopt the transnational strategy. The transnational strategy effectively addresses the challenge of maintaining low prices through increased economies of scale and the need for local responsiveness.
II. Introduction Anheuser-Busch (AB) is encountering various challenging factors in the Chinese beer market. In this case analysis, we will identify AB’s strategic issue and conduct a SWOT analysis while analyzing the financial statements.
Following the analysis, alternative strategies related to the strategic issue will be presented. Additionally, recommendations for moving forward and overcoming the strategic issue will be discussed.
III. The strategic issue challenging Anheuser Busch AB’s is the need to increase overall market share in China. However, increasing overall market share in China is not an easy task. Chinese consumers prioritize affordability and also expect a certain level of localization from foreign companies like AB. To have a fighting chance at gaining market share, AB must address various obstacles.
These obstacles are discussed and solutions are outlined in the Strategic Objectives/Goals section. IV. An examination of China’s strategic objectives/goals reveals that China has a significant market potential. With over 926 million people in its four main regions, China has the largest growth and beer volume potential compared to any other country. Moreover, the urbanization trend in China is leading to an increase in the urbanized population, which aligns with the target population for beer consumption and is accompanied by rising average incomes.
By targeting this specific segment of the market with AB’s products, AB will gradually gain a significant portion of the market share. As the average income in China increases, more Chinese individuals will be inclined to socialize at bars and opt for standard and premium beer instead of consuming low-cost beer at home. Additionally, low-end consumers will experience wage increases due to the economic multiplier effect. Consequently, these Chinese citizens, who were previously unable to afford more than one or two beers at a time, will now have the financial means to purchase larger quantities in a single transaction. There are numerous challenges involved in foreign companies entering the Chinese market.
Understanding political and legal challenges presents a significant obstacle for foreigners. To thrive in this setting, AB must show respect for all levels of authority and obtain the coveted “red stamp”. Possession of the “red stamp” grants control over all organizational actions. In order to fully harness opportunities for market expansion, AB must have authority over the “red stamp”. Additionally, numerous organizations overlooked the option of selecting Wholly Foreign-Owned Enterprises (WFOE) instead of joint ventures. Opting for WFOEs allows companies to retain control over technology, culture, intangible assets, while also reducing the risk of intellectual property theft lawsuits.
WFOE’s also enables increased control over the hiring process to navigate the terrain. AB should avoid joint ventures and maintain control over tangible and intangible assets. AB should initiate the acquisition or takeover of renowned local brewers in each region and preserve their local brand names. By incorporating these local brewers, AB can create more efficient regional breweries through acquisitions and takeovers in China. Consolidating these local brewers into a strategically located facility will enhance AB’s ability to conduct cost and logistical analyses.
AB can achieve economies of scale, reduce prices, and attain a larger market share by controlling costs and logistics. In addition, it is important for AB to increase customer awareness of their products. This can be accomplished through various marketing tools such as television commercials, billboards, and radio ads in China. It is crucial for AB to target the Chinese market as most citizens currently prefer local beers due to their high customer awareness and availability. By effectively increasing customer awareness, AB will experience significant growth in market share.
AB is a major player in the global brewing industry, with high sales and market share. Appendix I provides details on AB’s financial ratios, demonstrating its financial well-being and growth potential. A key strength of AB is its significant free cash flow, which will enable the company to acquire local Chinese breweries, an important aspect of its strategic plan. Moreover, AB has already established a strong presence in the Chinese market through its acquisition of Harbin Breweries.
AB’s acquisition has enabled them to enter the Chinese market with an established customer base, providing strategic advantages for success. However, being a US company may pose challenges in gaining acceptance from Chinese consumers. This is a weakness beyond AB’s control as consumer attitudes are difficult to change. To mitigate this, AB could acquire a WFOE and operate as a Chinese company, thus disguising their origin. Entering the Chinese market presents a major opportunity due to its immense size and the high demand for alcohol, providing potential for economies of scale. However, other alcohol distributors have also recognized this opportunity, emphasizing the need for swift exploitation before the market becomes more saturated with new entrants.
The time constraint created by AB for the opportunity is the acquisition of struggling Chinese local breweries. By purchasing these breweries, AB can strengthen their position, leveraging their success with the acquisition of Harbin. However, operating in China carries political risks due to government intervention, posing a significant threat to companies like AB.
Besides political risk, there is also the concern that local Chinese breweries, with their established customer base, may pose a threat to AB’s market share. The recommended strategy to address this issue is a multi-domestic strategy that combines AB’s organizational culture with China’s culture. This approach would empower each regional director at AB to adapt to the local culture, legal-political circumstances, and economic conditions.
This approach is likely to promote local innovation and enhance the success prospects of AB in China. By leveraging the well-structured management styles employed by AB in the U.S., they can effectively address management issues in Chinese breweries and foster collaboration between the two teams to create sustainable development and training strategies. Adopting a multi-domestic approach would provide a competitive edge in brewery production and efficiency, eventually allowing AB to dominate the market as competitors would struggle to meet AB’s quality control and production standards.
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 collaboration with plant staff and home country management, and allowing Regional Managers to tailor their product in response to local preferences. This strategy would also enable local breweries to customize their products to meet the preferences of local consumers.
Therefore, the multi-domestic strategy would demonstrate AB as a company that is responsive to local needs, which may be viewed positively by Chinese consumers. However, implementing this strategy would limit AB’s ability to achieve economies of scale as each production facility would have its own overhead and variable cost inputs to cater to local demands. Additionally, AB faces challenges in transportation logistics in the Chinese market. According to the text, the issues of cost reduction and customer satisfaction are closely tied to the transportation and logistics problem encountered by many Chinese brewers.
