Bacardi Limited Essay Example

face potential threats from non-alcoholic drinks such as beer, wine cider, and other non-alcoholic beverages. The focus on wellness has resulted in a decrease in overall alcohol consumption. In response to this trend, healthier options such as low-alcohol/non-alcoholic beer, reduced-sugar wines with lower alcohol content, beauty alcoholic drinks, and fiber-enriched beer have emerged. Consumers' increasing awareness of calorie content due to rising obesity rates has led to the popularity of light, low-calorie, and low-carbohydrate beers as well as soy-based carbohydrate-free and gluten-free vodka options. Additionally, recent introductions include flavor variations such as pear peach pomegranate grapefruit flavors.According to the Bacardi Limited Annual Report 2009, energy drinks like Red Bull and Burn are popular choices. Baijiu, Chinese spirits, also have a strong position in the market. Bacardi holds significant influence over retailers due to its well-known brands and high-quality products. As the economy recovers from recession, Bacardi may benefit from increased purchasing power of customers. However, consumer preferences vary across countries and greatly impact the company's performance.

Bacardi's bargaining power with providers is limited as they rely on raw materials such as sugar cane, molasses, barley,and wine grapes for production. Changes in material prices directly affect spirit prices produced by Bacardi (Purwanto 2009). Nevertheless, substitutes exist in the alcohol industry for these materials resulting in relatively low bargaining power for providers.

Bacardi primarily operates fully-owned production facilities in major markets like Puerto Rico, Scotland, Italy, France, Spain Germany,and Mexico (Bacardi Limited Annual Report 2009). It is ranked sixth globally among liquor companies according to Exhibit 1 and ranks third internationally.In 2007, it was estimated that Bacardi accounted for about 2% of global volume sales (Euromonitor 2009a). Compared to

its competitors Diageo and Pernod Ricard, Bacardi is facing significant pressure. In the same year, Bacardi's global volumes were less than half of both Diageo and Pernod Ricard. Between 2002 and 2007, Bacardi achieved a growth rate of 15%, while Diageo grew by 22% and Pernod Ricard by 84%. According to Euromonitor's report titled "Global Alcoholic Drinks: Buying and Winning Share in Global Spirits," Bacardi aims to distribute its international brand portfolio worldwide. The company's main objectives are expanding product sales globally and increasing profit margins through product line expansion. The poor performance of Bacardi compared to its competitors highlights the need for internationalization. Before selecting an entry country, it was crucial to analyze existing markets as well as potential ones.

Bacardi primarily focuses on developed economies with North America and Western Europe accounting for 76% of volume sales. However, there are missed opportunities for expanding non-rum brands as they only contribute 10% of total revenues across other markets combined. Additionally, relying heavily on rum (which made up 60% of global sales volume in 2007) is a major flaw since dark rum outperforms white rum in all markets. Furthermore, in order to regain market share, it is important for Bacardi to concentrate on expanding its presence in emerging economies where its brands are expected to thrive.The sales of blended Scotch whisky in the Chinese and Thai markets are predicted to grow by 24 million and 11 million liters, respectively, from 2008-2013. Similarly, India is expected to see an increase in vodka and rum sales by approximately 71 million liters and 56 million liters, respectively. The Russian market offers growth opportunities for blended Scotch whisky, Cognac, premium

vodka, and tequila. Additionally, Brazil shows strong potential for growth in vodka and blended Scotch whisky. Therefore, it is recommended that Bacardi focuses its efforts on the BRIC countries: Brazil, Russia, India, and China. These countries not only represent a significant portion of the global population but also demonstrate promising prospects for growth compared to developed economies (Exhibit 2). According to Euromonitor (2009), the Chinese economy is projected to surpass both the UK and German economies by 2015 and is expected to attract around 1 billion new consumers over the next quarter-century. Investing in BRIC states has the advantage that as they develop economically, wealth spreads among their populations resulting in increased purchasing power (LearnMoney.co.uk Ltd., 2009). An evaluation of Bacardi's product portfolio will be conducted to determine which BRIC country should receive investment (see Appendix A). After careful consideration, Dash (2007) believes that the Chinese market holds the most potential for investment.Due to its larger market size and projected growth rate of 24.8% from 2008-2013, which is twice as high as India's second-place growth rate, China's liquor market is currently undergoing a PESTLE analysis. Politically, China's accession to the WTO has brought significant changes, including a proposed flat tax rate of 25-28% for both foreign and domestic companies. Additionally, China aims to reduce taxes on its middle class to stimulate consumption. The success of Chinese industrial zone policies has attracted substantial foreign direct investment. In terms of economics, China has the world's second-largest economy with an expected growth rate of 5% between 2008 and 2013. Chinese spending is lower than India's by 20-30%, remaining unaffected by rising prices and worker turnover. There is a

