Flight centre limited annual report

Corporate Strategic Analysis Report.

Most importance: Assessments must be submitted via Turnitin, and the similarity must below 20%.

The module is assessed (100%) by an individual Strategic Report (maximum 3,000 words) involving an in-depth, strategic analysis of a large organisation. The subject of the report will be decided by the module convenor but students will be able to choose from a list of 6 varied examples.

Instructions for assessment

The Strategic Report should strictly NOT exceed 3,000 words and demonstrate clear report style with relevant Harvard references. It is to be a unified whole that answers three questions (see below) focused on the selected organisation. Formative work in weekly seminars will guide students through analytical techniques and processes required to complete the task.

For the selected organisation, assume you are an outside consultancy reporting to the Chief Executive. The Strategic Report should:-

1). Identify 3 key strategic issues facing the organisation with a clear explanation of why they are “strategic” (20%).

2). Analyse fully the resources and key capabilities of the organisation plus key factors that give the company its competitive advantage. (40%)

3). Assess the extent to which the organisation’s competitive strategy

addresses its strategic issues, and suggest improvements where they

might be justified. (30%)

A further 10% is available for clarity, structure, grammar, correct Harvard referencing and overall professional presentation showing clear report style.

Best answers will draw explicitly on strategic concepts and analysis from the module and apply them to the organisation. Clear referencing (Harvard system), professional presentation with appropriate diagrams/tables are required.

Again note the report should not exceed 3,000 words. Appendices are allowed outside this limit but NO MORE than 6 pages.

How will your work be assessed?

Your work will be assessed by a subject expert who will use the marking scheme indicated below. Feedback will be given in the Turnitin/Grademark system with script comments plus overall points. When you access your marked work it is important that you reflect on the feedback so that you can use it to improve future assignments.

In this Strategic Report, high marks come from using strategic concepts and analysis from the module clearly applied to the organisation. Harvard referencing, a professional report style plus appropriate diagrams/tables are also required. Outline marking expectations are as follows:-

Q1: (20%) After a short introduction, we expect 3 key Strategic Issues with explanations and knowledge of why they are “strategic”. The 3 environments (PESTLE, 5 Forces & internal) should be used as a guide.

Q2: (40%) We expect strong course knowledge, clear industry CSFs plus the organisation’s resources & unique capabilities well analysed. Also how unique capabilities link to advantage & CSFs, and their Porter generic strategy.

Q3: (30%) We expect an evaluation of how their strategy addresses their issues using the three SAFe tests – plus how it might be improved. A short overall conclusion completes the report.

PRESENTATION: (10%) We expect a professional report with clear report style (not an essay) e.g. frontsheet, contents, clear sections, tables & diagrams and relevant Harvard referencing. The word count should not be exceeded by more than 10%.

(In addition to marker feedback, a full marking rubric will be available within the Turnitin submission system for student consideration.)

Assignment submissions.

The Business School requires a digital version of all assignment submissions. These must be submitted via Turnitin on the module’s Moodle site. They must be submitted as a Word file (not a pdf) and must not include scanned in text or text boxes. They must be submitted by 2pm on the given date. For further general details on coursework preparation refer to the online information via StudentZone

If you cannot submit a piece of work and wish to submit Mitigating Circumstances, the University Mitigating Circumstances Policy can be found on the University website

How will we support you with your assessment?

There will be weekly references to the assessment task in seminars and weekly activities in those seminars will be helpful in creating “scaffolding” for eventual submission. An assessment worksheet will be provided in Wk4 to assist the development of ideas.

The formative mini-casework in seminars will be of direct help in the application of relevant strategic tools. There will be regular Q&A sessions linked to the assessment report and in the final weeks of teaching there will be an opportunity to review and reflect upon work from previous cohorts.

The 6 cases (with initial links) from which you should choose are:-

Case study

Online links for more information

Johnson et al.

1

H&M in fast fashion: continued susses?

http://www2.hm.com/en_gb/home.html

Ed. 10: p.575 Ed. 11: p.576

2

Megabrew: creating an undisputed global brewing champion?

http://www.ab-inbev.com/investors/combination-with-sabmiller.html

Ed. 11: p.639

Ed. 10: p.647 (SAB Miller)

3

All change at Teva

http://www.tevapharm.com/about/profile/

Ed. 10: p.634

Ed. 11: p.690

4

Mondelez International: Are you going to stick around Irene?

http://www.mondelezinternational.com/investors

http://ir.mondelezinternational.com/sec.cfm?DocType=Annual&Year=&FormatFilter=

Ed. 10: p.686

Ed. 11: p.695

5

CRH plc: leveraging corporate strategy for value creation and global leadership

http://www.crh.com/

Ed. 11: p.705

Ed. 10: p.639

6

Flight Centre Limited: competing to provide the lowest air fares

https://www.flightcentre.co.uk/about-us/our-story

http://www.fctgl.com/our-brands/

http://www.fctgl.com/investors/annual-reports/

Ed. 11: p.636

Ed. 10: p.676

How will your work be assessed?

