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Expansion or Diversification?
Abstract
One of the main objectives of any company is to make money for the shareholders. A
sign of prosperity is sustained profitability. Hence, pursuing profits is an ongoing
effort by a company‟s management and directors. When all avenues for business
expansion schemes. Carlsberg Brewery Malaysia Bhd. (Carlsberg) is such a company.
It has sustained profitability for ever nearly 40 years in the Malaysian beer and stout
market. It serves as an excellent model for the study of business expansion schemes,
as part of a corporate finance curriculum. The case study of Carlsberg is in itself
interesting because it is full of irony. On one hand, Carlsberg operates in a „sun-set
industry‟ with no more scope for expansion because of the ever increasing excise
duties, taxes and other costs, restricted market target groups, the socially
undesirable/unacceptable nature of the products, high advertising costs and the
associated social responsibility that comes with it. On the other hand, Carlsberg and
other competitors have succeeded to remain profitable and cash rich, with
consumption on the rise in spite of the ever increasing prices, and contribute
substantially to the Government‟s tax revenue. In discussing on the issue of expansion
on diversification, such company has to face the business reality behind Malaysia‟s
halal premise, the understanding behind „sin taxes‟ and other related social and
ethical issues. DIVERSIFICATION FOR SUSTAINED PROFIT
David Ross returned to his office at 12.00 noon, after a heavy morning of monthly
business meetings. On the way back to his office, all he could think of was what his
boss, Robert Stanley, had said to him.
David had been working for 3 years as a consultant with ABC Consulting Sdn. Bhd.,
after graduating from university. The consulting firm specialized in business
turnarounds and had been successful in reviving a number of distressed businesses in
the past decade. At this month‟s meeting, the Mr. Stanley had lamented that, although
their overall business remained profitable, too much time was taken to resolve cases
and, because they dealt with business turnarounds, the firm‟s cash inflow had become
irregular. To be sustainable, Mr. Stanley had suggested that the firm ought to start
looking into proposing schemes to cash-rich firms that wanted to expand, diversify or
venture into profitable business. David was given the task of pioneering such a move,
with full support from the firm.
David, anxious to strengthen his mark in the firm, readily took up the challenge. He
remembered he had read somewhere that the beer and stout industry was at crossroad
because of the high excise duties. He began his research on the industry and come up
with some preliminary findings. A CASH-RICH COMPANY
There were three very profitable beer companies in Malaysia, supported by a nonMuslim population of 8 million, approximately one-third of its total. One of them, a
marked leader with more than a 50% share of the beer and stout market, was
Carlsberg Brewery Malaysia Berhad (Carlsberg).
Carlsberg had been incorporated in 1969. Two years after that, it began brewing
Carlsberg Green Label beer market in innovation, quality and product launches and
campaigns. The Carlsberg brand became a part of everyday life for the beer drinking
community and held no less than 12 products of beer, stout and shandy. Carlsberg was
51% owned by the Carlsberg Group of Denmark and listed on the Main Board of
Bursa Malaysia. It locally marketed its products via a 100% subsidiary in Carlsberg
Malaysia Sdn. Bhd.
Since it began its operations, the prudently-managed company was able to enjoy
sustainable profits. They increased from RM14 million in 1997 to RM138 million in
1999. Even when profits started to decline, the company was still able to maintain
respectable RM76 million in 2008. The company‟s share price averaged between
RM5.00-RM6.00 per share over the last ten years in the Malaysian stock market until
2007, despite the 2005 stock split (shareholders give 2 shares in exchange for 1) from
RM1.00 To RM0.50 per share. The share price fell in 2008 but it was still able to
secure a reasonable RM3.50 per share.
Carlsberg rewarded its shareholders well. Although its profits fluctuated over the
years, the company was able to keep a stable dividend yield policy. For example, its
profits after tax changed from RM138 million in 1999 to RM76 million in 2008,
while its dividend from RM109 million to RM79 million in the same period. It
indicated that, while its retained earnings plummeted from RM29million to a negative
RM3 million in those ten years (it began to report negative retained earnings since
2002), its dividend payments had exceeded its net profits over seven straight years.
Furthermore, by Carlsberg‟s calculations, if an investor had invested RM1,000 in
1971 and an additional RM500 in 1972 (at RM1 per share), as at 31 December 2008,
the shares would be worth a market value of RM121,500 with accumulative dividends
of RM191,381. Depositing the same amount with a bank that paid an average interest
of 5%, would make a pale comparison as the returns, if compounded annually, would
estimate RM9,281 by end 2008.