progressive income tax system in place in China, ranging from 5% to 45%. Despite price increases up to 9%, the Chinese elite account for 12% of global expenditure and continue their affinity for luxury goods. Sociologically, there is a growing middle class in China comprising approximately 250 million people who are becoming increasingly brand conscious.The increasing health-consciousness of consumers has led to a higher demand for low-calorie and low-alcohol content drinks. With a population of approximately 1.3 billion people, China is the largest market globally. This has resulted in an increase in popularity of foreign alcoholic beverages like Cognac, whiskey, and rum due to the presence of pubs and bars. In China, both Chinese and foreign premium alcohol brands are preferred as gifts to demonstrate generosity and economic status.

Technological advancements in urbanization have greatly improved transportation infrastructure in China. However, specific regulations are in place for advertising alcoholic drinks on television and radio.

Starting a business in China involves meeting legal requirements such as obtaining an authorized business license. Additionally, businesses must register with nine different government bodies, with policies differing across locations. This process can take anywhere from 3-12 months.

While there is no law enforcing a legal drinking age, individuals below 18 years old are prohibited from purchasing alcoholic beverages. Tax rates for alcoholic drinks vary based on their type: cereal-based drinks and spirits have a tax rate of 25%, potato-based spirits have a rate of 15%, yellow liquors are taxed at 240 yuan per metric ton, beer at 220 yuan per metric ton, other alcoholic beverages at 10%, and alcohol at 5%. There are also restrictions on advertising alcohol in China.The Chinese government is

actively seeking foreign direct investment in the environmental sector to address pollution control and water resources management (UK trend & Investment, 2007). However, it is important to be aware of the risks associated with the Chinese alcohol market. High-end products like our premium liquor brands are particularly susceptible to economic crises and natural disasters such as earthquakes and floods that can potentially damage industry sites. It is crucial to carefully consider which specific product or line of products should be produced when entering the Chinese market. A product selection model was created using secondary information from Euromonitor (2009a, 2009b, 2009d) to assist in this decision-making process. According to Gupta (2004), baijiu, a popular local spirit and the top-selling spirit globally in terms of volume, is considered the most attractive product for internationalization in China's spirit market. Localization and expected payment considerations are taken into account when utilizing this model. The vast size and scope of the Chinese market pose challenges for foreign manufacturers. Television channels are limited to a maximum of two alcohol advertisements per hour during prime time hours between 19:00hrs and 21:00hrs daily, with a total limit of ten ads within twenty-four hours (Euromonitor, 2009d).Bacardi conducted a SWOT analysis on all regions (Leu, 2007) and found that the Southwest and Central regions are the most suitable locations for starting business operations. These regions have a high demand for baijiu drinks, prefer local liquors, have well-established transportation networks, and face lower threats compared to other regions. A PESTLE analysis reveals that the Chinese spirit market is massive and faces strong competition both locally and internationally.

Because of unfamiliar preferences, Bacardi limited finds joint ventures (JV)

more advantageous than acquisitions when entering this market. Although joint ventures involve sharing profits, they are still preferable over the downsides of acquisition. Building up a complex Chinese market knowledge and supply chain system poses challenges for Bacardi in entering the Chinese market. This process is time-consuming and carries a high risk of failure.