Your work will be assessed by a subject expert who will use the marking rubric provided on Moodle. When you access your marked work it is important that you reflect on the feedback so that you can use it to improve future assignments.

Referencing

You MUST use the Harvard System.

Tips for how to do make a good start:-

Tip 1: Read the Assessment Brief to understand clearly what is required.

Tip 2: Use web links to initially research each of the 6 organisations.

Tip 3: Choose your organisation with the assessment task in mind.

Tip 4: Assemble material from a wide range of research sources.

Tip 5: Focus on knowledge & application of relevant module concepts.

Tip 6: Participate in module seminars & draw lessons for your Report.

Flight Centre Kenneth Wiltshire

Limited: competing to provide the lowest air fares

ed (FLI) is one of the world's largest IPS, with more than 30 brands and crate and wholesale businesses in ll 5. FLT achieved a record revenue of it before tax of A$256.5m continuing trend that FL] has established over

finally based in Australia, FU's rapidly k now extends throughout Australia. USA. Canada, the UK, South Africa, China, Singapore and the United Arab )n, the company's global travel manage M Travel Solutions, extends to more

ntries through strategic licensing agree- endent local operators. The company n 15,000 people globally, and actively ?rowth. FLT is a successful entrepre- at became established and grew rapidly ble industry and government obstacles. highly competitive environment requiring lon. with a staff- and client-focused odd. However, it constantly faces signif- in an intensely competitive industry

wing capacity for clients to make their :ements online. Having become a major questions arise as to whether Flight lue to operate with one business opera 11 regions and cultures.

Source: Kumar Sriskandan/Alamy Images

double decker buses to take tour groups around Europe. Despite harrowing experiences with bus breakdowns, ;.ani.; .ffi.i;ldi. i" ";-y c.u-t'i.;, ;h''!;g. o ' working capital and back-breaking hours for the founders /drivers/operators, the tours proved very popular and the number of buses and tours grew. Along this journey the entrepreneurs, who had no experien.ce in the industry, had to engage in improvisation, rule- bending, fudging and originality in marketing with no formal strategy.z However, the lessons learned stood them in good stead when they decided to explore the gap they perceived in discounted air travel and founded Flight Centre in 1981.

This turned out to be a formidable challenge. The practice of flight discounting was virtually unknown in the cosy travel industry in Australia, which was charac- terised by intensive government regulation of airlines which had long-established relations with existing travel agents. The industry was immediately hostile to these new upstarts, and they had to turn first to lesser known

)73 when a few young Australians living e inspiration to begin a travel company ck Tours', using old refitted London

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LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES FLIGHT CENTRE LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES

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!ms and arranging local partnerships

y monitorsoperof trnvel .paokages Strategy and the business model s around the world, stepping in when When the company decided to float in I ; occurred on a few occasions when was largely based on a desire to facilil ive maQe poor decisions. Described ownership in the organisation in or

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emselves in some tight personal financial fund expansion or acquisitions along the share buy-back scheme was attempted in

nly because the directors felt that the share :n well below the true value of the company of external conditions. Flight Centre has ed with a small Board of Directors four or comprising the original founders for most

iny's history. element of the strategy is the price guar-

3dvertising slogan originally said 'Lowest Air xnteed ' because the company's policy is to ler lower published price for a fare. But this hth objections from regulators and today the

:s the slogan 'Lowest Airfare Guarantee '. This caused plenty of headaches and additional

:times over A$10m the total cost of }r fares submitted by clients. It is made

nous because of the airlines who now offer to the public themselves. However, Flight tuck religiously with this pledge and it is now !nched part of the brand and the culture. iamentals of Flight Centre's strategy are organic growth and in this it has been highly Some buy-outs have occurred and some

)rslfication (e.g. hire of bicycles), but the firmly grounded in the travel business and its

(pansion into corporate and student travel as more up-market luxury products has all been !hind the retail presence is an engine room of

tivity as deals are negotiated with a plethora Most travel agents operate their own whole-

as which arrange deals and contracts with

flight, accommodation and ground travel package opera- tors. and then make these deals available to their own retail agents. In an effort to achieve cost efficiencies through internal competition, Flight Centre introduced a purchaser provider approach whereby their retail stores could opt not to choose to buy from the company's own suppliers if they could do better elsewhere a cost- centre concept which was fiercely resisted at first and caused some morale problems, but has gained accept- ance and introduces healthy intra-company competition. However. more in-house transactions are now happening than ever before. The FCL 'replicable small business model ' contains six elements (see Box I)

The business model is followed by a list of rules for running a project which are process-oriented. Perhaps the most interesting one is 'Perfection is banned near enough is good enough. We want action and progress not perfection.

