CASES ASEOUTLINE 621

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1 CASES CASE OUTLINE 1. CLUB MED: MAKING A COMEBACK 2. HONDA IN EUROPE 3. ANHEUSER-BUSCH INTERNATIONAL, INC.: MAKING INROADS INTO BRAZIL AND MEXICO 4. VOLKSWAGEN AG NAVIGATES CHINA 5. WAL-MART OPERATIONS IN BRAZIL: AN EMERGING GIANT 6. LOUIS VUITTON IN JAPAN: THE MAGIC TOUCH 7. STARBUCKS COFFEE: EXPANSION IN ASIA 8. GAP INC. 9. MOTOROLA: CHINA EXPERIENCE 10. ipod IN JAPAN: CAN APPLE SUSTAIN JAPAN S IPOD CRAZE? 11. NTT DoCoMo: CAN i-mode GO GLOBAL? 12. THEFUTUREOFNOKIA 13. MAYBELLINE S ENTRY INTO INDIA 14. YAHOO! JAPAN *15. AOL GOES FAR EAST *16. DANONE: MARKETING THE GLACIER THE UNITED STATES *17. BMW MARKETING INNOVATION *18. HERMAN MILLER, INC. VS. ASAL GMBH *19. NOVA INCORPORATED: TWO SOURCING OPPORTUNITIES *20. CERAS DESÉRTICAS AND MITSUBA TRADING COMPANY *21. THE HEADACHES OF GLAXOWELLCOME *22. BENETTON *23. TWO DOGS BITES INTO THE WORLD MARKET: FOCUS ON JAPAN *24. ABC CHEMICAL COMPANY GOES GLOBAL *25. DAIMLERCHRYSLER FOR EAST ASIA *26. SHISEIDO, LTD.: FACING GLOBAL COMPETITION *27. SMS PACS *28. DAIMLER-BENZ AG: THE A-CLASS AND THE MOOSE-TEST *29. PEPSI ONE *30. UNISYS *31. FORD MOTOR COMPANY AND DIE DEVELOPMENT *32. CITIBANK IN JAPAN *33. KAO CORPORATION: DIRECTION FOR THE 21 ST CENTURY *34. PLANET HOLLYWOOD: THE PLATE IS EMPTY *35. HOECHST MARION ROUSSEL: RABIPUR RABIES VACCINE Indicates available on the Web at: 621

2 622 Case 1 Club Med: Making a Comeback CASE 1 CLUB MED:MAKING A COMEBACK Club Mediterranée (Club Med), a corporation in the allinclusive resort market, manages over 140 resort villages in Mediterranean, snow, inland, and tropical locales in over 40 countries. Its resorts do business under the Club Med, Valtur, Club Med Affaires (for business travelers), and Club Aquarius brand names. Club Med also operates tours and two cruise liners: Club Med 1 cruises the Caribbean and the Mediterranean, and Club Med 2 sails the Pacific. The company also arranges specialized sports facilities. Club Mediterranée s clientele is about one-third French, with the rest being mainly from North America and Japan. Club Med found that its all-inclusive price is not as widely accepted today as it was in the past and that consumers preferences have changed. Vacationers are not willing to spend large amounts of money for vacations that include many activities they are not using as much as they had been in the past. This change in preference poses a problem for the company because Club Med s competition has been able to customize travel packages for each consumer at prices that vacationers feel more comfortable with. Although it appears easy for Club Med to customize travel packages, the company is at a disadvantage compared to its competition. Most of the competitors are found in a small number of locations, whereas Club Med has resorts scattered all over the world. Currency devaluation and political boycotts are some of the situations that Club Med faces worldwide on an ongoing basis. These external factors are reducing the company s ability to increase sales and gain new customers. BACKGROUND AND HISTORY Club Mediterranée, otherwise known as Club Med, was originally founded by a group of travelers, headed by Gerald Blitz, in However, through the years, as this group was increasing in size, it was becoming increasingly more difficult to manage. Blitz, therefore, took the opportunity to turn this association into a business, with the aid of Gilbert Trigano, in Trigano sought to establish this organization, and by 1985, Club Mediterranée S.A. was transformed into a publicly traded company on the Paris Stock Exchange. Club Med Inc. became the U.S.-based subsidiary of Club Mediterranée, headed by Trigano s son Serge. Today, Club Med encompasses over 114 villages, on six continents, and 33 countries (see Exhibit 1). In addition, Club Med has two cruise ships. The Club Med style can be best described by the sense of closeness found among the managers. All managers are former village chiefs and are therefore knowledgeable of the This case was prepared by Karen Bartoletti, Alexandra Doiranlis, Steven Kustin, and Sharon Salamon of New York University s Stern School of Business and updated by Sonia Ketkar of Temple University under the supervision of Professor Masaaki Kotabe for class discussion rather than to illustrate either effective or ineffective management of a situation described (2006). company s everyday operations. This immediately reflects on the friendly relationships that the GOs (Club Med-speak for assistants or gracious organizers) and GMs (Club Medspeak for guests or gracious members) have with each other, making every vacationer s experience a memorable one. A distinguishing feature of a Club Med resort is the living area, which is much simpler than that of a typical hotel chain. Rooms are sparsely decorated (i.e., no phones, televisions, etc.). Unlike typical hotel chains, Club Med measures its capacity in each resort by the number of beds, not the number of rooms, because singles have roommates. This simpler approach has made Club Med very successful. Another key to success was Club Med s image as a place to go when you want to escape. However, in the year 2004, after years of trying to make higher profits, the company altered its strategy hoping to make a comeback. The new strategy aimed at giving consumers a differentiated product that was more upscale and luxurious, especially in the Americas. INDUSTRY STRUCTURE Until 1986, Club Med had a very strong position in the all-inclusive resort market. The corporation s level of bargaining power with buyers, suppliers, and labor was high (see Exhibit 2). During that time period, a client interested in duplicating the Club Med experience would have had to pay an additional 50 percent to 100 percent to have an identical experience at other resorts (see Exhibit 3). With regard to suppliers, companies that provided vacation-related services, such as airlines, were willing to give Club Med significant discounts in exchange for mass bookings. In keeping with the advance in information technology and the value of the Web, Club Med launched a Web site at the end of The Internet now accounts for around 20 percent of its sales. This proved to be a huge boon to travel agents who check availability, prices, air fares, and even make bookings online. The Web site also allows travel agents to block reservations rather than book and confirm them for up to 48 hours. In 2004 Club Med developed a specialist program for travel agents. Under the program, the company certified 12,000 travel agents and apparently the certification has enabled the agents to increase bookings significantly. Finding labor was not a problem for this resort chain because thousands of people were interested in working at such a pleasurable location. COMPETITION As of 1986, Club Med began facing competition. This company was no longer the only all-inclusive resort. Many of the firm s competitors were realizing similar success. In 1986, most of the all-inclusive competitors had adopted Club Med s style of recreational activities, with staff members acting as directors of these organized games. By then, the only major difference that Club Med maintained was the fact that their price did not include drinks. At the start of the year 2004, after several years of listening to agents complain that vacationers

