Tsingtao Brewery Co Ltd in Alcoholic Drinks (China)

Company Background and Facts As one of the leaders of the beer industry in China, Tsingtao Brewery faces various challenges and difficulties. In order to retain its position in the industry, the company will expand and consolidate its share by adopting a dual-drive development strategy. On the one hand, the company will further tap the advantage of Tsingtao beer in the country and enhance its premium positioning. On the other hand, the company will strengthen sports marketing to boost the volume sales of Tsingtao beer. By 2014, the company aims to increase its production volumes of beer to 10 billion litres per year. KEY FACTS Summary 1 Tsingtao Brewery Co Ltd: Operational Indicators 31 December Net sales Net profit Number of employees 2010 RMB19,897 million RMB1,584 million 35,306 2011 RMB23,158 million RMB2,455 million 37,743 2012 RMB25,782 million RMB2,484 million 40,429

Tsingtao Brewery is solely focused on beer production and sales, which is a major source of the companys revenue. This company also runs an investment subsidiary, mainly concentrating on real estate, although this is not its core business. In addition to its core brand Tsingtao, the company also markets secondary brands, such as Laoshan and Hans, targeting regional markets. Tsingtao Brewery had 59 beer breweries across 20 provinces and cities in China by the end of 2012. The company does not only supply the domestic beer category, but also exports to over 80 territories including the US, Canada, the UK, Germany, Italy, Australia, Korea, Japan, Hong Kong and Macau. In addition to its own 59 production bases in China, Tsingtao beer is also produced by several local manufacturers under contract with Tsingtao Brewery, including those located in Shandong, Jiangsu, Sichuan provinces and Taiwan. In terms of its overseas operations, Tsingtao Brewery runs a production base in Thailand. Tsingtao Brewery ranked second in Chinas beer industry, with a total volume share of 16% in 2012. In value terms, the companys share increased dramatically mainly benefiting from its expanded sales network in China and even internationally. Its investment in targeted advertising also played a crucial role, which effectively enhanced its brand awareness and strengthened the position of Tsingtao as a top beer brand in China.

Analysis of the Beer industry in Singapore

HEADLINES Beer posts total volume growth of 6% to reach 115 million litres in 2012 An influx of brands caters to the ever-changing preferences of consumers Unit prices increase by 3% in 2012 Asia Pacific Breweries remains the leader with a total volume share of 53% in 2012 Beer is expected to post a total volume CAGR of 3% over the forecast period 20122017

TRENDS Beer posted total volume growth of 6% to reach 115 million litres in 2012. Consumers in Singapore are increasingly involved in social events where drinking is a part of interaction within a group. Singaporeans are not only consuming alcoholic drinks in clubs and pubs, they are also purchasing alcoholic drinks to consume at home. There is a growing trend of consumers drinking beer in the afternoon when having meals. Beer is seen as the most common alcoholic drink for consumers and it can easily be found in restaurants and cafs. With the increasing demand for beer, there has been an influx of many brands to cater to the ever-changing preferences of consumers. Lager represented the majority of beer, with a volume of 106 million litres in 2012, and total volume grew by 6% in 2012. Premium lager witnessed the highest volume growth among beer in 2012 at 12%. Premium lager grew significantly as consumers in Singapore were more willing to spend on more premium beer as well as trying the various brands available. Imported premium lager drove premium lager in Singapore, with total volume growth of 14% in 2012. The second highest growth within lager was posted by economy lager, with total volume growth of 9% in 2012. Economy lager brands, such as Skol and Leo, gained in popularity in Singapore over the review period. Increasing product availability across channels and the rising number of blue collar foreign workers present in Singapore accounted for the majority of economy lager sales in Singapore. Economy lager is at a lower price range, which is affordable for this group of consumers. Many consumers also opt for economy lager as they are increasingly more price conscious when purchasing lager for consumption at home. The unit prices of beer witnessed an increase in 2012. This was mainly due to consumers shifting their preferences to more premium beer, including craft beer, and the switch was evident across off-trade and on-trade channels.