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A challenging business environment

The company has faced some major challenges, many of which were very threatening to the travel business, including wars, natural disasters, global health epidemics and the global financial crisis. The sudden collapse and liquidation of Australia's Ansett airlines caught the company off guard because of loss of over-rides, super over-rides, plus credit card reversals. The closure of Heathrow Airport in December 2010 owing to its inability to cope with snow and bad weather with days of flight cancellations is an interesting case in point, where Flight Centre's own emergency helpline gave its customers up-to-the-minute information and the certainty that someone was looking af ter them, by comparison with the lacklustre performance of the airlines and the airport in this respect. Customer loyalty was further entrenched Indeed the company has always been prepared to sustain extra costs to retain customer loyalty and return business.

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lgrowth(organic, acquisitions and start-ups) level of the business.

!m-based and decentralised decision-making

and local ownership by individuals with )les and responsibilities. ial rewards/incentives on individual outcome fully relevant, consistently measured and

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The team leader works in the team with the same technical job as the rest of the team. All business team and support teams operate under the 'one best way ' brand guide, business systems and operating systems (the Systems /Wanda/). In FCL we have one set of values, one culture and one set of philosophies.s

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FLIGHT CENTRE LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES FLIGHT CENTRE LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES

Maintaining a healthy level of cash reserves has been an Important element of risk management in a precarious industry

Throughout the whole of its history, Flight Centre has had to deal with a great deal of inflexibility and intransi-

gence from government officialdom. In the beginning, this applied particularly to gaining licenses to operate in almost all countries they wanted to enter. Innovative ways were found around this including using less popular airlines, operating under licenses of associates. and even occasionally beginning operations before licenses were obtained and adopting a 'crash through ' approach which involved severe risk taking. This has usually been successful in the end, although initial attempts to operate in Vietnam were given up at considerable cost in

the light of bureaucratic inertia. The company has baulked at bribery and corruption suggestions from offi- cials in some countries.

+ Brand and specialization specialize in customer

+ Unique product. exclusive Flight

simply lust selling tagline 'Our product

e Experts not agents: ndprqtandingexperts in

that they readily available

+ Redefining the shops and retail spaces reflect people are retailers workers. (This ration in Flight bench row seating to individualized circular enjoy a more vidual

+ Blended always available and buy Flight

onlinewant

evolving brands which truly

specific areas of travel and have clear value propositions.

making, combining and sourcing Centre Travel products, rather than

supplier's products using the - not just someone else's'. ensuring each brand's people are

the brand's specialty and

in turn are backed by 'travel gurus' who are if additional expertise is required.

ensuring corporate, wholesale the fact that Flight Centre's

first and foremost, and not office is most observable in the new configu-

Centre stores with a change from of consultants to face customers,

tables for each consultantto direct and personalised space with indi-

customers.) access: ensuring Flight Centre's brands are

to customers. They can touch, browse Centre products when and how they offline, shop, email, chat, phone or

Legalissues

In a very significant twist in 2012, the company was investigated by Australia's Competition Regulator for allegedly trying to collude with airlines in fixing prices and anti-competitive behaviour. This was because of an attempt it made to have an airline reveal a cheap air fare which it was offering directly to the public, and which was lower than Flight Centre had been offering for the same fare. The regulator accused Flight Centre of ille- gally fixing prices of international flights on six occasions between 2005 and 2009 with Singapore Airlines. Malaysia Airlines and Emirates. The Federal Court in 2013 ruled that Flight Centre had competed with airlines for the retail or distribution margin on the sale of interna- tional fares and had sought to stop them from undercut- ting it on these fares. The issue involved the airlines offering cheaper fares on their own websites than it made available to Flight Centre agents through its global distri- bution system. Because of Flight Centre's 'lowest price guarantee ' a key element in FLC's business model it was forced to match the cheaper fares even though this inevitably meant selling at a loss. The case hinged on the question of whether travel agents are a retail extension of an airline or competitors of airlines. Clearly this ruling would have significant repercussions for accommodation and ground tour operators as well.

The initial court decision went against FLC which experienced a small dent in its share price and then had to face a strategic decision as to whether to appeal. Given the crucial importance to the business of its Lowest Price Guarantee ' policy Flight Centre mounted

an appeal; a costly and time-consuming exercise lasting over five years. In 2015, the company won the appeal

SMS

Underpinning the company, information 'patterns' and 'predictions and marketing machine

these five journeys is the belief that for is power through 'profiles',

. It also encompasses a sales that is more agile, personalised

The complexities of competition

The highly competitive nature of the airline and travel industry was highlighted in an incident in 2015 when the company issued a profit warning as it had lost some market share to internet companies like Airbnb and Booking.com and experienced weak growth in leisure travel in Australia. The share price slumped 17 per cent. The episode had a key business analyst asking whether

Flight Centre's business model had been cracked by its giant online global competitors.7 Turner was open in conceding that this competition was a fact of life, stating that travel has become more commoditized and it has increasingly gone online where the only point of differ- ence is price. However, the Flight Centre model is a hybrid or 'omni-channel ' model with an extensive phys- ical retail network complemented by its online offer. It is in the midst of another evolution, producing its own products together with its ability to offer person-to-

person advice and service to create unique and higher margin products. lts physical presence through its inter- national network of businesses is a differentiator.