3 Case 1 Club Med: Making a Comeback 623 EXHIBIT 1 THE CLUB MEDITERRANEE GROUP VILLAGES WORLDWIDE THE CLUB MEDITERRANEE GROUP VILLAGES WORLD WIDE Villages operated or managed by Club Med Inc. (the U.S. subsidiary) Villages operated by Club Mediterrance SA (the French parent company) PACIFIC OCEAN USA Copper Mountain Sandpiper MEXICO Cancun Huatulco Ixtapa Playa Blanca Sonora Bay ARCHAEOLOGICAL VILLAS NORTH AMERICA FRENCH WEST INDIES Buccaneer's Creek Caravelle Club Med 1 (winter) FRENCH POLYNESIA (TAHITI) Bora Bora Club Med 2 Moorea FRANCE Avoriaz Cargese Chamonix Chamonix (winter) Dieulefit Forges-les-Eaux L'Alpe d'huez L'Alpe d'huez (winter) La Plagne Les Arcs Les Menuires Meribel (winter) Opio Pompadour Sant'Ambrogio Superbagneres Superbagneres (winter) Tignes Val Claret (winter) Val d'isere Vittel SPAIN Cadaques Don Miguel BERMUDA Ibiza Porto Petro BAHAMAS Columbus Isle MOROCCO Eleuthera Agadir Paradise Island Al Hoceima TURKS & CAICOS Marrakech Turquoise Ouarzazate Smir HAITI Yasmina Magic Haiti DOMINICAN REPUBLIC Punta Cana GUADELOUPE SENEGAL Cap Skirring MARTINIQUE Les Almadies IVORY COAST Assinie SOUTH AMERICA BRAZIL Itaparica Rio das Pedras TUNISIA Hammamet Jerba la Douce Jerba la Fidele EGYPT SWITZERLAND Pontresina Pontresina (winter) Saint Moritz Victoria (winter) Saint Moritz-Roi Soliel Valbella Villars-sur-Ollon Villars-sur-Ollon (winter) Wengen ITALY Caprera Cefalu Donoratico Kamarina Metaponto Otranto Santa Teresa Sestriere AFRICA PORTUGAL Da Balaia NORTH SEA EUROPE INDIAN OCEAN YUGOSLAVIA ROMANIA BULGARIA Roussalka CROATIA Pakostane TURKEY Bodrum Foca Kemer Palmiye GREECE Corfou Ipsos Gregolimano Helios Corfou Kos ISRAEL Arziv Coral Beach MEDITERRANEAN SEA Club Med 1 INDONESIA Bali Ria Bintan MALDIVE ISLANDS Faru MAURITIUS La Pointe aux Canonniers REUNION ASIA AUSTRALIA Lindeman Island NEW CALEDONIA Chateau Royal Club Med 2 (winter) JAPAN Sahoro CHINA (PROVINCE OF) THAILAND Phuket MALAYSIA Cherating were skeptical above booking Club Med resorts due to its exclusive prices, Club Med reverted to an all-inclusive deal and launched its total all-inclusive package in most of its villages. In the first part of 2005, the company declared the Alps area, in which it operates 22 villages, a cash-free zone, meaning that an all-inclusive package with snacks and drinks around the clock. That area of the world being a major ski locale, it attracts thousands of people every year. Therefore, Club Med has also launched ski programs for its members at its resorts around the Alps. One competitor, Jack Tar Village, the Jamaica-based company, operates resorts located mostly in the Caribbean. Jack Tar positions the resorts as more glamorous and modern than those of Club Med. This can be seen in advertisements where the company implicitly criticizes the spartan rooms and methods of Club Med. Jack Tar s claim to fame in relation to Club Med is its open-bar policy. Another competitor that the firm must consider is the SuperClubs Organization, which operates four resorts in Jamaica. These resorts have reputations for being the most uninhibited and sexually oriented resorts. SuperClubs also follow a system of having drinks included in their price, but the other distinction from Club Med is the vacation s packaging and distribution. Club Med bundles the ground transportation with the rest of their packages while air transportation was to be distributed directly to consumers or travel agencies. SuperClubs, on the other hand, bundled ground transportation packages to be sold through large tour wholesalers, who in turn grouped these packages to be sold to the travel agencies. Activities that Club Med and their competition offer are similar, but the way they are offered is somewhat different. Club Med s competitors offer the same activities but do not include them in the initial price of the vacation. A few of SuperClubs activities that were included were tennis, basketball, and exercise rooms, but jet-skiing and parasailing were available for an additional fee. This allowed Club Med s competitors to offer lower prices and take away potential clients from Club Med. This concept has worked for the competition because consumers find that they are not using all the activities offered. Therefore, there is no reason to pay an all-inclusive price. Club Med, on the other hand, suffers from ecological, economic, and political constraints that prevent the firm from using this individual pricing method, which could lead to customized packages for vacationers. THE SERVICE CONCEPT Club Med has a worldwide presence in the resort vacation business that has allowed the firm to grow and dominate this industry. The original mission statement includes the idea that the company s goal is to take a group of strangers away from

4 624 Case 1 Club Med: Making a Comeback EXHIBIT 2 FORCES DRIVING INDUSTRY COMPETITION Determinants of Supplier Power Many price-competitive airlines Airline seats cannot be inventoried Many price-competitive food companies Host governments want hard foreign currency Strong demand to work for Club Med at low wages Minimal threat of forward integration by suppliers Economics of Scale Volume discounts Air travel Food Advertising Semitransferable demand among numerous villages Experience-Curve Effects 30 years' experience "Proprietary" Process Recipe for Club Med "magic" Village chiefs Barriers to Potential Entrants Intra-Industry Rivalry Few rival firms Most based in Jamacia (Club Med has no Jamacia villages) Determinants of Substitute Threat Buyers Face High-Switching Costs High opportunity cost of leisure time Reasonable Club Med price Risk-averse buyers Price of equivalent alternative vacations Substitutes Few and Dissimilar Cruise ships Traditional resorts Brand Identity Club Med name 65% new business through word of mouth Fantasy and romance High Capital Requirements $20 million to $25 million per 600-bed club Need several clubs to gain scale economies Favored Political Status Tax incentives Joint ventures with host governments Determinants of Buyer Power Purchasers are private individuals Price of similar vacation 50% 100% higher if buyers self-package High perceived risk of wrong vacation choice Buyers cannot integrate backward (except for buying a second home or timesharing EXHIBIT 3 COST COMPARISON Average Costing of a 7-day holiday in Normal Marbella Typical Club Med Don Miguel Prices Holiday Other activities/facilities included in the price at Club Med Don Miguel: Swimming Pool, Circus School, Archery, Weights Room, Keepfit Classes, Specialty Restaurant, Bridge, Evening Entertainment/Shows, Ping Pong, Jacuzzi, Sauna, Hamman. Other on-site conveniences at Club Med: Bank, Boutique, Medical Center, Bars (bar drinks extra cost), Car Rental, and Laundry Service. Return airfare London/Málaga 199 Included Coach transfer to resort 20 Included U.K. government departure taxes 5 Included Hotel (3-star equivalent) & breakfast 300 Included Seven three-course lunches (@ 15) 105 Included Wine with lunch and dinner (7 5) 35 Included Seven three-course dinners (@ 17) 119 Included Cycling (6 5/hr) 30 Included Tennis lessons (6 8/hr) 48 Included Night club entrance (6 5) 30 Included Tips to staff (7 2) 14 Included Child care facilities (6 4hrs@ 5/hr) 120 Included Total 1,025 From 569