Beer is consumed by customers of various ages. Younger consumers are shifting their preferences to beer as it is often the first drink for young alcoholic drinks consumers. In addition, social drinking has become a part of how consumers interact with each other. Glass bottles and cans are the main packaging for beers as these help to maintain the quality of beer. In on-trade channels the glass bottles are collected by manufacturers to be re-used. In addition, keg packaging is commonly found in bars/pubs. Craft beer has been growing in popularity. As consumers in Singapore do not have high brand loyalty, they like to try innovative and new flavours of beer. Craft beers offer consumers a variety in terms of flavours. Southeast Asia and Singapore s first craft beer week was held in October 2012, which offered consumers the chance to understand more about craft beer as well as trying the various flavours offered by microbreweries in Singapore.

PRODUCTION, IMPORTS AND EXPORTS Asia Pacific Breweries is the main beer company and brews brands, such as Tiger, Heineken, Anchor, Barons Strong Brew and Guinness. Domestic lager is still the largest total volume sales contributor in Singapore due to the strong brand name of Tiger. Microbreweries are also on the rise, manufacturing their own beer, increasing the production of beer in Singapore. The majority of imported beer comes from Malaysia due to proximity. In addition, Carlsberg, which is the second largest beer company, manufactured its products in Malaysia. Imported brands from Western European countries, such as Germany, Netherlands, and Belgium are widely available.

COMPETITIVE LANDSCAPE
Asia Pacific Breweries remained the leader in beer with a total volume share of 53% in 2012. This is mainly due to the wide range of popular beer brands within its brand portfolio, such as Tiger, Heineken, Guinness, Barons Strong Brew and Anchor.Extensive marketing campaigns were undertaken to promote Tiger beer, which is the companys leading brand. Digital media was used widely as a means to promote events. Asia Pacific Breweries has come up with campaigns using digital media, such as the Tiger Beer Live It Up contest, which was a contest hosted in its Facebook page at the end of February 2012 and invited people to a party at the end of March 2012. Asia Pacific Breweries launched new campaigns during festive seasons, such as the Lunar New Year and Christmas, when a large amount of sales take place.

Carlsberg was ranked second with a volume share of 24% in 2012. Carlsberg ran its advertising campaigns in social media, print advertisements, bus advertisements and TV advertisements during festive seasons to attract consumer attention. Craft beer has been growing in popularity among consumers in Singapore. Despite its small volume sales, craft beer companies used on-trade channels, such as bars and restaurants, to promote their beer and receive feedback. In this way, craft beer companies were able to improve and manufacture more special flavours for consumers. Premium beers are commonly purchased in restaurants and bars, while standard beers are commonly consumed in both on-trade and off-trade channels. On the other hand, economy beers are usually found in supermarkets and hypermarkets, where consumers are able to purchase beer at lower prices.

PROSPECTS
Beer is expected to post a total volume CAGR of 3% over the forecast period. Demand for beer will continue to increase over the forecast period as social drinking becomes more common and frequent among consumers. On-trade channels are expected to post a CAGR of 4% in volume terms over the forecast period, which will drive sales of beer. Consumers are expected to continue to purchase from on-trade channels as they are able to select from a wide range of beers at their convenience. However, Singaporeans are also likely to purchase more in off-trade channels as they hold more parties and social events at home, which is increasingly gaining popularity among consumers in Singapore, leading to a CAGR of 3% over the forecast period in volume terms. Premium lager is expected to post the highest CAGR of 6% over the forecast period as consumers become more willing to spend on premium beer, which is considered a status symbol. Imported premium lager is likely to drive volume sales of premium lager, with a total volume CAGR of 10% over the forecast period. As demand for beer increases among consumers and their brand loyalty is low, retailers are importing more premium lagers so as to offer consumers a wide selection. Potential threats include possible increases in the unit prices of beer due to the influx of premium brands. Strong competition will result from the increasing number of brands available which might lead to a short life for certain brands, due to intense competition. Constant unit prices are expected to decline over the forecast period. This is mainly due to the rising number of beer brands available in retail stores, which is expected to lead to price promotions by retailers to attract more consumers. Nonetheless, the decline is projected to be minimised by the growing demand for premium beer. Companies are expected to focus on advertising and promotion using social media, such as Facebook and Twitter, as these channels are the fastest way to connect to consumers.