An article (in 2009) focused on a comparison between Carlsberg and Guinness
Anchor Bhd (GAB), its main competitor, where Maybank Investment Bank analysts
had reported GAB‟s 2008 fourth quarter net profit‟s dramatis increase of 41% to
RM27.39million from a year earlier, while Carlsberg‟s 2008 second quarter net
profits fell 21.7% to RM12.88 million.Analysts saw GAB‟s gradual gain in market
share to eventually dominate the Malaysian Brewery Industry.However, Carlsberg
Manager Director, Soren Holm Jasen, had been quoted as saying that their latest result
were similar to what they had achieved in the previous year and that they were on
track and confidence of achieving favourable earnings for that coming year. He
further added that the newly acquired Carlsberg Singapore would boost the
company‟s earnings by 40% to 50%. Carlsberg‟s accumulated funds prior to 2002 had been invested in money markets,
overseas investments and share buybacks. In September 1999, Carlsberg had
repurchased its own shares through KLSE (now Bursa Malaysia) at a cost of RM12
million and held in the company as treasury shares. It had been at the company‟s
April 2007 Annual General Meeting (AGM) that the shareholders give the mandate
for the company to repurchase up to 10% of its issued and pay-up capital, inclusive of
2.33 million shares in it treasury stock. In addition, Carlsberg had also invested in
overseas ventures. In 2006, the company invested RM29 million in Carlsberg
Distribution Taiwan Ltd, and in 2008, RM0.9 million in Lion Brewery (Ceylon) Ltd.
In September 2009, it acquired 1 million shares, representing 100% equity capital,
from Carlberg Singapore Pte Ltd, at a cost of RM370 million. AT CROSSROADS
Operationally, a typical beer company in Malaysia would incur excise duties and
taxes that accounted for more than half of the costs. They included excise duties ad
valorem tax (49.6%), sales distribution and administration (19.1%), raw materials and
packing cost (13.1%), employee cost (5.5%), depreciation (2.2%), and corporation tax
(2.6%).
As reported in The Star on 29 July 2009, the beer and stout was facing though times
ahead, pending on the hike in excise duties and taxes. Malaysia‟s excise duties were
on gradual increase, and currently highest in Asia and second highest in the world.
Table 1 below provides the illustration on the increasing duties and tax.
Table 1 The effect of excise duties on the consumption per capita of beer and
stout in Malaysia Per capita consumption 2002 2003 2004 2005 2006 2007 2008 22 22 23 21 20 20 21 4 5 6 7 7 7 7 (in litres)
Excise duties
(RM/litre) Note: (1) Per capita consumption is based on individuals of the average age of 20+
years in the Muslim population. (2) Source: Star on line dated 29 July 2009.
It had been estimated that an increase in excise duties and taxes between 5% and 25%
would reduce per capita consumption further by 7% to 21%. All points indicated that
the Malaysian beer and stout market had reached saturated point, the excise duties and
taxes being the limiting factor. The same sentiments were shared by Carlsberg‟s
competitor, GAB. FOREIGN BEER
There is an influx of cheap foreign beer in the market and it may be costing the
country up to RM250mil in lost taxes annually.
Industry sources claim that beer with high alcohol content from Thailand, the
Philippines, China and Europe have flooded the market and are being sold at almost half the price of locally-produced beer at coffeeshops, convenience stores, medical
halls and even some established supermarkets here.
The low prices and easy availability have made the brew attractive to all beer
consumers, particularly the lower income group, such as labourers and migrant
workers. It is learnt that consumers are switching from locally-produced beer to
compounded hard liquor because of the high price of local beer due to high excise
duties.
The sources cited reports and analysis, which estimated that the uncollected duty from
cheap imported beer to be around RM250mil while the total tax evasion from all
alcoholic beverages could be as high as RM1bil.
The report noted that while tax losses from beer smuggling in Malaysia are lower
compared to smuggling of other liquors in terms of the amount of duty paid, the sheer
volume of illicit beer makes up for its lower profit margins.
Another source pointed out that imported beer should logically cost more than locally
produced beer if legally brought into the country as the import tax alone would be
about RM5 per litre. Moreover, importers should pay a higher excise duty on beer
with higher alcohol content.
The sources also questioned how foreign beer, despite having almost twice the
alcohol content of locally-brewed beer, could be sold for as low as RM4.29 per 330ml
can or RM7 per 550ml can (in some places, it‟s only RM5) compared to premium
imported beer brands that were priced from RM9 per bottle.