5 Case 1 Club Med: Making a Comeback 625 their everyday lives and bring them together in a relaxing and fun atmosphere in different parts of the world. This feeling can be expected in any of the 110 resorts. This mission is the key to Club Med s competitive advantage. Consumers anywhere in the world know they will get the same preferential treatment while they are in the Club Med villages. The company s strategy of keeping members coming back is carried out by having their guests join a club as members with an initiation fee as well as annual dues. With the membership, they receive newsletters, catalogs featuring their resorts, and discounts on future Club Med vacations. This makes people feel more like a part of the Club Med and creates strong brand loyalty. In fact, an average Club Med vacationer revisits four times after their initial stay at one of its resorts. All Club Med villages are similar in their setup regardless of what part of the world they are located. The resort sites are carefully chosen by taking into consideration the natural beauty (i.e., scenic views, beachfront, woodland, no swampland, etc.), good weather, and recreational potential. Each resort has approximately 40 acres to accommodate all the planned activities: windsurfing, sailing, basketball, volleyball, tennis, and so on. The resorts secluded atmosphere is further exemplified by the lack of daily conveniences such as: TV, clocks, radios, even writing paper. This is done to separate individuals from civilization so they can relax as much as possible. However, under the new luxury experience model, Club Med is in fact adding room facilities in some of its resorts. Club Med organizes everything in a manner that encourages social interaction between guests. The rooms are built around core facilities such as the pool. Meals are done buffet style, and the tables seat six to eight people so guests can sit and meet with many different people at every meal. All activities and meals are included in the fee paid before the vacation begins. The only exceptions are bar drinks and items purchased in the small shops; those items are put on a tab and paid for at the end of the vacation as guests check out. The goal behind this all-inclusive price is to limit the number of financial decisions made by the guests so that, once again, they do not have to think of the pressures of the real world. Each day the guests have a choice of participating in a variety of activities. As evening sets in, there are choices for after-dinner activities such as dancing and shows. All activities are designed to encourage guests to join in. Even the shows allow for audience participation. PROBLEMS Until 1996, Club Mediterranée was predicted to have strong sales growth due to successful market penetration in other countries (see Exhibit 4). However, the same expansion that helped the firm become famous may be the cause of the firm s disadvantage in relation to its competitors. Club Med does not have as large of a sales increase as it had anticipated. This is due to economic and ecological disasters in countries where Club Med resorts are located. This makes it difficult for Club Med to maintain its beautiful resorts in countries that suffer from such disasters. With this knowledge taken into consideration, contracts are drawn up between Club Med and the government of the corresponding country. The key clause in these contracts states that if Club Med is allowed to enter the country, the firm will increase tourism in the area. In turn, the government will provide financial aid to help pay for the costs of maintaining the new resort facilities. EXHIBIT 4 REVENUES BY REGION (2002) France 32% Europe (excluding France) 20% America 17.7% Asia 10.2% Joint ventures with host governments have not proven to be as profitable as expected. An example of such a disappointment occurred when the Mexican government agreed to maintain Club Med s facilities if the corporation would increase Mexico s tourism level. However, unexpected occurrences, such as depreciation in the country s currency, limited the amount of capital the Mexican government could allocate to maintain the resort s facilities. This put Club Med in a difficult situation when the firm had to suddenly maintain its facilities with less government funds than expected. Although Club Med s resorts are very profitable in Mexico, the devaluation of the peso has caused Club Med s maintenance costs to rise dramatically. This in turn prevents Club Med from reducing its prices and offering customized packages to its vacationers. A second example of how international resorts reduce the firm s ability to compete effectively is Club Med s penetration into France.The resorts in the area had been doing well until March At that time, it became known that France had been conducting nuclear tests in the South Pacific. This caused Club Mediterranée to receive fewer bookings than expected in its Tahiti-based resorts. Tourists avoided these resorts because of riots among residents concerned about the testing; this resulted in negative publicity in this part of the world. The riots, which often occurred in airports, deterred potential tourists from flying into this region. Another significant event in the history of Club Med was September 11, 2001, in the United States, which caused a considerable reduction in travel the world over. For Club Med, however, it was followed by the closing of 15 of its villages. Since then, it has reopened six and opened four new villages. The hurricanes in the Caribbean in 2004 also caused some serious damage to Club Med s resorts in those regions. The company had to rebuild its Punta Cana village and at the time it gave out hurricane protection certificates that allowed guests who had lost out on vacation days due to the category 1 hurricane. Guests can exchange those certificates for travel to that destination in the future. Worse still, the terrible tsunami disaster in South East Asia devoured most of its coastline and Club Med s properties in Malaysia, Phuket, and the Maldives. Furthermore, the region has experienced a huge reduction in tourism. Happenings in one area where Club Med is based often indirectly affect other Club Med resorts as well. With a lower clientele in its Tahiti-based resorts, and in the surrounding territories, Club Med experiences lower revenues and, therefore, acquires less money to maintain these resorts. As a result,