However, opting for a joint venture can help mitigate costs and risks associated with entering a new market while providing quick access to local expertise and enabling swift response to global competition. In addition, partnering with Chinese companies allows Bacardi to leverage their knowledge and distribution channels (Gupta, 2004). This is crucial as Bacardi's leading position continues to decline annually compared to its competitors (Euromonitor, 2009a).To summarize, Bacardi Limited does not currently offer baijiu products in their portfolio, making a greenfield strategy or licensing unsuitable entry methods. Yang (2009) suggests that partnering with the largest baijiu manufacturer in China would be the most appropriate approach. By collaborating with a strong Chinese company, Bacardi can benefit from their extensive distribution network and relationships with local retailers. This partnership will also provide valuable insights into consumer habits and cultural nuances specific to each region in China. The goal is to expand Bacardi's spirits portfolio by leveraging its partner's knowledge and expertise to produce premium baijiu products.

According to Appendix C, Sichuan Yibin Wuliangye Company Limited is the leading company in China's liquor market, holding 2% of volume sales in 2007 as a national brand owner. Most of Wuliangye Group Co Ltd's products are manufactured in Yibin, Sichuan and supplied to the local market. To enter the Chinese market successfully, it is recommended that Bacardi enters

into a joint venture agreement with Wuliangye Yibin Company Limited. This arrangement would allow Bacardi to maintain controlling interest while distributing its brands alongside baijiu products. The well-known trade name of Wuliangye Yibin Company in China complements Bacardi's more international recognition.According to Intangible Business (2009), Bacardi is ranked as the third most powerful liquor and wine brand globally in 2008. Additionally, Brand Score recognizes Bacardi as the second strongest overall brand and the most powerful brand based on market share. The text suggests that Bacardi should use their existing trade name for the premium baijiu product and all future products in the joint venture, aligning with their objective of investing in China and increasing brand awareness among Chinese consumers. This strategy would benefit all other Bacardi products too. By focusing on marketing the premium baijiu product through its joint venture partner, Bacardi can gain valuable knowledge about the Chinese market and adjust their marketing campaign accordingly, allowing for effective penetration and dominance in the market. Once established in the Chinese spirits market with premium baijiu, it is suggested that China be used as a production base for expanding into the Asia-Pacific region. To increase production and improve efficiency, it is recommended to consider altering the entry strategy by increasing Bacardi's share in the joint venture or acquiring a controlling interest in Yibin Wuliangye Distillery Company. The study analyzes Bacardi's current position using Porter's five forces analysis to identify a suitable entry strategy and overcome company growth stagnancy.After conducting an extensive analysis, it was concluded that entering the Chinese market would be highly advantageous for Bacardi Limited. This is primarily due to China's large market size

and strong growth rate in the liquor industry. Furthermore, China serves as a crucial gateway to the Asian-Pacific market, which holds strategic importance for Bacardi.

To ensure success in the Chinese market, understanding its dynamics is vital. Therefore, a PESTLE analysis was carried out. Given China's vast size and diverse regions, a SWOT analysis was performed to identify the most favorable region for Bacardi to initiate operations.

Based on the product choice model, premium baijiu spirit emerged as the most attractive product for Bacardi in China. Considering insights from both the PESTLE analysis and trends in the Chinese spirit market, it was recommended that Bacardi establish a joint venture with Yibin Wuliangye Distillery—a domestic company in China.

By holding a controlling share in this joint venture, Bacardi will have a significant opportunity to penetrate not only the Chinese market but also other Asian markets.

However, two main restrictions need addressing. Firstly, there are limitations regarding information used during this study—specifically secondary information. To overcome this limitation, it is suggested that Bacardi conducts additional research and obtains updated information from both primary and secondary sources.

Secondly, risk management and other uncertainties not covered within this study—such as detailed financial aspects and competitors' strategies—must be taken into account by Bacardi before proceeding with their entry into the Chinese market.It is crucial for Bacardi to take into account the possibility of retaliation from competitors when making any overlooked market move. In general, it is advised that Bacardi conducts a comprehensive feasibility study with updated information before making any decisions. It is important to evaluate whether Wuliangye Yibin Company has an interest in establishing a joint venture (JV) with Bacardi. The success of the

negotiation process between Bacardi and Wuliangye Yibin depends on factors outside their control, such as market conditions, the financial status of the company, and the choice of CEO. If Wuliangye Yibin agrees to a JV, both parties must prioritize meeting each other's expectations. However, if Wuliangye Yibin shows no interest in this agreement, Bacardi may need to consider collaborating with another local Chinese company instead.