A Customs Department official, who declined to be named, said beer pricing was not
regulated by the department. (Source: Star on line dated 17 October 2013) BEER IN SOUTHEAST ASIA
Southeast Asia is currently experiencing one of the fastest growth rates in beer
consumption in the world, according to a study by market researcher Euromonitor
(Source: Asean Lifestyle dated 6 March 2015). Why? Mainly because it‟s so hot, say
those who enjoy a cold beer to wash down spicy food at stalls and open-air restaurants
between Bangkok and Manila.
The main reason why Southeast Asia‟s citizen are gulping more booze is the growth
in the number of young people with higher disposable income in recent years. There
is a clear correlation between the consumption of beer and economic dynamics, let
alone Western influence through the growing influx of tourists, Western-style
restaurants and international beer brands. All this lets Southeast Asian people turn away from their traditional distillates, be it rice whiskey in Thailand, arrack in
Indonesia or various sugar cane or coconut brews elsewhere.
The survey also found that beer is increasingly being consumed in times of prosperity,
while people were seeking solace in cheap domestic liquor during harder times in the
past.
Asia overtook Europe and the Americas in beer consumption already in 2007. In
2011, the continent drank 67 billion liters of beer, against 57 billion in the Americas
and 51 billion in Europe, according to the latest available figures by Euromonitor. The
survey predicts that beer consumption is expected to grow 4.8 per cent in the AsiaPacific region each year up to 2016.
The top beer-drinking nation in ASEAN is Vietnam. Vietnamese drinkers downed 2.6
billion liters of beer in 2011, followed by Thailand with 1.8 billion liters and the
Philippines with 1.6 billion liters, nearly double the total amount of beer consumed in
Indonesia (236.4 million liters), Malaysia (171.4 million), Cambodia (136.3 million),
Laos (134.3 million), Singapore (108.2 million) and Myanmar (30.4 million). No
figures were available for Brunei where no alcohol is officially sold, but certain
restaurants in the small Chinese quarter in Bandar Seri Begawan would serve booze in
tea cups upon request at unknown volumes.
San Miguel Corporation, which produces San Miguel beer, the most popular beer in
the Philippines, has a business history of 125 years (Source: Inquirer.net dated 23
September 2015). It is the country‟s largest conglomerate in terms of asset size. The
group now has interests in several industries, locally and overseas, from energy to
telecommunications with consolidated revenues of $20 billion annually. AN OPPORTUNITY
David reckoned that the major beer industry players were worried about the industry‟s
future direction, having recognized that there was not much of prospect for expansion
in the market itself. Diversification appeared to be a promising alternative for such
companies like Carlsberg & GAB. David considered the types of products he felt he
should purpose for Carlsberg to diversify into. The strength of Carlsberg laid in it
brewery operations and it bottling and marketing forces. An alternative was seen in
the bottling and marketing the non-alcoholic beverages where the company could tap
into a much larger market in Malaysia.
After looking at the Carlsberg‟s and GAB‟s 2014 annual reports, David felt confident
that he could sell the idea of manufacturing sparkling grape juice under a “halal”
brand to Carlsberg. David was equally aware that Guinness had successfully launched
the non-alcoholic „Guinness Maltase‟ many years ago. He also considered a route
map to list the new company in Bursa Malaysia within the shortest time frame. Armed with research, David estimated that a carbonated beverage operation, under a
wholly owned subsidiary, would require an investment of RM200 million, where the
internal rate of return would be a likely 12%.
Required:
a. From your analysis of the case, identify and elaborate THREE (3) pertinent
issues.
(15 marks) b. Identify and thoroughly discuss THREE (3) business strategies should
Carlsberg adopt when entering new markets.
(15 marks) c. Assess and contrast the strength and weakness, opportunity and threat of a
beverage company similar to Carlsberg doing business in Malaysia.
(20 marks) d. To expand in new markets, funding is a critical factor for its success. Discuss
the company‟s funding ability. If not internally available sufficiently, analyse
and propose other sources can the company tap into.
(15 marks) e. Assuming you are David, what would you recommend to Carlsberg in terms
of dealing with increasing competition, country risk and new product
reception?
(20 marks) f. The challenge for David is convincing Carlsberg whether it is viable and the
market is receptive for marketing a „halal‟ soft drink owned by a beer
company. What are the alternative businesses that David can propose
assuming that Carlsberg is willing to go for expansion strategy? What internal
and external changes do you think need to be considered? What business
model needs to be used to make it viable? You need to quote examples of
other „sinful‟ companies that have followed this path.
(15 marks)
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