6 626 Case 1 Club Med: Making a Comeback the firm compensates for such losses by using the profits from other resorts that have not suffered from similar disasters. Problems such as these prevent Club Med from reducing prices by implementing a customized travel package, which would enable the firm to compete more effectively in the vacation resort market. WHAT LIES AHEAD? Club Med fell on hard financial times through much of the 1990s, as a result of rundown properties, a reputation for mediocre food and amenities, the aging of the baby boomers, a backlash against the sexual revolution, and an inconsistent message that was filtered through eight advertising agencies in different countries. In 1998, Philippe Bourguignon, who is credited with turning around Euro Disney, was brought in as the new chairman to stem the decline. He immediately instigated a $500-million, three-year rescue program. Unprofitable villages and some sales offices were closed, and older resorts are being refurbished. Thanks to the new chairman s leadership, Club Med is making a comeback. Attendance is rising, the company turned a modest profit last year, and 74 villages are undergoing a $350 million restructuring. In April 1999, after the growth strategy was put into action, the stock bounced back from a 12-month low of $63.67 to close at $ Occupancy rose to 72.3 percent last year, up from 69.1 percent in the 1997 fiscal year and 66.9 percent in the 1996 fiscal year to 73.7 percent in In fiscal 1998, attendance at Club Med rose 5 percent to almost 1.6 million, although it is still well below the record 1.8 million set in Equally important, after huge losses in both 1997 ($215 million) and 1996 ($130 million), the company earned $30 million in revenue of $1.5 billion in sales. In 2001, revenues were up 5.1 percent, to billion euros. Although many problems still confront the resort club, such as a 10 percent loss of room space because of renovations, Club Med appears to be back on track to success. The company finally reported a net profit of 3 million euros for the six months ended April 2005 compared with a loss of 4 million euros the previous year, its first time in four years, despite calamities such as the devastating tsunami in the Indian Ocean and the continuous storms in the Caribbean, which caused a drop of 4.3 percent in sales. The company also attributed this positive profitability to a slight change in its strategy away from two-trident properties to a more upscale position. Boosted by these results, the company is aiming at an operating profit of 100 million euros in the year After serious losses and cash problems in 2002, former chairman Bourguignon resigned and Henri Giscard d Estaing was appointed as the new chairman. With this new appointment, the company started looking toward a change in strategy and a brighter future. Current management is well aware of the strong brand recognition that Club Med holds. It is synonymous with the pursuit of pleasure. However, management would like to alter this perception. It would like to eliminate the perception of Club Med as a swingers paradise. Even ifclubmedwantedittobesucharesort,itwouldbevirtually impossible to compete with resorts that have sprung up in Europe, Asia and the Caribbean in recent years catering exclusively to hedonistic life styles. But Club Med has not just been renovating properties. A big change is the decision to concentrate its sales and marketing efforts on France, the United States, Canada, Belgium, Japan, Italy, Germany and Switzerland. These countries account for 74 percent of visitors. Club Med also plans to enter the Chinese market once again. It tried to enter China a few times before but the effort was largely unsuccessful. Therefore, this time it will not open a resort until it has developed brand familiarity in China by opening a sales office first. The company intends to follow this similar strategy it adopted while entering the South Korean market, which has been growing every year. In January 2005, the company announced that it was opening its first report in Albania. The company s next step is opening villages in Italy and Brazil. The U.S. is Club Med s No. 1 target. To increase U.S. visitors, Club Med is considering opening three new resorts around the U.S., one of them being a resort for couples in the Dominican Republic, another being a family report in the Yucatan Peninsula near Mexico, and the third being a family resort in Brazil. It has invested over $350 million from 1998 to 2004, in advertising to rejuvenate their strong brand name in the U.S., which has been misunderstood because of poor advertising campaigns. Each village is now ranked with two, three, or four tridents, based on amenities and comfort level, with the result that the 13 budget Club Aquarius villages are being folded into the two-trident category. A major expansion is under way around the Pacific Rim, including new resorts in Indonesia, China, the Philippines, and Vietnam. As part of its agenda to promote itself and leverage occupancy, Club Med has started entering strategic alliances with firms all over the world. In November 2002, it signed a deal with match.com, an online dating company and a part of USA interactive, to offer vacation packages for singles who could casually meet people in a different setting. This was part of its focus on the American customer. In the year 2004, Club Med executed its new upmarket strategy. Prior to that, French hospitality group Accor had acquired a 28.9 percent stake in Club Med, which provided it with the much needed financial assistance and association with a powerful ally. To start with, it changed its brand identity and logo with a makeover expenditure of more than 500 million euros. The company believed that with consumers changing preferences, these were looking for a different vacation experience and it launched its New Luxury product. This included major renovations at its U.S. locations, namely Club Med Columbus Isle, Club Med Buccaneer s Creek and Club Med Turkoise. Club Med Columbus Isle went through a $5 million upgrade to include more luxury features that include king sized beds, flat screen TVs and well-stocked minifridges among many other such facilities. Add to that three new dining options and a poolside with eclectic music, daybeds, and lounges that it hopes to offer an experience like no other. The company also spent $ 50 million on refurbishing its resorts at Buccaneer s Creek and $6 million on the one at Turkoise. Among the new experiences that Club Med is trying to bring to its members are the unique gym facilities in some of its resorts and the Seven Senses of Summer Program offering a different activity every day of the week (including art classes, movie nights, dancing, and meditation). In early 2005, the company launched its first flagship store in London, UK, known as the The Travel Boutique.