In the event, the incident proved to be just a glitch. with the market recognising the resilience of Flight

and relevant.9

A dynamic business model The increasingly competitive travel industry environment has seen Flight Centre constantly re-orient its business model to acknowledge and accept the trends which are occurring, especially the growth of self-booking of travel, and offer services that enhance and enrich that experi- ence and blend with it. This is achieved by offering more client-f ocused and personal attention, unique products and services. guaranteed backup and instant access for customers through a wide range of modern and tradi- tional communication and contact modalities

In recent times, Skroo Turner has identified one big strategic challenge for the company as achieving greater pro(juctivity per employee. A number of approaches are being taken in this regard, including revision of support to the shopfront, clever use of ICT and an improved data- base, and introduction of more realistic performance measurement. Another is the creation of more hyper- stores in some markets where various teams performing in different parts of the company will be accommodated

636 637

FLIGHT CENTRE LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES

together in the one location on different floors. The Oxford Street branch in London has been a prototype. This will be a seven-day-a-week operation. The 'village ladder will be in the one place. There is also a vertical integration strategy to overcome the problem that occurs when the purchaser-provider principle does not fit because one part of the company cannot choose whether to purchase from another part because the margins are not suitable or the product unavailable elsewhere. The goal here is better and faster service to the customer. The pay and incentive structure for consultants has also been remodeled.

The full year net profit for 2015 was A$256.5 million, up 24 per cent from the previous year. Revenue

mbed 6.8 per cent to A$2.4 billion, but the company said it faced higher costs in Australian operations owing to a new more generous and incentivised salary struc- ture for consultants.io Currently, Australian business accounts for 56.5 per cent of the company's total trans- action value but 81.3 per cent of its earnings before interest and tax, meaning that, despite ongoing growth in its overseas business, it remains heavily leveraged to Australia. Turner has said he would like that mix to shift over time so that overseas businesses accounted for around 30 40 per cent of EBIT (earnings before interest and taxation), at the same time as the Australian division continues to grow. The company's sights are set for more overall organic growth, having

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CASE STUDY

Megabrew: creating an undisputed global brewing champion? Duncan Angwin

Notes and references 1. A$1 ; £0.52 : $0.74 - €0.66

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10. Cot//for /Wa//. 28 August 2015. 11. ,4t/s/xa//an £3t/sheds /?Chew 23 September 2015.

production

Draf t and Grolsch along with local country brands such as Aguila, Castle Lager, Miller Lite, VB, Snow and Tyskie.

Despite these successes, the dramatic consolidation in the brewing industry continued. In the early 1990s, the five largest brewing companies accounted for lust 17 per cent of global beer sales. By 2014, the largest four brewing compa- nies accounted for 45.7 per cent of sales and analysts estimated they had captured 80 per cent of the $33bn gk)bal profit pool. Moreover, three of SABMiller's main global competitors, Anheuser Busch, Interbrew and Ambev, had merged in 2008, to form AB InBev, to claim market leader- ship with a consolidated 25 per cent of global market share, although that had fallen to 20 per cent by 2014.

In September 2014, SABMiller launched a surprise takeover bid for Dutch counterpart and third placed rival, Heineken. Charlene de Carvalho-Heineken and her husband Michel de Carvalho are head of one of the richest families in Britain, with a combined fortune esb mated at more than £6bn. The family controlled more than 50 per cent of Heineken and their response was swift and unequivocal. They rejected the bid and said they intended to 'preserve the heritage and identity of

Source: Douglas Carr/Alamy Images

Heineken as an independent company '. This dealt a blow to SABMiller's ambitions and there was little point in returning with a better offer as the family wasn't moti-

vated byrmoney ' consider their position, ' SABMiller re-examined its four strategic priorities set out in 2010 (see Table 1). This can be seen as a synthesis of the learning the company had developed over its history, first weathering the political crises of twentieth-century South African history, then building its operations in emerging and mature markets, where it gained a reputation as 'a turnaround specialist ' and subsequently an acquirer of major breweries in mature markets. These strategies had served the company well as SABMiller has shown sustained good performance compared with the London Stock Market Beverage index (see Figure 1).

ss discussion and not as an illustration of good or bad

6393638

MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION? MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION?

