Cyber

Strategic Management Labatt Breweries of Europe Case Individual Case Analysis Paper 1. In 1989, Labatt Breweries of Europe, located in Toronto, Canada, was in an endeavor to expand and increase its beer brewing market share overseas. Their primary focus was to acquire two Italian brewing companies, Birra Moretti, SpA and Prinz Brau Brewing Company. Additionally during the company’s push into Europe, they focused on the “toll brewing’ method, which employed regional brewers that had excess capacity to brew the beer. This move proved to be highly profitable for Labatt. This further opened the door for the company to expand its reach in the region. Three major factors that influenced these expansions included: - The need to invest extra cash that was made in brewing -The attractive purchase prices of the two Italian brewing companies. -The increased threat of competition in Canada, originated by the merger of two rival breweries and the U.S.-Canada free trade agreement. With a profitable and growing beer industry, Labatt aggressively focused on the two breweries in Italy. Factors which were attractive to the firm included: an annual growth of 2.5% over the previous 10 years, a growing beer target group of 10 to 35 year old males and the ability to distribute operations through small vendors. After lengthy negotiations, Luigi Moretti was purchased for an undisclosed amount of cash. The deal’s attractiveness centered on strong financial projections and a present value analysis. Afterwards, Labbatt focused its sights on the second piece of this acquisition puzzle on Prinz. Both buys had to be made in order for the business model to be successful. A purchase price of $25 million was decided upon. Soon, concerns developed over inflated sales figures at Prinz. Errors in billing and returns caused their recorded sales to plummet in December of 1988. These problems caused a dilemma for the acquisition team because of the importance of both breweries being purchased together, prompting quick decisions by the team. The Business Plan for LBOE would mirror the pre late 1980s strategic plan that was in Canada: ownership of a majority of breweries, injection into the sports market, the purchase of troubled breweries that hold a stake in the brewery market overseas. 2. Before the late 1980’s, Labatt had a brewing firm that was diversified. They were not only in the brewing business but along with the food division, they had a 45% ownership of the Toronto Blue Jays and invested in a Canadian sports broadcaster. The food business also had as revenue, an agricultural biotechnology company. These assets accounted for 15 percent of the company’s revenue. With a mix of related and unrelated businesses owned and with revenues between 70% and 95% coming from a single business, they exhibited a dominant business diversification model. Labbott used a corporate-level diversification strategy that employed economies of scope and market power practices. They wanted to increase their value by sharing activities such as their business operations in the beer and food companies. Beer and baseball go together, so the 45% stake in the Toronto Blue Jays was an example of using the economies of scope by the related diversification of business techniques. The ownership of 12 breweries across Canada was an example of market power. Because the breweries were spread out, this blocked competitors in various regions through multipoint competition. After the late 1980’s, threats from the U.S.-Canada free trade agreement made their diversification efforts outside of brewing hard. They had to several businesses in 1988 because of the merger of its weakest 2 competitors. These businesses had no longer provided a strategic advantage. All of the cash that was earned prior to the late 1980’s had to be put to use to help keep a strategic advantage in Canada. 3. Brascan Ltd placed pressure on Labatt in the late 1980s. Because Brascan was a 42.3% owner of Labatt’s outstanding stock, it had an interest in how well several of Labatt’s business performed which meant maximizing cash up the corporate chain. Several of these businesses lacked “strategic relevance” and did not provide any support for future expansion overseas, so they were sold. Brascan’s responsibilities in this instance, focused on the stakeholders-those who are directly affected by the firm’s performance. Since several of the companies that Labatt owned weren’t adding any real relevance to the strategic plan to push overseas, Brascan pushed for the firm to sell the “dead weight”. Also, Brascan was a part of the Peter F. and Edward F. Bronfman financial empire. This financial firm was also not doing well financially. Because Brascan was a part of this firm also, they had to shore up its losses again, by putting pressure on Labatt to sell. 4. Labatt attempted to expand overseas by taking advantage of two international opportunities: Increased Market Size: -The beer market in Italy was one of the few growing in the world. -The beer target group of 18 to 35 year old males was growing. -The country had one of the lowest per capita beer consumption rates in Europe. Use Core Competency (Modes of Entry): -An infrastructure of regional brewers was available to brew beer. -Small vendors were available for operations that could be distributed evenly. -The U.K. operations were shifted from importing to “toll brewing’. Although consumer data that was incorporated into this business model was dated before 1986, the evolution of Labatt’s international strategy did make sense. There was a promising infrastructure that had characteristics that preceded the beer growth in Canada. There was an infrastructure of smaller breweries already in place that could readily handle the brewing and distribution phases of the firm’s operations. Additionally, this was a time when beer consumption was on the rise. Labatt used a multidomestic strategy as it pushed it’s businesses overseas. Strategic and operational decisions were decentralized in the U.K. because of the changing role of lager consumption. There, the strategy focused around employing regional brewers to brew beer and then market it through joint venture arrangements. Strategic and operational decisions were also planned for Italy. Being a rarity because it was one of the few growing beer markets, Labatt had plans for branding and image-building strategies. Distribution chains centered around the small vendors that were in place. 5. Strategic Plan The strategic plan for LBOE would mirror those that were in place in the early 1980s in Canada. It would be recommended that the employment of regional brewers in the U.K. to remain a formidable part of operations there. This is critical because of the present success of the lager launch and the fact that ’toll brewing’ has substantially cut the importing of beer. Because LBOE has reserves of cash on hand, partner with a sports network or sports association that is dominant and provide sponsorships and advertisements of the lager. Once this become successful, purchase a soccer team or rugby team to further penetrate the sports industry there. Table 7.1 points out that increased diversification usually results in too much diversification. If the firm stands firm with placing its mark on the sports market, then this problem will be avoidable. Sports is a market in which the introduction of a beer firm goes hand-in-hand and it can be controlled relatively easily. Over time as the firm grows, purchase several of the regional brewers that were once employed by LBOE. This will help them grab a foothold of the industry in the region. Figure 7.1 assumes that problems with this increased market power would include integration difficulties but with the purchase of breweries that are already present in the region, this is not the case. In Italy, the plan would include abiding by the original purchase of Moretti. Because the brewer had a strong brand image and a well-established distribution network in northern Italy, the name would remain Moretti. In the south, the purchase of Prinz should also go forth. Prinz has already proved that it has the girth to practice non ethical business practices, so it is critical that any business decisions that surrounded the sale of both brewers be kept confidential. The irregularities in the accounting of the firm should be addressed and all vendors and suppliers compensated before a final deal is penned. If not, then LBOE should use that as a bargaining tool to lower the purchase price of the firm.