7 Case 2 Honda in Europe 627 For the future, Club Med is scanning for new properties in the Americas that it can convert into boutique style luxury properties like the one on Columbus Isle. DISCUSSION QUESTIONS 1. Given Club Med s current problems, do you feel the company could have avoided its pricing scheme problems through different expansion plans? 2. Why is Club Med unable to offer competitive prices? 3. Given Club Med s current problems, do you think that the Club will be able to survive by keeping its current pricing strategy, or do you think a new strategy should be implemented? 4. How can Club Med continue to differentiate itself in order to sustain its competitive advantage against its competitors who seem to be imitating its service concepts? CASE 2 HONDA IN EUROPE INTRODUCTION The Honda Motor Company first entered the European market in the early 1960s through the sale of its motorcycles. The company s motor vehicles were introduced into Europe at a much later date. Honda s motor vehicle sales in Europe have been relatively poor, especially in the previous five years. Despite its huge success in the North American market, Honda is struggling to gain a significant foothold in the European market. Honda executives wonder why their global strategy is sputtering. Is global strategy just a pipedream, or is something wrong with Honda s European strategy? HISTORY OF HONDA In 1946, Souichiro Honda founded the Honda Technology Institute. The company started as a motorcycle producer and by the 1950s had become extremely successful in Japan. In 1956, Honda entered the U.S. market and was able to position itself effectively, selling small-sized motorcycles. In the early 1960s, the company commenced automobile manufacturing and participated in Formula-1 racing (F-1) to assist its technology development. Thanks mainly to its F-1 efforts, Honda became recognized as a technologically savvy company not only in Japan but in the rest of the world as well. Until the early 1990s, the company experienced serious organizational mismanagement resulting from tension between the technology side and the marketing-sales side. The situation became so dire that the technology-biased president and founder, Souichiro Honda, was forced out, as a result of his neglect in important marketing decisions. After Souichiro Honda s departure, the company became more marketingtechnology balanced, and by 1999 it was second in sales only to Toyota in the Japanese market. The company s underlying success is best summarized in its mission statement, pleasure in buying, selling and producing, and Beat GM, not Toyota. Honda currently has 25 separate factories in the world, and its operations cover automobiles, motorcycles, financial services, power products, and power tools. In fiscal 2004, 83 This case was prepared by Jong Won Ko, Peter Wirtz, Mike Rhee, and Vincent Chan of the University of Hawaii at Manoa and updated by Sonia Ketkar of Temple University under the supervision of Professor Masaaki Kotabe for class discussion rather than to illustrate either effective or ineffective management of a situation described (2006). percent of Honda s revenues came from its automobile sector, as outlined in the accompanying table. HONDA SBUSINESS PORTFOLIO (IN MILLION YEN) Motor cycle 446,622 Automobile 2,918,750 Others 123,733 Total 3,489,105 AUTOMOBILE INDUSTRY The automobile industry worldwide is in the mature stage of its life cycle. By the 1990s, an oversupply of motor vehicles became such a problem to the industry that a number of mergers and acquisitions (M&A) and alliances took place. In the late 1990s, industry experts stated that only six or seven companies would remain global players, while other companies would be forced to sell in niche markets. In the last decade, DaimlerChrysler acquired a major share of Mitsubishi, GM became the controlling shareholder of Fiat and Saab, Ford acquired Volvo, Jaguar, and a major share of Mazda, and Renault became the controlling shareholder of WORLD AUTOMOBILE PRODUCTION RANKING IN SALES Ranking Name Number (million) 1 GM Toyota Ford Volkswagen Daimler-Chrysler Peugeot(Citoreng) Honda Nissan Hyundai-Kia Renault 2.282

8 628 Case 2 Honda in Europe Nissan. Global scale production and sales became important as a way to cut cost through developing a common platform or engines as well as global procurement. Unlike their European and American counterparts, Japanese automobile companies, including Honda, did not adopt the M&A strategy for expansion. To remain a global competitor, Honda instead expanded its operations by setting up plants in regional markets. The following table shows that Honda is currently ranked seventh in the world in auto production. HONDA IN EUROPE Currently, Honda has five regional operations: North America, South America, Japan, Asia-Oceania, and Europe. The European operation covers Europe, the Middle East, and Africa. Honda entered the European market in 1961 as a motorcycle manufacturer, with its automobile operations following several years later. In 1986, Honda started engine production in the UK, and six years later it launched its European production at Swindon in Somerset, UK. Honda opened production facilities in Turkey in 1999 to target the Middle East and Eastern European markets. The European operation accounts for a small portion of Honda s global operation, as shown in the following table. players in the market. The company needs to expand its sales and production in order to survive in global scale competition. BRAND IMAGE IN EUROPE Brand image High Low Low BMW DMC Honda Daewoo Hyundai Audi Volvo Peugeot Toyota Fiat GM, Ford VW Renault Breadth of product High HONDA S EUROPEAN MARKETING The four largest markets within the European market are those of Germany, the UK, Italy, and France. HONDA S GLOBAL SALES BY REGION Net Sales (in billion Yen) Year 2004 Year 2005 Japan United States Europe Other Unit Sales (in thousands) Year 2004 Year 2005 Japan United States Europe Other Year ended March 31 There are a number of reasons for the low sales in Europe. Honda entered the European market rather late, and its first production facility in the region was built in 1992, at a time when Honda was still only a minor player in the Japanese market. Prior to 1992, Honda Europe was forced to import its vehicles from the United States, making it impossible for the company to aggressively attack the European market. One of the most important reasons for the lack of success was that the European market was highly saturated with locally owned car manufacturers. Companies such as Saab, Volvo, BMW, Audi, Volkswagen, DM, Opel, Renault, Peugeot, and Fiat have been dominating the European market for a considerable number of years. In addition, other foreign companies, such as Toyota, Nissan, Ford, and Hyundai make the European market extremely competitive. In 2001, Volkswagen was ranked number one in Europe with 17.6 percent of the market and Peugeot number 2 with 15.8 percent. Renault, Ford, Fiat, and GM had approximately 10 percent of the market each, and Toyota, BMW, and Audi had a market share in the region of 5 percent. Honda captured only 2.4 percent of the European market. The competitive industry map below shows Honda s current position in the European automobile market. The Honda brand image in Europe is relatively weak, and the product line is narrow compared to the other major Product. Honda s European manufacturing plant is located in the UK, and as a result, the country has more Honda models than any other country in Europe, with a total of 20. Germany, the country with the highest number of vehicle registrations, has the next largest number of models, 16. Italy and France, both similar in size to the UK, have 11 and 9 models, respectively. The products found in Italy and France are found in Germany and the UK. The UK has a number of automobiles that cannot be found in the other three countries, including diesel-powered cars. Price. The prices of Honda s vehicles in Europe are comparable to those of similar cars produced by local manufacturers. AUTOMOBILE PRICES Vehicle Price (euro) Honda Jazz 13,800 Peugeot ,250 VW Polo 13,930 Renault Clio 13,650 Opel Astra 13,400 Fiat Stilo 13,500