Table I SABMiller's strategic priorities Emerging

1993

onto the global market SAB made its first acquisition outside Africa,

Hungary's largest brewery, Dreher, describing move ' into Central Europe. So began

explained in the 1998 annual report: 'SAB's focus has been on countries in which it

it could use its expertise, which has been gained

years in South Africa, to develop beer markets economies.'

of developing brewing capabilities in beer markets continued through the

SAB established operations in China in 1994, a joint venture with China Resources Enterprise

China's biggest beer brand, Snow, to its port- There followed further acquisitions in Eastern

including Lech (1995) and Tyskie (1996) in acquisitions in Romania, Slovakia, and the Czech and in 1998 SAB entered into Russia by estab-

a 'greenfield ' brewery in Kaluga, near Moscow. s strategy was spelled out in the 2000 report and

this logic prevailed up until AB InBev's bid:

'In the less developed world, Africa and Asia and much of Europe, brewing remained highly fragmented, with beer drinkers supplied by breweries which were never more than small-scale and localised, often producing low-quality beer . . . This fragmentation presented the opportunity for SAB from the mid-1990s to create a profitable and fast-expanding business in emerging markets with huge potential. This opportunity involves, generally, taking a share in a brewery with a local partner and, transforming the business while retaining the brand, given drinkers have fierce attachments to their local brew. Transformation starts with upgrading

quality and consistency to create a beer for which people are prepared to pay more and which can give us a healthy profit margin. Then comes improvement to marketing and distribution and improvement to produc- tivity and capacity. In each country we have begun by acquiring an initial localstronghold from which we can advance into regions beyond the brewery's original catchment area. We then build critical mass in the region and progress, over time, to a national basis. This is often achieved by acquiring further brewing busi- nesses and focusing the brand portfolio. An optimum brand portfolio gives us a better overall marketing proposition, increases total sales and delivers economies of scale in production and distribution.

This process demands, on one level, great political sensitivity in dealing with governments, partners, local communities and our workforce and, on another level,

the deployment of expert operational management

skills learnt in South Africa . . . Our management struc- ture is de-centralised, reflecting the local nature of beer branding and distribution.

Our businesses do not all advance at the same speed. or have the same potential. It is characteristic of emerging markets that growth can be variable. and we are accustomed to temporary setbacks. However,

the spread of our international businesses provides a 'porta alia effect ', thereby reducing the impact of setbacks in one or two individual countries.'

1. Creating a balanced and attractive global spread of businesses

Our acquisitions in recent years have given us a wide geographical spread with emerging markets without being over-reliant on any single region. This allows growth in developing markets and "value" growth as consumers around the economy to mainstream and premium brands. We also look to identify and for growth within our existing business portfolio. This can involve a entering into local joint ventures or partnerships, to buying or local brands to help shape a full, local, brand portfolio.

Our aim is to develop an attractive brand portf ono that meets consumers' needs markets. In many markets, growth is fastest at the top end, as shown of our international premium brands. Another rising consumer trend is fragmentation. Affluent consumers are varying their choices and speciality brands, craft beers, foreign imports and other subdivisions of And a third trend is the growing importance of female consumers.' 'In order to raise our performance, we need to become more efficient. manufacturing processes. Efficiency is part of our day-to-day commodity costs compels us to do whatever we can to counteract the All SABMiller operations strive to improve our products' route to ensure that the right products reach the right outlets in the right condition As a global organisation we are constantly seeking to use the benefits of our scale While recognising that beer is essentially a local business and that local managers are in the position to identify and exploit local opportunities. Our aim is to generate maximum advantage from our size without becoming over-centralised and losing our relevance responsiveness in each market.:

us to capture new

world trade

build

2. Developing strong, relevant brand portfolios in the local market n each of Ourby th

popularitythe hprnm ng more interested in

he premium segment. SAB's history of buying local companies with strong

market positions had worked very well for the group. The most successful acquisitions had domestic leadership positions in under-developed beer markets. CEO Graham Mackay commented that: 'We acquire reasonably priced assets, often severely neglected under public ownership in growing markets; establish market leadership and build local mainstream brands.

The way in which SAB could be successful with these acquisitions was through 'Operational improvement and efficiencies - to distribute beer more efficiently and drive down costs.' This could be achieved reliably through the use of seasoned leaders with deep experience from the South African business. They would parachute into new acquisitions, drawing upon SABMiller's long-standing strengths and capabilities in operational excellence in the beer industry and its distinctive people/performance management.

Analysts had also recognised, however, that SAB had been less successful with its acquisitions in developed markets. where it seemed to have less strength. This focus on local improvement was echoed in Mackay's comments that: 'We are not top down. We are very locally driven.

