1. ANALYSIS OF CORPORATE STRATEGY Prepared by Jessica Choi, Phoenix Tiu, Janet Poon, Cathy Ho & Timothy Sargeant China Resources Enterprise

2. Content Problem Business Level Strategy - Differentiation - Focused geographical - Recommendation Corporate Level Strategy - Related- link - Acquisition- based Strategy - Recommendation Conclusion

3. Problem Low margins  CRE operating margin: 1.5% (2009 FY)  Sector average: 3.1% Desire from investors for higher profit margin Acquisitions currently a very important part of CRE’s strategy

4. Problem CRE has yet to improve its margins through an acquisition based strategy Should CRE continue acquisition based growth strategy or focus on fine-tuning their core business against the risks?

5. C’estbon Pacific Coffee Beverage Analysis

7. Strength - Largest packaged water brand in Guangdong Weakness - Insufficient production capacity for launching new products Opportunity - Fast-growing coffee market - Emphasis on healthy diet Threat - High development Cost - Keen competition

8. Beverage Analysis Five Forces  Rivalry with existing competitors “C’estbon”: Master Kong, Wahaha, Nongfu & Coca-Cola Pacific Coffee: Starbucks and Gourmet Master (Taiwan brand)

9. Beverage Analysis  Potential Entrants China beverage industry is attractive to the potential entrants Source: Canadean

10. Beverage Analysis  Bargaining power of customers “ C’estbon”: HIGH Pacific Coffee: LOW  Bargaining power of suppliers Pacific Coffee: HIGH  Product Substitutes Carbonated drinks, energy drinks and tea

11. “ Snow” Advertisement http://www.snowbeer.com.cn/ Beer Analysis

13. Beer - " 雪花 Snow“ SWOT – Strength  China’s best-selling beer for 2009 in terms of sales volume  Market leader position further consolidated by acquisition of Kingway in Feb 2011  US $40m investment in Technology Legend of quality: unified technological and technical standards Appointed again as the official beer for NPC and CPPCC

14. Beer Analysis Customer-Focused Royal- looking and extravagant  noble gold and jade inlaid and engraved vision  Focus shift from supply-driven to demand small bottles like imported beers

15. Beer Analysis -Brand Promotion Campaign : “The Great Expedition” ( 勇闖天涯 )  more customer interaction  attracted many customers due to its story (not actual taste)

16. Beer Analysis SWOT –Weakness - Thin profit margin (Chinese: price-sensitive) [$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]

17. Beer Analysis SWOT –Opportunity Enlarged customer group :  younger, higher income, more urban customers  high-end : Snow Draft, Snow Super Premium  urban: Beijing Chinese robust economy Chinese twelfth five-year plan

18. Beer Analysis SWOT –Threat  cost of production: raw materials, rent, utilities  increasing M&A cost

19. “Tsingtao”: great brand recognition, 15% of domestic market share “Bud Light”: “Snow” outsold [Source: Pluto Logic] Rivalry with existing competitors High market reputation and strong customer loyalty “The Great Expedition” (“ 勇闖天涯 ”) Bargaining power of customers Raw materials + Packaging materials: hard to be replaced Bargaining power of suppliers Hard to gain a share in this competitive market Potential Entrants Taste speciality Product Substitutes Beer Analysis

20. Retail Analysis Strength - 2 nd largest retail organization in China in Retail Asia Pacific top 500 awards - Multi-format business platform

21. Retail Analysis Regional leadership on a multi-format business platform

22. Weakness - Lower average sales per store compare to competitors Strength - 2 nd largest retail organization in China in Retail Asia Pacific top 500 awards - Multi-format business platform Retail Analysis

23. Average sales per store for hypermarkets format in 2009 Market AverageCNY 163.4 million CRECNY 78million Carrefour’s Shanghai storeCNY364 million Retail Analysis

24. Weakness - Lower average sales per store compare to competitors Strength - 2 nd largest retail organization in China in Retail Asia Pacific top 500 awards - multi-format business platform Opportunity - Increasing urbanization of China has expanded the consumption market Threat - Keen competition from Carrefour, Tesco, Wal-Mart Retail Analysis

25. Multinational retailers such as Wal-mart, Tesco, Carrefour expand their operations in 2 nd and 3 rd tier cities Will open 12-20 new stores each year according to PwC Rivalry with existing competitors switching cost is moderate and is decreasing with growing experience in the market Bargaining power of customers rather low for small suppliers such as small farming businesses higher for international brands like P&G as they have international brand awareness Bargaining power of suppliers High cost to entry due to the need to set up new distribution channels Competitors may retaliate with price war or bad publicity Potential Entrants Traditional stores offering human contact are an alternative Internet shopping may eliminate hypermarkets and supermarkets Product Substitutes