9 Case 2 Honda in Europe 629 The following table compares the price in euro of Honda s new 1.4-liter Jazz with similar cars offered in the European market. The table clearly implies that Honda is attempting to price its product at a similar level to that of the competition. HONDA S UNIT SALES IN EUROPE: EUROPEAN SALES The following table shows the sales figures for Honda s eight most popular motor vehicles through Honda s most successful year was in 1998; since then, however, sales have been decreasing dramatically. Year Civic Accord Shuttle CR-V HR-V Logo S2000 Stream Total ,783 44,248 3, , ,530 39,410 3,278 16, , ,270 31,536 4,670 41, , ,156 48,835 4,261 35,923 26,257 12,856 1, , ,653 46,579 2,956 29,751 28,537 10,593 3, , ,024 28, ,381 17,726 4,145 2,195 7, ,922 Distribution. The image of Honda s vehicles and motorcycles in Europe is aligned together. Consequently, Honda vehicles throughout Europe are distributed at the same locations that their motorcycles are. Vehicles produced in the UK Honda s motor vehicles have been relatively unpopular in the majority of Europe, in particular Italy and France. The company s best sales have occurred in the UK and Germany as shown in the accompanying table. HONDA S UNIT SALES IN EUROPE BY COUNTRY: Country UK 38,187 45,772 50,075 55,611 61,044 65,290 68,736 63,459 77,842 81,858 Germany 53,687 52,614 54,550 55,918 48,247 43,610 33,536 31,868 32,580 34,251 France 14,411 11,848 13,260 12,585 14,095 15,270 8,717 6,495 6,392 5,547 Italy 12,063 14,101 15,014 25,406 24,532 22,031 18,570 13,732 15,509 18,887 and Turkey are distributed throughout Europe, the Middle East, and Africa. Recently, because of the depreciating euro vis-à-vis the U.S. dollar, cars manufactured in the UK have also been exported to the United States. Promotion. The promotion of Honda s motor vehicles is essentially the same throughout Europe, whether in France, Germany, Italy, or the UK. The company spends very little time and money in promotion, however. It believes that its success in Formula-1 racing, together with its ability to produce high-mileage fuel-efficient products that exhibit great engineering, is enough to make it popular in the European market. It relies on word of mouth by its customers to potential customers and, to a lesser extent, on the Internet and the company s various Web sites. In the recent 2002 launch of the Jazz (known as the Fit in Japan), the company relied heavily on word of mouth and on a Web site created especially for the occasion. The Web site, using the same design for all European countries, promoted the car as suitable for young working women. The Web site attempted to give the car a cool, young image by associating it with Feng Shui, Yoga, and other relatively hip activities. A sense of fun was also attached to the Web site in an attempt to draw in young women. Once inside the Jazz Web site, the user could easily find the nearest dealership to purchase the vehicle. EUROPEAN CULTURE Honda s relatively poor showing in Europe may be explained by a number of reasons. The main problem was that the company failed to truly understand the culture of Europe, and, more importantly, it treated Europe as one giant single market. Although France, Germany, the UK, and Italy are all European, cultural differences abound among them. One theory that explains the differences between the four nations is that of high-context versus low-context cultures. In a highcontext culture, the interpretation of messages depends on contextual cues like gender, age, and balance of power, and not on physical written text. In a high-context culture things may be understood, rather than said. High-context cultures include those of China, Japan, Italy, France, Spain, and Latin America. Conversely, a low-context culture emphasizes a distinctive written text or spoken words, where ideas are communicated explicitly. Low-context cultures expect others to say what they mean and do what they say. There is far less emphasis on contextual cues, such as ranking and balance of power. Examples of countries that fall within this category are the United States, the Scandinavian nations, and Germany. The accompanying figure presents a graphical view of high-context and low-context countries.

10 630 Case 2 Honda in Europe CULTURAL CONTEXT Cultural Context High context Japanese IMPLICIT Arabian Latin American Spanish Italian English (U.K.) Scandinavian French English (U.S.) Low context Swiss German EXPLICIT CULTURAL CONTEXT Successful advertising in low-context cultures differs from that in high-context cultures. An advertisement for a high-context culture is based on an implicit style where the emphasis is on the overall feel and outlook rather than on the feeding of pure information. In this type of advertisement, the actual product may not even be shown. The audience may only be given implied images and subliminal messages. Honda s Jazz Web site contained a large amount of information which would have been too much for high-context cultures such as the French and the Italians. In addition, high-context cultures have been much slower than their low-context counterparts in adopting the Internet. On the other hand, the advertisement for a low-context culture includes the actual product, together with a large amount of information. Low-context nations such as Germany would have most likely been able to appreciate Honda s Jazz Web site. It is therefore unlikely that an advertisement/promotion campaign created for a high-context culture will be effective in a low-context culture country and vice versa. Since Europe consists of both high-context and low-context culture countries, companies such as Honda, intending to expand its business, should take into consideration two separate market segments when planning its marketing strategy. Honda s situation in France, Italy, Germany, and the UK in regard to their culture is outlined in the following sections. France. France is a high-context culture where style and image are of the utmost importance. The perceived quality of a product means that the French have a bias toward the style and image of a product. The image of Japanese cars in France is relatively poor, dating back to the 1930s when Japanese manufacturers entered the European market with low-quality products. Since that time, Japanese carmakers, in particular Honda, have not understood the concept of style and image in marketing. They appear to show a car only in a factual way, which is extremely low-context. Japanese carmakers in France have recently tried to alter their image, though with limited success. Today France s image of Japanese cars, and in particular that of Honda, is that of a small, low-quality car, suitable only for a second car. Most buyers of Japanese cars are young career women who have just entered the workforce and housewives with limited cash. The main family car is likely to be a Renault or Peugeot and is driven by the man in the family. In addition, the French are risk-averse people, who dislike trying new things. They are also highly patriotic, supporting and purchasing their national products, such as Renault and Peugeot cars. The patriotism and risk averseness of the French, together with their low image of Japanese cars and the large number of other European automobiles available in the market, makes it extremely difficult for Honda to be successful in this market. Italy. Italy, like France, is a high-context culture where a great deal of emphasis is placed on feeling and style. The Italian culture is reflected in their daily lifestyle, which gives a sense of romance to the people living there. As in France, the Italians view Japanese cars as small, low-quality vehicles, suitable only as a second family car. The most popular automobile in Italy, especially for families, is the Fiat. The Fiat is dominant because the Italians, like their high-context cousins the French, are very patriotic. Italians are also risk-averse and are not adventurous in sampling products outside of Europe. Italians, like the majority of Europeans, love to drive diesel automobiles. Only the French enjoy driving diesel cars more than the Italians.