Customers expect beer that is fresh and must be transferred immediately from the production plant to the distributor and finally the consumer. AB could adopt a multi-domestic approach similar to tactics used in the U.S., where the brewery sells the beer directly to company-owned retail stores, eliminating the middleman. This would require a moderate investment but would significantly reduce the problems faced by other Chinese breweries. The strategic plan for transportation logistics under the multi-domestic strategy is as follows:
Utilize local transportation methods to expedite the delivery of beer in the most efficient manner. It is probable that transportation companies in China have pre-existing trade routes that would require AB a significant amount of time to establish independently. Hence, employing local delivery approaches such as trucks, trains, and even camelback would be logically sound to guarantee swift distribution of their merchandise. Ultimately, the multi-domestic strategy presents an excellent opportunity for AB to acquire local adaptability, yet falls short in attaining the necessary economies of scale to maintain affordable costs and prices.
Therefore, the next strategy that would better address the issue of lowering costs and prices is a global strategy. Since beer is a highly price sensitive product in China, it may be more advantageous for AB to follow a global strategy rather than a multi-domestic one. This global strategy would give AB headquarters ultimate control over operations in China and would result in increased economies of scale as AB would not need to customize their already established brewing operations to the new Chinese market. Research indicates that Chinese beer consumers prioritize the price of the beverage over its quality or cultural authenticity.
If this is true, then implementing a global strategy would be advantageous for AB. A global strategy would ensure low unit costs and enable AB to sell their product at a highly competitive price. The specific details of the global strategy would involve the following:
- The main headquarters of AB would be responsible for managing all support activities, including marketing, accounting, and human resources.
- AB’s breweries in China would adhere to the rigorous standards set by the main hub. This approach would address some of the quality issues faced by other Chinese breweries.
- To maintain control over critical operational decisions, AB would acquire established local breweries through Wholly Foreign-Owned Enterprise (WFOE) takeovers instead of Joint Ventures.
- AB would establish and uphold standardized operating procedures across the company, encompassing machinery, brewing, bottling, packaging, and presentation of the end-product. This adherence to uniform standards would enable AB to achieve economies of scale and keep per-unit costs low, ultimately allowing them to compete effectively in terms of pricing.
AB’s transportation logistics strategy involves positioning company-owned retail stores strategically near the plant and using company vehicles and staff for beer delivery. This method ensures a low cost for the beer and enables Anheuser Busch to strategically set prices for economy beer, thereby capturing market share from competitors. By placing the stores just outside congested areas, customers can easily access the retail stores, ensuring fresh and well-stocked products.
The global strategy effectively tackles unit cost and enables AB to offer low-priced products. However, it does not take into account local responsiveness and consumer preference. Therefore, this global strategy has its limitations. Consequently, a strategy that incorporates both economies of scale and local responsiveness should be considered, which leads us to the transnational strategy. In order to succeed in the Chinese market, AB must accomplish two objectives: maintain low prices through economies of scale and cater to local preferences.
The most effective approach for AB to achieve both objectives is by implementing a transnational strategy. This strategy is particularly suitable for companies facing significant pressure to reduce prices and address local responsiveness concerns. Our analysis indicates that AB encounters these specific challenges as they explore opportunities to establish operations in China. By adopting a transnational strategy, AB can benefit from location economies, efficiently leverage their core competencies, consolidate economies of scale, and directly address the pressures associated with local responsiveness.
The success of this strategy relies on AB adopting “global learning”, which will enhance their global operational abilities and strengthen their core competencies. By implementing global learning in their operations, AB can standardize many processes to increase efficiency and minimize costs while still meeting the needs of local markets. The operations will be tailored to the extent that international consumers will perceive it.
For instance, AB would apply region-specific labels on their bottles to meet the preferences of local consumers while maintaining standardized brewery process and bottling machinery across regions. Transportation logistics would be carried out as follows: Similar to the multi-domestic strategy, AB would utilize any transportation method required to promptly and effectively deliver their beer. Nonetheless, transportation efficiency might frequently involve utilizing AB trucks and personnel to properly deliver the product to consumers.
Ultimately, the transnational strategy combines the strengths of the multi-domestic strategy and the global strategy. However, implementing this strategy is challenging and requires extensive global learning and balancing between local responsiveness and standardization. AB should determine which operations to standardize and which to delegate to local managers. In conclusion, we recommend that AB adopts the transnational strategy.
This strategy addresses the strategic issue by maintaining low prices through standardization and economies of scale, while also providing local consumers with the differentiated product they want. VIII. Conclusion Anheuser-Busch has demonstrated a considerable commitment to the Chinese market. Several foreign breweries have struggled to navigate this challenging market and achieve profitability. This analysis has identified AB’s strategic issue, examined the market, conducted a SWOT analysis, and proposed alternative strategies that address 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 Earned: 6.82, 4.58, 4.29, 3.78, 6.40
Retained Earnings Growth Year 2000-2004E: Retained Earnings – 334, 340, 462, 577, 722
Profit and Revenue Growth Year 2000-2004E: Net Sales – 5868, 4511, 4714, 1318, 6758
Gross Profit – 2823, 8950, 3622, 2823
Operating Profit – 1161, 5121, 2101, 8930
Profitability Year 2000-2004E: Gross Profit % – 48.12%, 46.04%, 43.85%, 44.02%, 44.08%
Return on Assets (ROA) – 16.89%, 13.96%, 14.04%, 9.84%, 13.60%
Return on Equity (ROE) – 25.45%, 23.53%, 13.75%, 10.99%, 15.31%
Productivity Year 2000-2004E: ROS -14.51%,9.47%,9.68%,8.07%,9.69%
Fixed Asset Turnover -1.10,0.72,0.83,0.87,1.02