CATEGORY BACKGROUND Lager Price Band Methodology Lager is broken down into Premium, standard and economy lager. Premium and standard lager are broken down into imported and domestic lager, whereas economy lager is broken down into imported lager. Standard lager brands can be found in most on-trade channels which include both modern and traditional on-trade channels, such as hawker centres. Premium lager brands can be found more in modern on-trade channels, such as pubs and bars. Economy lager brands are more commonly found in supermarkets and hypermarkets. The price band is based on off-trade unit prices in 2012. Summary 1 Lager by Price Band 2012 Category Premium Standard Economy CATEGORY DATA Price range per litre S$

9 and over 6 to 9 Below 6

Table 2

Sales of Beer by Category: % Total Volume Growth 2007-2012

Table 3

GBO Company Shares of Beer: % Total Volume 2008-2012

Table 4

LBN Brand Shares of Beer: % Total Volume 2009-2012

Table 5

Forecast Sales of Beer by Category: Total Volume 2012-2017

Table 6

Forecast Sales of Beer by Category: % of Total Volume 2012-2017

Industry Characteristics A very important step in assessing the attractiveness of an industry is to understand its characteristics. There are a variety of demographic, socio cultural, political/ legal, economic, technological and global factors that are affecting the beer industry. Key factors: Age pyramid from 2012-2030

Population: The population reached 5.3 million in 2012. By 2020, officials expect the population to be 5.5 million. Singapore has one of the fastest ageing societies in Asia. Median age is presently 35.8 years, 13.7 years greater than in 1980. The numbers of those over 65 will almost double by 2020. Eventually, the increasing proportion of older workers will make it more difficult to develop new, high-tech industries and for existing industries to move up the value-added chain. It will be necessary to increase the number of skilled immigrants but various other countries are pursuing the same strategy. In 2012, 79.8 % of the population was between the age of 15-65 years. Income and Expenditure

From the above we can make out that on an average Singaporeans spend nearly 29 % of their disposable income.

Based on the data above, the general characteristics of the beer industry are enumerated below: Demographics - Favourable Beer consumption shows an increasing trend Younger population consumes more beer than older generationFavourable Favourable

Socio- Cultural - Favourable Consumers prefer different segments ( Dark, Lager, Premium etc) High disposable income & lifestyle trends Favourable Favourable

Political/ Legal - Unfavourable Laws impose high taxes 18+ years to purchase beverages Unfavourable Favourable

Technological - Favourable Greater use of T.V to for advertising & product differentiation Shift to aluminium can: industry average 54 % Recycling program to re use cans Multi site expansion to reduce shipping costs Favourable Favourable Favourable Unfavourable

Economic - Favourable Commodity agricultural and packaging inputs Low beer price elasticity Favourable Favourable

Global - Unfavourable Increased Global Competition Unfavourable

Result Favourable and Attractive

Porters five forces of industry competition

Threat of Substitute Products (Moderate) Substitute Products Wine, mixed drinks, soft drinks, water Different consumption habits: Although substitute products exist for beer, they are not consumed in the same manner as beer. e.g. soft drinks & water do not contain alcohol, Wine & mixed drinks contain alcohol but cost much more than beer

Power of suppliers(Moderate) Commodity products: Virtually all the products needed are commodities such as malt, barley, water, aluminium cans which can be bought at efficient market prices. Undifferentiated inputs: Suppliers cannot differentiate themselves on the basis of inputs. Low switching costs: Brewers are able to switch easily among suppliers Highly import driven economy.

Rivalry amongst existing firms(High) Tiger, Heineken & carlsberg occupy 60 % of the market. Product differentiation: Brewers differentiate and seek an Image for their product through advertising, segmentation & packaging. High Exit barriers Slow economic growth Price elasticity of demand for beer is relatively low and negative

Power of Buyers (Moderate) Few wholesalers but large retailers Wholesalers carry many brands. Buyers purchase highly differentiated products. Each wholesaler may have exclusive rights to sell in a regional area. Wholesalers may carry only one brand. For small brewers , wholesalers may carry many brands.

Threat of New Entrants (Low) Highly saturated market High start up costs Specialized recipe: Brewers differentiate their products based on the specialized brewing process. Brand Loyalty : People may be attached to a particular brand and may be unwilling to switch to different brand. F Existing brewers have an advantage in introducing new brands through establishes network of distributors

From the Porters five forces model and the general characteristics of the beer industry, it is evident that even though Singapore market is attractive for introduction of Brand Tsingtao, setting up a manufacturing plant is not a lucrative idea. The ideal way to enter the market is through joint venture, partnership or other market entry options which will be analysed later.

