David had been working as a consultant with ABC Consulting Sdn. Bhd for 3 years. The firm specialized in businesses turnarounds and reviving distress businesses in the past decades. At this month’s meeting, David’s boss, Robert Stanley had voiced out his concerns about the amount of time taken to resolve their cases. He mentioned that although their overall business is considered profitable, but the firm’s cash inflow had become irregular considering the nature of their business. In order to be sustainable, Mr.
Stanley suggested that they start looking into proposing schemes to cash-rich firms that wanted to expand, diversify or venture into profitable businesses. David, who was anxious to prove himself, readily took up the challenge when he was offered the task of pioneering the move. David immediately remembered reading somewhere that the beer and stout industries was at crossroads because of high excise duties in Malaysia. Therefore, he began his research on the industry and came up with some preliminary findings: 1.
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Carlsberg Brewery Malaysia Berhad (Carlsberg) was a market leader with more than a 50% share of the beer and stout market.
Incorporated in 1961, Carlsberg began brewing Carlsberg Green Label Beer for the Malaysian market 2 years later. 3. Over the years, Carlsberg led the beer market in innovation, quality and product launches and campaigns. 4. Carlsberg held no less than 12 products of beer and shandy, was 51% owned by the Carlsberg group of Denmark and listed on Main Board of Bursa Malaysia, locally marketing its products via 100%v subsidiary in Carlsberg Malaysia Sdn. Bhd. 5. Since its operations, the company was able to enjoy sustainable profits, an increase from RM 14 million in 1977 to RM 138 million in 1999.
Even when profits declined, it still maintained a respectable RM 76 million in 2008. 7. Carlsberg always rewarded its shareholders well regardless of the fluctuating profits over the years. It was able to keep a stable dividend yield policy. Its dividend payments had exceeded its net profit over 7 straight years. 8. In 2008, Maybank Investment Bank analysts had reported that Carlsberg’s main competitor, Guinness Anchor Berhads (GAB) gradual gain in market share has eventually dominated the Malaysian Brewery industry.
However, Carlsberg’s Managing Director (MD), Soren Holm Jasen confidently quoted that they were on track of achieving favorable earnings for the coming year. He also added that the newly acquired Carlsberg Singapore would boost the company’s earnings by 40% – 50%. THE ISSUES 1. The incurring of excise duties and taxes that accounted for more than half of the cost for a typical beer company in Malaysia. These include: a. Excise duties and ad valorem tax (49. 6%) b. Sales, distributions and administration.
Raw materials and packaging costs (13. 1%) d. Employees costs (5. 5%) e. Depreciation (2. 2%) f. Corporation tax (2. 6%) 2. As reported in The Star on 29 July 2009, the beer and stout industry was facing tough times with the pending hike in excise duties and taxes which were on gradual increase, being the highest in Asia and second highest in the world. 3. It has been estimated that an increase in excise duties and taxes between 5% and 25% would reduce per capita consumption further by 7% to 21%. 4.
Due to this increase acting as the main limiting factor, Malaysian beer and stout market has reached saturation point. 5. Carlsberg’s main competitor, GAB shares the same issue as well. THE SOLUTIONS 1. Since there is not much of a prospect for expansion in the market, a promising alternative for Carlsberg and GAB is diversification. 2. David recognized Carlsberg’s strength in its brewery operations and its bottling and marketing forces. Therefore, he saw the alternative in bottling and marketing of non-alcoholic beverages where the company can venture into a much larger market in Malaysia.
After analyzing Carlsberg’s and GAB’s 2008 annual reports, David was confident that his idea of manufacturing sparkling grape juice under a “Halal” brand to Carlsberg could be sold. 4. David was well aware about the successful launch of the non-alcoholic “Guinness Maltase” by Guinness many years ago. 5. He also considered a route-map to list the new company in Bursa Malaysia within the shortest time frame. 6. Based on his research, David estimated that a carbonated beverage operation under a wholly-owned subsidiary would require an investment of RM 200 million where the internal rate of return would be a likely 12%.