Anadolu Efes Case Optimization of Location, Distribution and Capacity Expansion Decisions

Company Background Anadolu Efes Leading beer producer and distributor in Turkey Emerging international presence in Eastern Europe and Central Asia operates 9 breweries and 4 malteries in 5 countries annual beer production capacity: 1.4 billion liters sells its products in over 30 countries domestic market - 77% of total sales volume

Organization Anadolu Holding Anadolu Efes (Beverage Group) Production Group: Brewery and Malteries Soft Drinks: Coca-Cola Efes is the largest business unit of Anadolu Holding, named after the Turkish peninsula Anatolia. The principal activities of Efes Beverage Group are in the production and distribution of malt and beer The group also conducts Coca-Cola operations in Turkey and 5 CIS countries (The marketing and distribution company of the group is responsible for the direct distribution of Efes Pilsen, Efes Light, Efes Dark, Efes Extra, Everest, Miller and Beck’s products in six main regions of Turkey, and works through distributors in 300 districts.) (Efes has seen outstanding consumer response in Russia, Eastern Europe, the Caucasus and Central Asia. The company has been active in these markets via its subsidiary Efes Breweries International after the construction of breweries in the Romanian city of Ploiesti and Moscow, and the acquisition of breweries in Kazakhstan and Ukraine in late 1990s. The sales volume of Efes Breweries International almost tripled in 2000, during which the Moscow brewery became fully operational ) International Operations: Efes Breweries International Sales and Distribution: Efes Marketing

Efes’ Domestic Beer Market Share In 2000, Efes’ share in the Turkish beer market reached a record high of 78%

Domestic Beer Market Market Size Potential for market growth Per capita beer consumption in Turkey increased by more than 50% from 1995 to 2000 Annual population growth of 1-2% over the years increases the adult population each year Market Size 730 million liters sales and around $294 million sales value in 2001 Turkey ranks as the tenth largest beer-consuming nation in Europe Surveys indicate that around 48% of the adult population in Turkey consumes alcoholic beverages 2000, per capita consumption 16.8 liters (global average: 22.7) Population 65 million 50% of the current population is below age 25.

Who drinks the most beer? Beer Trivia Who drinks the most beer? Annual Beer Consumption USA 23.00 billion liters China 20.73 Germany 10.46 Brazil 7.88 Japan 7.15

Who drinks the most beer? Beer Trivia Czech Republic has the largest per capita beer consumption in the world: 156 liters Global average is around 25 liters Who drinks the most beer? Per Capita Beer Consumption

Global Beer Market Market Size World beer consumption was around 126 billion liters in 2000 USA and China account for 36% of the global beer market; emerging markets make up 45% Growth Opportunities Consumption in emerging markets has been growing Major US and Europe based brewers have been focusing on Eastern Europe, China and the CIS countries Markets in Western Europe and North America are saturated Emerging markets: Africa, Asia, Eastern Europe, Middle East and Latin America (due to growth in young population and changing cultures) (US per capita consumption : 84 ltr, Adult population: over 14 or 15) Focus on East Europe: For example, Carlsberg has become more active in Eastern European markets and Turkey recently. Heineken has significant stakes in a number of Eastern European brewers but not with the Turkish companies.

Efes’ Strategic Goals Business diversification and international presence Maintain domestic market share Concerns: Increasing competition due to new entries into the domestic beer market Anticipated increases in beer demand that will surpass the available beer production capacity

Plans Optimize malt and beer distribution network to provide leverage against increasing competition Open new breweries and possibly expand the capacity over the next several years to supply for increased demand

Analysis Improve the current distribution system Analyze Efes’distribution strategy and develop a malt and beer shipment plan that minimizes total transportation costs Determine when and where Efes should build new breweries and possibly expand their capacities Optimize distribution, location, and capacity expansion decisions over the next three years.

Beer Trivia 1,000 years 2,000 years 7,000 years 20,000 years How long have we been drinking beer? 1,000 years 2,000 years 7,000 years 20,000 years

How long have we been drinking beer? The earliest recorded beer recipe was found in clay tablets written 7,000 years ago. Beer originated in Mesopotamia and then found its way to Anatolia. Four thousand years ago in Anatolia, Hittites, were drinking beer in daily life as well as in sacred rituals.

+ + H2O + = yeast Beer Production Hops Barley Malt Beer is the product of fermentation of the carbohydrates in cereals, such as maize, rice, millet, oats, rye, wheat and most commonly barley. The main ingredients of beer are malt, water and hops. Malt, the processed grain that has begun germination by being soaked in water, provides beer its body and color. Hops is used in small amounts to prevent the brew from going sour, but also brings a characteristic bitter flavor and a pleasant aroma. Water constitutes as much as 95 percent of the ingredients used in the brewing process. The mineral content in water influences the quality and the flavor of the beer. The main ingredients of beer: Malt provides beer its body and color. Water 95 % of beer, mineral content influences quality and flavor Hops used in small amounts prevents the brew from going sour brings a characteristic bitter flavor and a pleasant aroma + H2O + yeast =

Beer Production Process malting barley Mashing Boiling Fermentation Aging brewing distilling Brewing of beer is essentially a four-stage process. The first stage requires mixing malt, sugar, hops and water into wort by means of a “cooking” procedure that involves mashing and boiling in large copper kettles. In the second stage of brewing, wort is chilled and transferred into a fermentation tank. Yeast is added in the third stage, through which fermentation takes place in three to ten days. In the final stage, flat beer is stored for slow fermentation and aging for a few weeks to several months, depending on the type of beer being produced, after which it is carbonated and bottled. bottling

Production and Distribution System

Distribution System - Current Brewery Supply / Capacity Beer Demand Malt Supply / Capacity Current Malt Transportation Current Beer Transportation Istanbul 103 103 Afyon Izmir 24 / 30 Istanbul 49 74 25 50 Antalya 24 50 Konya 202/ 220 2 2 / 68 Bursa Ankara 60 60 20 Import 102 Kayseri 20 / 20 200 / 200 102 13 Export 13

Current Distribution System The current shipment plan enforces certain restrictions due to established relations between brewery-distributor pairs: Ankara brewery supplies all the beer demand of Bursa distributor Istanbul brewery supplies all the beer demand of Antalya distributor Total shipment costs can be reduced by optimizing the shipment plan

Analysis Optimize the distribution system by formulating and solving a linear programming model, 1) with existing relationship limitations, 2) by relaxing these limitations, and summarize the resulting savings in costs.

Analysis - continued Discuss the sensitivity of the model solution to changes in model parameters For example: 1) analyze how much reduction in transportation costs would justify keeping the existing brewery-distributor relations. 2) discuss other input parameter changes that would make certain shipment choices in the current distribution plan, i.e. malt import, cost-effective. 3) discuss sensitivity to demand changes

Capacity Expansion Decisions Multi-period strategic planning problem Total beer production capacity can be increased by opening a new brewery at one of the identified potential three sites, and by expanding the capacity of the newly established brewery, if necessary, over the next three years.

Analysis Optimize Objective: new brewery location and capacity expansion decisions malt and beer distribution decisions over the next three years Objective: Minimize the present value of the malt and beer transportation costs over a 20-year horizon and the present value of the capacity expansion costs such that all of the beer demand at the distribution centers is satisfied in each year.