Critical Success factors of the Beer industry

The three most important factors for the success of the beer industry are as follows: Brand Differentiation: The beer industry is highly competitive in Singapore. Producers must differentiate their products from others in the market. Advertising is imperative to creating an Image for each product. Tsingtao already has an image in china. Company must make efforts to bring that image and relate it to the residents in Singapore. Images may be obtained through specific product characteristics and successful advertising. Market Segmentation: Producers must have a different product to appeal to different demographics. Producers need to be able to offer products that appeal to customers having different tastes. Strategic Relationships: Producers need strong relationships with suppliers and buyers in order to ensure a quality product is delivered to the end user to ensure continued sales. Strong relationships with suppliers ensure good inputs are accessible whenever asked for. A cohesive network of buyers is needed to ensure that brands have good product availability to end users.

Market Entry Options

As per Singapore Law, to enter in to the Singapore market one need to apply for Liquor License from LLB (Liquors Licensing Board) if any company / business / society intend to sell or offer for sale intoxicating liquors by retail sale or wholesale within the country. Therefore, to apply for license one need to be a Singapore Citizen, Singapore Permanent Resident or posses a FIN issued by a ICA (Immigration and Checkpoints Authority) and he is required to register the company / business with the ACRA (Accounting and Corporate Regulatory Authority) formerly known as the Registry of Companies and Businesses (RCB). Due to above criteria, the various methods which are available to enter the market in a given country are as follows: 1) Joint Venture 2) Merger & Acquisition 3) Partnership 4) Licensing 5) Foreign Direct Investment 6) Franchise 7) Import KEY CONSIDERATIONS OF THE OPTIONS:

Joint Venture:
The company can make the market entry through Joint Venture. It is more or like setting up a company with a strategic partner in Singapore. Advantages English is the main language, which takes care of communication barrier between Singapore and China. Effective Common Wealth based legal system. Singapore is an excellent Travel Hub (globally and regionally) A local partner can help in penetrating a new product in the market People in Singapore are well educated, which can lower down the training cost. Dynamic business environment

Many joint venture companies are successfully operating in Singapore.(Fraser & Neave Ltd. and Heineken)

Disadvantages Joint Venture in Singapore might reduce managerial participation of international industry. Profit has to be shared with the local partner Singapore in the case of beer has a market of its own (Tiger Beer), therefore it is important to consider whether the huge investment costs would validate the potential market or not. Joint Venture can only be viable if Tsingtao is interested to operate in the long term.

Merger and Acquisition:

A merger or acquisition is a combination of two companies where one corporation is completely absorbed by another corporation. On 5th Nov, 2012 Asia Pacific Breweries Limited (APB) was acquired by Heineken International B.V. for $ 4.6 Billion. Advantages Improved Earnings Per Share and Profitability. For example, after acquiring APB, EPS of Heineken B.V rose. Help in expanding Business Increased market share An established market Easy to positioning the industry Lower down the cost of operation Expand Market Research

Disadvantages Lead to decrease in share price Market expectation increases Liabilities of acquired company becomes the liabilities of acquiring company

All disputes of acquisition company has to be taken care by acquiring company

Partnership:
A partnership is commonly formed where two or more people wish to come to together to form a business. Perhaps they have a common business idea that they wish to put to the test or have realised that their skills and talents compliment each others in such a way that they might make a good business team. Advantages The partners will fund the business with start up capital. More partners mean more investment, which allow better flexibility and more potential for growth. Partnership businesses are far more flexible in terms of management, as long as all the partners agree. Partners share the risk of running the business equally. Partners can split the wok according to their skill. So if one partner is good with figures, they might deal with the book keeping and accounts, while the other partner might have a flare for sales and therefore be the main sales person for the business.

Disadvantages There is a danger of disagreement between the partners while taking a vital decision. Different people are likely to have different ideas about how the business should run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those people involved. Major disadvantage of partnership business is unlimited liability. Individual decision is not encouraged. The partnership may have a limited life; it may end upon the withdrawal or death of a partner. Profit must be shared with the local partner or as per the agreement.