26. Food Processing and Distribution Analysis

27. Strength: premium food quality competitive position in the market (5 forces) FOOD

28. Food Processing and Distribution Analysis Five Forces  Rivalry with existing competitors: medium - The monopoly live cattle importer from China - Strong brand recognition & reputation - Competitors: Local farms(limited supply), frozen meat suppliers all over the world  Bargaining power of customers & product substitutes : medium to low - Monopoly in live cattle market in HK - Substitutes: local meats, chilled / frozen meats  Potential Entrants: low - Monopoly in live cattle market in HK

29. Bargaining power of suppliers: Low - Many product sources Food Processing and Distribution Analysis

30. Strength: premium food quality competitive position in the market (5 forces) Weakness: increasing cost of production raise the price of food Customer dissatisfaction Opportunities: economic growth in China increases demand for premium food products Market expansion in China( joint venture and acquisition) Threats: Hong Kong Pork Trader: urge the government to open up the live cattle market break Ng Fung Hong's monopoly FOOD

31. Recommendation 1. Integrated cost leadership and differentiation strategy Increase efficiency: Integrated value chain system: - Beverage: Manufacture the products by themselves rather than by OEM factories - Beer: divest non-core beer brands (e.x 扎西德勒, Singo) --- focus investing in core brand Flexible manufacturing system(FMS): Computer controlled process--- flexible quantities--- product variety with low cost - Food, Beverage and beer

32. Benefits: - Lower operational costs - Allow quality tracking --- create value to customers - Widen operating margin ---higher investment return - Build core competence to ensure continual growth Recommendation

33. Locating supermarkets in self-owned or partially- owned property development projects Recommendation

34. 2. Differentiation Product quality improvement and innovation - Food: emphasis on its safe and high quality food products - Beer: increase product mix to meet variety seeking of customers Recommendation

35. - Beverage: Develop healthy drinks--- strength product portfolio --- offer health-conscious customers a wide range of products Recommendation Source: China Food and Drink Report

37. e.g. Co-location of CRE’s existing and expanding retail network and Pacific Coffee More sophisticated lifestyle experience for customers Increase profit margins Recommendation

38. Benefits: - Customer loyalty: superior quality - Set a premium price - Food: justify high price Drawback: - High cost : marketing research, new product development Recommendation

39. Focused Geographical market: domestic Chinese market leverage its strength : good understanding of Chinese Market better serve the segment Less risky ally with mission: China’s largest consumer goods company Benefits local competitors : focus on more narrowly defined competitive segments (same differentiation at lower price) cannot tap the advantages of using global strategy: (market size, ROI, economics of scales and learning) Drawbacks

40. Recommendation External environment Increasing urbanization, GDP in China China’s twelfth 5-year Plan: boost domestic consumption ( minimum wage) Attractive industry Retail, food, beverage (increasing demand) Strategy formulation Focus on regional Chinese market Expand in profitable 2 nd tier markets substantially Asserts and skills Market leadership : better equips the company to effectively participate in the vibrant Chinese markets Good understanding of Chinese Market Strategy implementation Products: the famous Price : premium price Place: 2nd tier area Promotion: advertisements---raise brand awareness

41. Growing urbanization

42. Increasing GDP per capita

43. Recommendation External environment Increasing urbanization, GDP in China China’s twelfth 5-year Plan: boost domestic consumption ( minimum wage) Attractive industry Retail, food, beverage (increasing demand) Strategy formulation Focus on regional Chinese market Expand in profitable 2 nd tier markets substantially Asserts and skills Market leadership : better equips the company to effectively participate in the vibrant Chinese markets Good understanding of Chinese Market Strategy implementation Products: the famous Price : premium price Place: 2nd tier area Promotion: advertisements---raise brand awareness

44. Business-level strategy Related linked: SBU Form of Multidivisional Structure - share some resource: distribution channels in different business units

45. Beverage and Retail Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE - sharing of marketing resources

46. Food and retail Development of self-owned retail stores and launched more than 120 meat counters and stores Shanghai, Hangzhou, Nanning, Shenzhen and Ningbo, etc, Leveraging the strong “Ng Fung” brand name and efficient supply chain

47. Recommendation Development of centralized customer base system retail: membership card--- get customer profile & preference---used in product development for food and beverage Centralized IT system - sharing of updated information and technology: R&D - monitor IT system: drive cost efficiency - economies of scope

48. Current Corporate Level Strategy Restructuring ActivitiesQuality Expansion Platform Leverage CRE`s existing core competences to create synergistic combination Market leadership and improved profit margins

49. Examples of Key Acquisitions in 2010 Acquisition of the Jialinshan project marked the Group’s expansion into the mineral water sector  Synergy: Diversifying product offerings Acquired 80% interest in Pacific Coffee (Holdings) Limited from Chevalier Pacific Holdings Limited  Synergy: Differentiating retail markets Acquisitions in meat processing sector  Synergy: Expanded operations in slaughtering, storage, trading and increased CRE market power