11 Case 2 Honda in Europe 631 However, Honda produces very few diesel cars, and the only country in which they are offered is the UK, where they are relatively unpopular. The following table shows the five-year diesel car market share percentages in the UK, Germany, France, and Italy. MARKET SHARE OF DIESEL CARS BY COUNTRY Year UK Germany France Italy Euro Avg N.A. N.A. N.A. N.A. The table shows that diesel cars account for 30 to 50 percent of vehicles in France, Italy, and Germany. Diesel cars are hugely popular because of the high gasoline prices in those countries. Diesel engine cars are cheaper to maintain in the long run, compared to gasoline engine cars. A large number of European cars compete in Europe, particularly at the luxury end. BMW, Mercedes, and Audi are very popular for the very rich, as are Ferrari, Lamborghini, and Porsche. It is difficult for Japanese cars to enter the European market, especially at the higher end. The only Japanese cars that are selling reasonably well are Toyota s Yaris, Nissan s Micra, and Jazz from Honda. All three models compete in the 1.4 liter and under segment. Germany. Of the four main European countries in which Honda is sold, Germany has had the second highest sales volume. Germany is a low-context culture where practicality and durability are two of the main concerns of a product. Consumers are concerned with every detail regarding a product and wish to know all relevant information before making a purchase. The promotion style used by Honda on the Internet, bursting with information on their automobiles, seems to be an appropriate form of promotion for the low-context nature of the Germans. Another factor that should place Honda s products in a better position in Germany is the Germans greater willingness to take risks and to purchase new products. As a result, Honda would not have to spend additional resources to change the image of their vehicles in Germany, as it should probably do in France and Italy. In reality, however, Honda s sales have been dropping rapidly in the past five years 50 percent of what they were five years ago. If Honda s promotion is in line with the German s low-context nature, there must be another reason for the decrease in sales. The most logical is the perceived nature of Honda s quality. The company needs to use its marketing to promote quality because competitors such as Mercedes (under DaimlerChrysler), Audi, Volvo, Jaguar (under Ford), and Volkswagen, to name a few, are seen as high-quality carmakers. The United Kingdom. The English are a moderately highcontext culture, who focus on tradition and class. Accordingly, the type of advertising and marketing promotion that will appeal to the English is similar to that popular in France and Italy but is more conservative in nature. On the other hand, the English are more individualistic and less risk averse than the French and Italians. Hence, it should be easier for Honda to introduce its range of cars in the UK and to improve sales. The fact that the manufacturing plant is located in the UK helps in the promotion of the cars. The construction of a second assembly plant should also help Honda s position in the UK. The existence of the assembly plant, together with the risk-taking nature of the English, has increased the number of Hondas sold in the UK in the last five years to such a level that it is easily Honda s best market. The number sold in the UK as of 2001 was twice that of Germany, which only five years before had recorded more sales than the UK. However, no Honda vehicle has entered the list of the top ten cars sold in the UK, as shown in the following table for TOP 10 CARS SOLD IN EUROPE 1. Ford Focus 2. Vauxhall Astra 3. Ford Fiesta 4. Peugeot Vauxhall Corsa 6. Ford Mondeo 7. Renault Clio 8. Renault Megane 9. Volkswagen Golf 10. Citroen Xsara POSSIBLE ENTRY WEDGE A possible entry wedge exists in Europe that could help Honda recover some of its lost ground. The European automotive industry is committed to a voluntary agreement to reduce CO 2 emissions by 25 percent from the 1995 levels by 2008 for all new cars. As an incentive for individuals to drive lowemission cars, special tax brackets will be given to drivers of low-emission cars. In 2001, Honda s Insight produced the lowest levels of CO 2 emission of any car in Europe. The following table shows the five cars with the lowest CO 2 emission. TOP 5 CARS WITH THE LOWEST CO 2 EMISSION Rank Car Engine Gas Type Co 2 g/km 1. Honda Insight 1 liter Gasoline 80 2 Peugeot liter Diesel Toyota Prius 1.5 liter Gasoline Renault Clio 1.5 liter Diesel Audi A2 1.4 liter Diesel 116 The ranking is an excellent opportunity for Honda to promote its cars in Europe, where people (especially in Germany) are obsessed with the environment and are burdened with high taxes. In addition, Honda is introducing the Civic Hybrid in It is a gasoline-electric power train, fuel-efficient car with a low CO 2 emission level. Although the car has an electric engine, it does not need to be plugged in and recharged. The battery pack recharges itself automatically as the car is running.

12 632 Case 3 Anheuser-Busch International, Inc.: Making Inroads into Brazil and Mexico THE ISSUE Honda is currently at the crossroads of its European expansion in the automobile market. It has been successful in managing to market essentially the same cars in many parts of the world, particularly in the North American and Japanese markets. Honda executives are wondering whether or not they should adopt more localized product development in Europe. DISCUSSION QUESTIONS 1. Does adapting the promotion of its motor vehicles to suit each country s culture make sense for Honda? 2. Is it wise for Honda to market its products the same way in every country? 3. Is pricing its vehicles similar to the competition a good strategy for Honda? 4. Should Honda change its product mix from country to country? 5. Is distributing its motor vehicles together with its motorcycles a good strategy for Honda? 6. Is the European market too competitive for Honda? CASE 3 ANHEUSER-BUSCH INTERNATIONAL,INC.: MAKING INROADS INTO BRAZIL AND MEXICO HISTORY In 1852 George Schneider started a small brewery in St. Louis. Five years later the brewery faced insolvency. Several St. Louis businessmen purchased the brewery, launching an expansion financed largely by a loan from Eberhard Anheuser. By 1860 the enterprise had run into trouble again. Anheuser, with money already earned from a successful soapmanufacturing business, bought up the interest of minority creditors and became a brewery owner. In 1864 he joined forces with his new son-in-law, Adolphus Busch, a brewery supplier, and eventually Busch became president of the company. Busch is credited with transforming it into an industry giant and is therefore considered the founder of the company. Busch wanted to break the barriers of all local beers and breweries, so he created a network of railside icehouses to cool cars of beer being shipped long distances. This moved the company that much closer to becoming one of the first national beers. In the late 1870s, Busch launched the industry s first fleet of refrigerated cars but needed more to ensure the beer s freshness over long distances. In response, Busch pioneered the use of a new pasteurization process. In 1876 Busch created Budweiser, and today the company brews Bud the same way it did in In 1896 the company introduced Michelob as its first premium beer. By 1879 annual sales rose to more than 105,000 barrels, and in 1901 the company reached the one-million barrel mark. In 1913, after his father s death, August A. Busch Sr. took charge of the company, and with the new leadership came new problems: World War I, Prohibition, and the Great Depression. To keep the company running, Anheuser-Busch switched its emphasis to the production of corn products, baker s yeast, ice cream, soft drinks, commercial refrigeration units, and truck bodies. They stopped most of these activities when This case was prepared and updated by Masaaki Kotabe with the assistance of Sonia Ketkar of Temple University for class discussion rather than to illustrate either effective or ineffective management of a situation described (2006). Prohibition ended. However, the yeast production was kept and even expanded to the point that Anheuser-Busch became the nation s leading producer of compressed baker s yeast through the encouragement of the company s new president in 1934, Adolphus Busch III. August A. Busch Jr. succeeded his brother as president in 1946 and served as the company s CEO until During this time eight branch breweries were constructed, and annual sales increased from 3 million barrels in 1946 to more than 34 million in The company was extended to include family entertainment, real estate, can manufacturing, transportation, and major league baseball. August A. Busch III became president in 1974 and was named CEO in From that time to the present, the company opened three new breweries and acquired one. Other acquisitions included the nation s second-largest baking company and Sea World. The company also increased vertical integration capabilities with the addition of new can manufacturing and malt production facilities, container recovery, metalized label printing, snack foods, and international marketing and creative services. CORPORATE MISSION STATEMENT Anheuser-Busch s corporate mission statement provides the foundation for strategic planning for the company s businesses: The fundamental premise of the mission statement is that beer is and always will be Anheuser-Busch s core business. In the brewing industry, Anheuser-Busch s goals are to extend its position as the world s leading brewer of quality products; increase its share of the domestic beer market 50% by the late 1990s; and extend its presence in the international beer market. In non-beer areas, Anheuser-Busch s existing food products, packaging, and entertainment will continue to be developed. The mission statement also sets forth Anheuser-Busch s belief that the cornerstones of its success are a commitment to quality and adherence to the highest standards of honesty and integrity in its dealings with all stakeholders.