Licensing:
As per Singapore Law, for entering into the Singapore market one needs to apply for Liquor License from LLB (Liquors Licensing Board), if any company / business / society intend to sell or offer to sale intoxicating liquors by retail sale or wholesale within the country. Therefore, to apply for license one need to be a Singapore Citizen, Singapore Permanent Resident or

posses a FIN issued by a ICA (Immigration and Checkpoints Authority) and they required to register the company / business with the ACRA (Accounting and Corporate Regulatory Authority) formerly known as the Registry of Companies and Businesses (RCB). This gives the local manufacturer the right to use the manufacturing process, a patent design or a trademark, technical information or some facility in return for some fee or royalty. It is a method which involves little expense and avoids all distribution costs. Advantages Tsingtao can expand its business in Singapore at low investment cost with the help of licensing It carries low financial risk to the licensor Not much formalities need to be carried out by Tsingtao Brewery Ltd in case it come under licensing method Licensing helps the parent company from the risk of product failure

Disadvantages There is a high risk involved that the local manufacturer may learn the techniques or the production process used to manufacture beer and they might come up with new brand. Costly litigations could arise between the two parties and this may lead to huge financial losses for both the companies

Foreign Direct Investment

Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. The stock of foreign direct investment (FDI) in Singapore amounted to $672.0 billion as at end 2011.Singapore always encourages FDI. Tsingtao could also consider the option of setting up a plant but has to be for the long term and for which a lot of investment will be required. Advantages The market potential of Singapore reflects the future market size available for Tsingtao beer products. One of the important determinants of market potential is the consumer demand for alcohol or beer beverages, which has a direct relationship with the sales forecasts for beer products

FDI reduces the Foreign exchange Fluctuation By establishing a plant overseas, the company ensures that the cost of production incurred is in the same market where the goods are ultimately sold Lower down the Transportation Cost Lower tax rate for Tsingtao Beer in the Sea Market

Disadvantages The existence of a high number of dominant beer producers, local and foreign (Heineken), would indicate a highly competitive and saturated market. Therefore Tsingtao would need to assess the number and size of other beer breweries that are competing in the foreign market (Singapore). FDI is always risky venture. Political situation keeps on changing with the passage of time, due to which some legal obligation or barrier may arise in future Investing in setting up plant in a foreign country is much more expensive than exporting goods

Franchise
A form of business organization in which a firm which already has a successful product or service (Tsingtao) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee. Some of the most popular franchises in the United States include Subway, McDonalds, and 7-Eleven. Here Tsingtao could share its business model with potential franchisee agents who are willing to receive the manufactured goods from China and then distribute them to the right channels. Advantages Saving in setup cost Saving in Distribution cost Market available for sale Can minimize risk and get higher rate of return

Disadvantages Ongoing royalties cut down the profit margin Less control over manager

High exportation cost Rely upon franchise to market the product

Import
Singapore is known for its free port and an open economy. Most of the beers are imported by Singapore. To initiate importation in Singapore, Trade Net online system is used. Around 113 Million litres of beer was imported in Singapore in 2011. Alcoholic beers are considered to be a part of dutiable goods and licensed warehouses are used for storage. For importing beer one needs to find a partner company in Singapore which will become a distributor or agent for the company. Local partner is required and brewery needs to be registered online. Advantages Trade Net online application makes the import procedure simple and less tedious Allow traders to obtain permit within 24 hours Licensed warehouse is available easily

Disadvantages Taxes are imposed on alcoholic bear which needs to be stored only in licensed warehouse Punishment for committing offences Importing will limit Tsingtao from achieving economies of scale due to no manufacturing operations and strict rules and regulation by the Singapore Government and hence it will not be able to compete against major breweries such as Heineken and Carlsberg.

Recommendations
From the Porters five forces model and the general characteristics of the beer industry , it is evident that even though Singapore market is attractive for introduction of Brand Tsingtao, setting up a manufacturing plant is not a lucrative idea.Since Singapore has a free trade agreement with China and some neighbouring countries where there is low or no tariffs on the import of beer (source: www.fta.gov.sg) it is recommended that Tsingtao enters Singapore market by forming an alliance with a local player and access its local distribution channel. Option 1: Joint Venture Tsingtao has set up a brewing plant in Thailand, which is nearer to Singapore than to China. To establish a distribution channel in Singapore, Tsingtao china can first make a joint venture with one of the local brewery and then it can import its product from Tsingtao Thailand and sell the product through established distribution channels of the partner company. Option 2: Merger or Aquisition Tsingtao can enter the Singapore market by purchasing the shares of any local brewery or acquiring the company or hold at least 50% of its shares (which makes the company a Tsingtao subsidiary) so that it can easily distribute its product through subsidiary companys distribution channels.

Data Sources: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources Official website of Tsingtao Brewery Company Ltd.