50. Acquisition-Based Strategy Value Creating Drivers Pursuit of Market Power Learn and Develop New Capabilities

51. Pursuit of Market Power Market Power Vertical Integration Vertical Acquisitions Horizontal Acquisitions

52. Learn and Develop New Capabilities Exploit economies of scope Leverage CRE’s Core Competences Operational and corporate related acquisition

53. Learn and Develop New Capabilities Acquisitions to create operational relatedness  CRE can leverage its existing primary activities  Distribution systems  Sales networks  Also facilitate their support activities  Purchasing practices  Bargaining power Has potential to improve existing profit margin  Increased revenues  Decreased costs

54. Learn and Develop New Capabilities Limitations to acquisitions to further operational relatedness  Organizational integration may fail to create synergies  Success is dependent on CRE’s ability to integrate acquisitions into a cohesive structure that will allow sharing of activities to take place efficiently  Important that HQ implements controls to foster sharing of activities between related divisions

55. Learn and Develop New Capabilities Enhancing corporate relatedness through acquisitions  Transferring CRE’s core competences to an acquired business  CRE has expert local market knowledge and a sophisticated distribution system  Transferring core competences of core business to CRE  Possible targets should include companies that can transfer cost saving related core competences to CRE

56. Learn and Develop New Capabilities Downside of pursuing a combination operational relatedness and corporate relatedness acquisition based strategy  Cost of organization and compensation structure could be expensive leading to further decrease in CRE’s profit margins

57. Risks of Acquisition Based Strategy Integration Challenges Inability to achieve synergy Too much diversification CRE may be getting to big Managers overly focused on acquisitions

58. Recommendation Highly fragmented Chinese retail market  Great Opportunity for M&A to enhance market leadership

59. Keys to a Successful Acquisition Complementary Assets Target firm has complementary assets to leverage CRE`s business High probability of synergy and competitive advantage by maintaining strengths Ex. Acquisitions to enhance product new development, leverage CRE`s distribution network Acquire firms who have a core competence in maintaining high profit margin

60. Keys to a Successful Acquisition Acquisition is Friendly Leads to faster and more effective integration and lower premiums Targets should be selected and groomed by establishing a working relationship prior to acquisition Use cooperative strategies before acquisition to see if `fit` is right Use of JV`s and competitive strategic alliances

61. Keys to a Successful Acquisition Avoid Paying too high of a premium Rational M&A Only acquire firms with strongest complementary assets This will avoid expensive restructuring in the future Use strong bargaining power to drive down the cost of M&A

62. Keys to a Successful Acquisition CRE Maintains emphasis on R&D and innovation Maintains long-term competitive advantage Maintain CAPEX program in R&D and innovation Do not let acquisition replace innovation Continue to invest in supply chain management initiatives to improve profit margins

63. Keys to a Successful Acquisition CRE manages change well and is flexible and adaptable Faster and more effective integration facilitates achievement of synergy Facilitate merging of two corporate cultures Friendly acquisition is vital Retrain target firm`s human capital by CRE in an effort for the target firm to fully understand CRE`s operations and capabilities

64. Conclusion Establishing Market Leadership M&A is the growth engine Quality Expansion New Product Development Regional expansion Improving Profit Margins Leverage supply chain to generate efficiencies R&D + Innovation to drive cost efficiencies Acquisitions to help improve margins

65. Appendix I: Deal Activity (2007- 2011YTD) Source: DataMonitor

66. Appendix II: Deal Activity Type

67. Source: CRE 2010 Annual Report Appendix III: Turnover by Segment

68. Appendix IV: Geographical distribution of the group’s retail network

69. Appendix V: GDP by province

70. RankProvince/ municipalityPer capita consumption expenditure of urban households 1Shanghai20,992 2Beijing17893 3Guangdong16,858 4Zhejiang16,683 5Tianjin14,801 6Fujian13,451 7Jiangsu13,153 8Inner Mongolia12,370 9Liaoning12,325 10Chongqing12,144 Source: National Bureau of Statistics, PRC Appendix VI: Top 10 provinces/ municipalities in terms of per capita consumption expenditure of urban households, 2009

71. Awards in Food processing and distribution Shanghai Ng Fung Shangshi Food limited Company 2009 "China's meat industry influence brand" 2010 2010 Shanghai World Expo Shanghai World Expo Park fresh pork supplier recommended by the government Henan Cereals, Oils and Ng Fung Food Co., Ltd 2009 The top ten livestock enterprises 2009 The industrial management of agriculture leading enterprise (Zhengzhou Municipal People's Government of Zhengzhou ) 2010 The export of key enterprises in Henan Province

72. Food processing and distribution Large nation-wide source of supply: - China: joint venture with food processing companies---operate the breeding, slaughtering and meat processing, food products - the three pig breeding base model (the slaughter of 400,000), five meat processing center ( annual slaughter capacity of 1,000 million head); cold frozen business has four modern processing plants, with an annual capacity of 1.5 million tons, the largest cold Zhejiang enterprises - West Africa: operators ocean fishing company, with 130 types of fishing, all types of fishing more than 10 million tons of aquatic products,