This reflected a strongly held view in the group that beer is a local taste and that SABMiller can create winning brands that tap into deep local insights and win. One way in which SABMiller had been particularly effec- tive in boosting local sales was the development of a 'shopper ' marketing capability, where they worked along- side local beer retailers to help them grow their beer category, helping SABMiller sales. Amongst its major competitors, SABMiller saw itself as the most local of global brewers. -

3. Constantly raising the perf ormance oflocal businesses

especially in our management and the rise in

squeeze on ourrnargins. marko o remove costs and to

4. Leveraging our global scale

best value and and

Source: SABMiller.

5000 4500

3500

2500 2000 1500 1000 500

0

Background

South African Breweries (SAB) predated the state of South Africa itself. It faced the challenge of doing busi- ness amidst the upheaval the country experienced during the twentieth century, including the 'apartheid ' regime (1948 1994). Worldwide opposition to apartheid included a campaign for economic sanctions on South Africa, aiming to restrict international business from investing in, or trading with, South Africa and restricting South African business from trading with international markets. In 1950, SAB moved its head office from London to Johannesburg and southern Africa became the focus of its business expansion during the subsequent four decades.

In this time, SAB responded to business restrictions

by focusing on dominating domestic beer production through acquisition of competitors and rationalisation of production and distribution facilities. By 1979, SAB controlled an estimated 99 per cent of the market in South Africa and held commanding positions in Swaziland, Lesotho, Rhodesia (now Zimbabwe) and Botswana. In 1978, SAB also diversified into hotels and gambling by acquiring the Sun City casino resort.

The establishment of a multiracial democracy in South Africa in the 1990s eased SAB's expansion

through the rest of Africa. By 2000, SAB's market domi- nance in southern Africa provided a serious deterrent to potential competitors, but there remained little space for it to expand locally, particularly in alcoholic beverages.

9/12/11 9/12/12 9/12/13 9/12/14 9/12/15 Year

ller FTSE100 rages sector

Figure I Five-year SABMiller share price vs FTSE 100 and Beverages indexes(rebased)

While SABMiller was pondering its options in 2015. rival beer giant AB InBev announced a formal offer to buy them for $107bn. The combined group would control 58 per cent of the global profit pool, dwarfing next rival Heineken with just 11.6 per cent and Carlsberg with only 4.6 per cent. Tense private talks between stakeholders followed until 13 October 2015 when a tentative deal was announced. There was some way to go, however, to complete the deal, scheduled for late 2016. with formi-

dable obstacles to overcome, not least dealing with regu- latory interests around the world. In the meantime, the question was whether the deal was the best strategic option for SABMiller?

Going global In 1999. SAB decided to list on the London Stock Exchange (LSE), justifying it in terms of=

Giving the group greater access to world capital markets and providing it with financial resources and f[exibi[ity ' [so as to] 'enhance the ability of SAB to take

640 641

MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION? MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION?

advantage of increasing consolidation in the interna- tional brewing industry and to compete with other international brewers for development opportunities throughout the world.'

:lb'l :::RS UP: :$111HiHgH$! ie $1RWRg on improving weaker performers. Th s was a considerable change from Miller's previous system of performance

1 2 Main acquisitions, joint ventures and brewery investments 2001-15 (conf/need)

Builds new £3m research breweryEstablishes a

China with acquisitionCR Snow continues expansion in

ienxms=nlinlnHT rnnnaiu-nui :n inunwillHiMSABMiller SABMiller

Strategic Invests

Unsuccessful attempt to acquire

Africa, with The Coca Cola Company and Gutsche Family

a new brewery in Nigeria. in the UK

of remaining equity interest in Hangzhou Xihu Beer and Huzhou Brewery with China Kweichow Moutai Distillery Co. Ltd

for Turkey, Russia, the CIS, Central Asia and the Middle East. acquires Foster's Group. the number one brewer in Australia for A$1 1.8bn

alliance with Castel to takeover running of Nigerian businesses. in doubling capacity in Uganda.

Heineken International. operation for non-alcoholic ready-to-drink beverages, Coca-Cola Beverages

This will account for 40% of all Coca-Cola sales in Africa

Initially SAB's share price lost over 15 per cent rela- tive to the FTSE 100 as analysts argued this reflected a failure to make a major acquisition of a first-world (devel- oped country) brand and its over-reliance on its devel- oping markets.

SABMiller

In 2002, SAB did succeed in acquiring a major brand in a developed market: Miller Brewing Company, the second largest brewery in the USA. SAB paid Philip Morris Co. US$3.6bn in stock and assumed US$2bn of Miller's debt. The 2003 annual report claimed that this gave the group access, through a national player, to a growing beer market within the world's largest profit pool, and at the same time diversifying the currency and geographic risk of the group.

