1. ANALYSIS OF CORPORATE STRATEGY China Resources Enterprise

2. Content Problem SWOT Analysis –Overview Business Level Strategy - Focused geographical - Differentiation - Related- link Acquisition- based Strategy Recommendation

3. Problem Recently restructured companies assets Low margins  CRE operating margin: 1.5% (2009 FY)  Sector average: 3.1% Desire from investors for higher profit margin Acquisitions currently a very important part of CRE’s strategy

4. 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?

5. CRE Limited, SWOT Overview StrengthWeakness Market leadership better equips the company to effectively participate in the vibrant Chinese markets Store productivity significantly lower than the competitors Inorganic expansion to further establish a dominant market position Lower margins Integrated business model

6. OpportunityThreat China’s twelfth 5-year PlanRising minimum wages will increase operational costs Robust Chinese economy

7. Business-level strategy Focused differentiation with related linked strategy

8. Source: CRE 2010 Annual Report Business-level strategy

9. 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

10. Business-level strategy Differentiation strategy in each business unit

11. “ Snow” Advertisement http://www.snowbeer.com.cn/

12. Beer Analysis

13. 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

14. 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

15. -Brand Promoton Campaign : “The Great Expedition” ( 勇闖天涯 ) more customer interaction attracted many customers due to its story (not actual taste)

16. SWOT –Weakness - Thin profit margin (Chinese: price-sensitive) [$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]

17. 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

18. SWOT –Threat - cost of production: raw materials, rent, utilities - increasing M&A cost

19. Five Forces  Rivalry with existing competitors  “ Tsingtao”: great brand recognition, 15% of domestic market share “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

20. Retail Analysis Regional leadership on a multi-format business platform

21. Retail Analysis

22. Strength - 2 nd largest retail organization in China in Retail Asia Pacific top 500 awards Weakness - Lower average sales per store compare to competitors Opportunity - Increasing urbanization of China has expanded the consumption market Threat - Keen competition from Carrefour, Tesco, Wal-Mart

23. 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

24. 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

25. C’estbon Pacific Coffee Beverage Analysis

27. Strength - Largest packaged water brand in Guangdong Weakness - Insufficient production capacity for launching new products Opportunity - Fast-growing coffee market - Emphasis on healthy diet Threat - High development Cost - Keen competition

28. Beverage Analysis Five Forces  Rivalry with existing competitors “C’estbon”: Master Kong, Wahaha, Nongfu & Coca-Cola Pacific Coffee: Starbucks and Gourmet Master (Taiwan brand)

29. Beverage Analysis  Potential Entrants China beverage industry is attractive to the potential entrants Source: Canadean

30. 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

31. Food and Processing Distribution Analysis

32. 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)

33. 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

34. Bargaining power of suppliers: Low - Many product sources

35. 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

36. 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

37. 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 monopolyHong Kong Pork Traders Call For End In Monopoly Imports

38. Business-level strategy Related linked: SBU Form of Multidivisional Structure - share some resource: distribution channels in different business units

39. 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

40. Beverage and retail Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE - sharing of marketing resources

41. Beer Strategy to be No.1 - encircling the cities from rural areas - moving up-market - promotion and branding strategy

42. Acquisition-Based Strategy Value Creating Drivers Pursuit of Market Power Learn and Develop New Capabilities

43. Source: DataMonitor

44. Acquisitions in 2010 Acquisition of the Jialinshan project marked the Group’s expansion into the mineral water sector. Acquired 80% interest in Pacific Coffee (Holdings) Limited from Chevalier Pacific Holdings Limited. Ng Fung Hong won the bid to acquire a 60% stake in Jiaxing Food & Meat Co., Ltd.

45. Pursuit of Market Power CRE has potential to further increase market power as a result of their related linked strategy Proper execution will allow CRE to reduce the costs of its primary and support activities CRE can further employ vertical integration via vertical acquisitions

46. Pursuit of Market Power Vertical Integration  Food, beer and beverage divisions provide inputs for CRE’s retail business segment CRE can increase their market power using an integrated model  R&D, processing & distributing, storage, wholesaling, retailing Limitations of vertical integration  Outside supplier may produce the input at a lower cost  Changes in consumer demands create capacity imbalance and coordination problems

47. Pursuit of Market Power Horizontal Acquisitions  CRE can integrate its own assets that complement their core competency  Key driver to top-line growth and market share  Ex. Strengthening retail position by acquiring supermarkets Expand geographical coverage in the northern and central areas of mainland China  Help CRE further establish its network of primary activities  Ex. CRE recent push to acquire breweries in these locations

48. Learn and Develop New Capabilities Goal: Develop and exploit economies of scope between CRE’s businesses Broaden knowledge base and leverage CRE’s core competences Create value by pursuing Operational and corporate related acquisitions

49. 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

50. 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

51. 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

52. 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

53. Risks of Acquisition Based Strategy Integration Challenges  Financial systems  Control systems  Building effective working relationships

54. Risks of Acquisition Based Strategy Inability to achieve synergy  Ideally want acquisitions to create economies of scope and share resources to benefit the company  Must focus on rational evaluation of private synergies  Business is worth more managed by CRE than by itself  Transaction costs  Due diligence fees (lawyers, investment banks, accountants, etc)  Managerial time to evaluate target firms, complete transaction  Transaction costs < expected synergies

55. Risks of Acquisition Based Strategy Too much diversification  CRE could begin to rely on acquisition activities to replace innovation  Managers may focus solely on financial performance of a business segment rather than strategic controls to evaluate business performance CRE may be getting to big  Managers may implement more bureaucratic control to manage combined firm’s operations  Hinders innovation

56. Risks of Acquisition Based Strategy Managers overly focused on acquisitions  Large managerial cost associated with acquisitions  Searching for viable acquisitions  Completing due diligence process  Preparing for negotiations  Managing the integration process  Diverts attention from other matters that are necessary for long-term competitive success, such as identifying ways to drive cost-efficiencies

57. Recommendation Beer Raise avg. selling prices in certain strong regions to cover the increase in beer production materials - divest non-core beer brands - increase product mix - fine tune selling prices in certain regions - lift sales volume of premium beer

58. Retail locating supermarkets in self-owned or partially- owned property development projects

59. Recommendation Beverage Develop healthy drinks  More people aware of healthy life style  Healthy drinks can be charged a higher premium Source: China Food and Drink Report

60. 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