SAB became SABMiller following the acquisition and the second largest brewery by volume in the world. However, the acquisition brought with it its own prob lems. James Williamson, an analyst at SG Securities in London, commented: 'They didn't buy it because they

Acquires Meantime Brewery in the UK

two brewer and making Latin America the largest contrib- utor of profits in the group (32 per cent of EBITA, ahead of South Africa). The area has performed very strongly since the acquisition in terms of top- and bottom-line growth. Reviewing the Latin American operations at that Hme, the CEO confirmed that SABMiller saw these markets as offering 'exciting prospects for growth ' and added:

'Although the Bavaria businesses are well managed and profitable. we plan to create further value by applying SABMiller's operating practices and management skills. The best opportunities lie in brand portfolio development, creating good relationships with distrib- utors and retailers, and improving merchandising at the point of sale. The Bavaria acquisition brought very strong leader positions in its markets, with 90% market share - a huge advantage in a scale-driven industry.'

In 2008, a joint venture, Miller Coors, was formed between Molson Coors and the SABMiller business in the USA for scale advantages and productivity improvements of $500m in the face of increasing cost pressures and improved logistics across the North American market. The complementarity of brands was to enable more effective competition against the dominance of Anheuser Busch in the USA. Commentators viewed the joint venture as a way of gaining market share in the profitable ight beer category that accounted for 40 per cent of total US beer sales. The joint venture's profit perfor- mance has been robust.

At the group level, in 2009 profits dropped; however lsee Appendix Ifinancialsummary), this did not diminish top management interest in making further M&A. As CEO Graham Mackay stated via Bloomberg:2 'Nothing is stop- ping us from the right acquisition . . . There is money available even if we have to raise capital. We think our shareholders would agree with it if it was the right acqui- sition.' He added. however, that; 'The right acquisition

means something very different in an emerging market where a brewer can capitalise on growing volumes, than it does in the developed world where cost cuts and selling more premium beer is key.

In 2011, SABMiller made a major acquisition in Foster's Group in Australia for A$11.8bn3. Some industry observers were not convinced it was the right move as Foster's, the number one brewer in Australia, was competing in a mature market and its beer volumes profits and market share were all in decline compared with its main rival Anheuser-Busch InBev. In the year ended March 2012, Foster's volumes of beers were down four per cent on the year when SABMiller group saw an overall rise. Analysts worried that SABMiller's Foster's deal mirrored its Miller purchase in 2002 when SAB bought into an effective duopoly in the low-growth US market and gave the brewer a long-term headache. As one investor remarked; 'SABMiller has turned around difficult situations before but those have of ten been from dominant market share positions.

As an analyst at the time remarked, 'they have to be very careful how they play their hand. SAB's big deal record hasn't been great.'2 The Miller acquisition took longer than expected to repay the cost of capital and analysts believe the turnaround of Foster's would take some time.4 However, the CEO Graham Mackay was reported to say that he would 'sweat the assets' and 'make the numbers work'.s The board also acknowledged that there were few brewers remaining that could be acquired and would really make a difference to the company going forwards.

Continued acquisitions and international development

There followed a series of acquisitions (see Table 2).

In 2005, there followed a merger with Grupo Empresarial Bavaria, the second largest brewer in South America, consolidating SABMiller as the world number

Table 2 Main acquisitions, joint ventures and brewery investments 2001 15

2001 Takes a majority stake in the Sichuan Blue Sword Breweries Group in China. Pan-African alliance with Casted for investing in promising African countries. First international brewer to enter Central America when it acquired Honduran brewer, Cerveceria Hondurefia. Acquires 100% of Miller Brewing Company and changes name to SABMiller plc. Now the second largest brewer (by volume) in the world.

Acquires majority interest in Birra Peroni S.p.A. developing Peronias a global premium brand.

SABMiller associate, China Resources Breweries Limited, acquires two Chinese breweries. Buyout of joint venture partner in India, Shaw Wallace & Company. Acquires 71.8% of Colombian Grupo Empresarial Bavaria, the second largest brewer in South America. for $7.8bn. Acquires the Foster's business and brand in India and in South Vietnam. Joint venture with Vinamilk to establish a brewery in Vietnam. SABMiller and Coca-Cola Amatil form Pacific Beverages Pty Ltd, a joint venture to market, distribute and sell SABMiller brands n Australia.

IO-year partnership with Foster's Group to brew Foster's lager in the USA. $170m invested in a new brewery in Moscow. Pacific Beverages buys Australian premium brewer Bluetongue Brewery. Acquires Royal Grolsch NV for €816m ($1.2bn). Acquires the Vladpivo brewery in Vladivostock (Russia) and Sarmat brewery in the Ukraine. Joint venture with Moulson Coors Brewing Co., named MillerCoors, to pool US interests. Acquires Bere Azuga, Romania. Acquires the remaining 50% interest in the Vietnamese business and remaining 28% in the Polish business. Acquires three further breweries in China.

Investment in new plant in Juba (South Sudan), Russia, Tanzania, Mozambique and Angola.

Acquires Cervecerfa Argentina S.A. lsenbeck ('CASA lsenbeck '), the third largest brewer in Argentina, from the Warsteiner GrouP- Builds US$34m brewery in Namibia A new US$105m brewery begins operations in New South Wales. Australia. Southern Sudan Beverages Ltd (SSBL) is doubling the size of its existing brewery operations.

2002

2003

2004 2005

2006

2007

2008

2009

The state of the world brewing market to 2015

Global beer volumes (excluding China) recovered to about a two per cent growth rate after the trough of 2008 10 but well below the four to five per cent achieved in 2006-7. The growth rate by region varied considerably (see Table 3). Going forwards analysts expected flat beer

2010

tcontinued

642 643

MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION? MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION?

Table 3 Compound annual growth rates (CAGR) by volume, by region (2013 2017)

on each one. Carlsberg was struggling due to a recession

in its core Russian market, tighter regulations and conflict in Ukraine. Although it turned profitable for the first time in India in 2016. it announced a profits warning and a strategy review which could include an intention to acquire in growth markets such as Asia (see Table 5 for competitor share of global profits).

Potential new competitors, including global Spirits companies, were also increasingly encroaching on beer competitors' markets with greater focus on the same consumer occasions and needs, e.g. alcopops and ready-mixed drinks. Companies such as Diageo, previ- ously focused on developed markets, were now very active in growing rapidly through M&A in key emerging markets. Some media commentators predicted this would lead to convergence in the wine and beer market and pointed towards increased innovation in mixing beers with spirits and flavours. Heineken's flavoured beer 'Desperados' reflected an increased consumer demand for more sophisticated beverages at mixed

gender occasions.

Global beer consumption by region (%) in 2013

Oceania

Annual beer consumption by region 2004-2013

Region CARR (2013-2017F) ] .2% Middle East0.6% 7000

g 6000 8 5000

Africa Asia Austra lasia East Europe Latin America Middle East North Africa North America West Europe

5% 4% 1% o% 3% 4% 1%

1%

; Asia

; Europe South America

Asia 34.8%

a) E 3 0 >

C0

E3 C0 c)

4000

3000

2000

1000

0

--+- North America

; Africa

=:: Oceania

Sot/nce: Based on http://www.canadean.com/news/africa-to-become-fast- est-growing-bee r- ma rket- in -the-world- by-2017/.

Middle East

.+ (b nb A .b na .s .\ .D .5

volumes in North America and Europe with decline in key markets such as Germany France and UK. The per capita consumption by Germans for instance, some of the world's biggest aficionados of beer, had fallen due to demographic change, alternative beverages such as health drinks, wine and cider, tighter regulations and global economic slowdown. There was significant growth, however, in Latin America. with China, India and Africa offering the best long-term volume prospects given their large populations and low per capita consumption. Table 4 gives market profitability estimates by region. In particular, Africa's growth rate was estimated to be 44 per cent from 2014 25, nearly three times the fore cast global growth rate.

Against this backdrop of regional variation in sales (see Figure 2), the large brewing companies also faced changes in the nature of demand. There was intensifying competi- tion in premium beer segments where high profit margins made it easier for niche providers to compete successfully. In many European countries there was a substantial increase in new beer products on retailers' shelves and in the US craft beers were making substantial inroads.

In this context, SABMiller's main competitors, focused on various geographies and had different strategies. Heineken was increasingly centralizing its brands in order to have a global brand design that they could then license, allowing global advertising and the use of a mass premium model. They were determined to retain their independ- ence. AB InBev remained focused on cost reduction through a few very large acquisitions and had generally managed to achieve between 10 and 15 per cent margin

Figure 2 Global beer consumption by region bounce: www.kirinholdings.co.jp, Kirin Beer University Report Global Beer Consumption, 24 December 2014

Going Flat Anheuser-Busch InBev's volumes have declined in the USA in recent years as craft and imports have risen. (a)(b)

Craft Hlmports BAB Bother -Craft -Imports -AB

The AB InBev bid

The AB InBev bid, dubbed 'Megabrew ' by analysts, would result in the world's largest consumer-staples maker by earnings, with profits around $25bn.6 The enlarged brewer would be number I or number 2 in 24 of the world's 30 biggest beer markets. Analysts believe AB InBev made the bid in order to continue growing as its own growth rate was forecast to slow down over the following five years. In the US market. which accounted for 34 per cent of group revenue, its market share had already fallen from over 50 per cent to 44 per cent largely due to the rapid growth of craft brewers (see Figure 3). lts attempts to create its own craft beers such as Bud Lime had had only limited success.

Historically, AB InBev had a strong position in Latin America with 78 per cent market share in Argentina, 68 per cent in Brazil and 58 per cent in Mexico. This accounted for 30 per cent of group revenue in 2014 (see Table 6). It was an attractive area as there were low labour and raw material costs, economies of scale and production was near to market. Together with Mexico, Latin American revenue at $18,849m accounted for over 40 per cent of AB