13 Case 3 Anheuser-Busch International, Inc.: Making Inroads into Brazil and Mexico 633 ANHEUSER-BUSCH INTERNATIONAL PARTNERSHIPS Country Partner Investment Date Argentina Compañía Cervecerías Unidas S.A.-Argentina (CCU Argentina) Equity investment (of which 28.6% is direct and indirect); licensed brewing and joint marketing Dec Central America (Costa (Cervecería Costa Rica Import, distribution Apr Rica, El Salvador, La Constancía Guatemala, Honduras, Cervecería Centroamericana Nicaragua, Panama) Cervecería Hondureña Compañia de Nicaragua Cervecería Nacional) Chile China Compañía Cervecerías Unidas (CCU) Budweiser Wuhan International Brewing Co. 20% equity investment Jan % A-B owned brewery, A-B sales, marketing, distribution Feb China Tsingtao Brewery Co. Ltd. 4.5% Equity investment June 1993 Denmark Carlsberg Breweries A/S Import, distribution May 1998 France Brasseries Kronenbourg Import, distribution, Jan packaging Ireland Guinness Ireland Ltd. Licensed brewing; joint June 1986 marketing Italy Birra Peroni Industrial S.p.A. Licensed brewing; joint Apr marketing Japan Kirin Brewery Co. Ltd. Licensed brewing; joint Jan marketing Kirin sales, distribution Mexico Grupo Modelo Import, distribution July 1989 Equity investment (of which Jan % is direct and indirect) South Korea Oriental Brewery Co. Ltd. Licensed brewing; joint marketing Dec BEER AND BEER-RELATED OPERATIONS Anheuser-Busch, which began operations in 1852 as the Bavarian Brewery, ranks as the world s largest brewer and has held the position of industry leader in the United States since More than four out of every ten beers sold in the United States are Anheuser-Busch products. In 2004, when the world s third largest brewing company, Brazil s Companhia de Bebidas das Americas (AmBer) joined hands with Belgium s Interbrew, the combined firm InterbrewAmBer became the world s largest Brewer with a global market share of 14 percent and revenues of over $12 billion. Anheuser-Busch s principal product is beer, produced and distributed by its subsidiary, Anheuser-Busch, Inc. (ABI), in a variety of containers primarily under the brand names Budweiser, Bud Light, Bud Dry Draft, Michelob, Michelob Light, Michelob Dry, Michelob Golden Draft, Michelob Gold, Draft Light, Busch Light, Natural Light, and King Cobra, to name just a few. In 1993 Anheuser-Busch introduced a new brand, Ice Draft from Budweiser, which is marketed in the United States and abroad as the preferred beer because it is lighter and less bitter than beer produced in foreign countries. Bud Draft from Budweiser was first introduced in the United States in late 1993 in 14 states, with a full national rollout in 1994 in the United States and abroad. SALES Anheuser-Busch s sales grew slowly after a sales decline in Net sales increased consistently from 1993 to almost $13.3 billion in 1998 but fell again to $11.8 billion in Net sales were up again in the next five years to $14.9 billion in ANHEUSER-BUSCH INTERNATIONAL, INC Anheuser-Busch International, Inc. (A-BII), was formed in 1981 to explore and develop the international beer market. A-BII is responsible for handling the company foreign beer operations and for exploring and developing beer markets outside the United States. Its activities include contract and license brewing, export sales, marketing and distribution of the company s beer in foreign markets, and equity partnerships with foreign brewers.

14 634 Case 3 Anheuser-Busch International, Inc.: Making Inroads into Brazil and Mexico A-BII has a two-pronged strategy: (1) build Budweiser into an international brand and (2) build an international business through equity investments and creating partnerships with, or leading foreign brewers. In seeking growth, Anheuser-Busch International emphasizes part-ownership in foreign brewers, joint ventures, and contract-brewing arrangements. These elements give the company opportunities to use its marketing expertise and its management practices in foreign markets. The success of these growth opportunities depends largely on finding the right partnerships that create a net gain for both companies. Other options for international expansion include license-brewing arrangements and exporting. In addition to its domestic breweries in the United States, the company operates two international breweries in China and the United Kingdom, respectively. Budweiser beer is locally brewed through partnerships in seven other countries, Argentina, Canada, Italy, Ireland, Spain, Japan, and South Korea. A-BII is currently pursuing the dual objectives of building Budweiser s worldwide presence and establishing a significant international business operation through joint ventures and equity investments in foreign brewers. Anheuser-Busch brands are exported to more than 60 countries and are brewed under Anheuser-Busch s supervision in five countries. A-BII has experienced international growth in all operating regions, with a 9-percent market share worldwide, and has the largest export volume of any U.S. brewer. Anheuser-Busch had more than 45 percent of all U.S. beer exports and exported a record volume of more than 3.4 million barrels of beer in From 2002 to 2003, Anheuser-Busch s international sales volume increased by 5 percent to 8.4 million barrels. The company now sells beer in over 80 countries worldwide. MARKET SHARE The top 10 beer brands worldwide for 2000 in worldwide market share are shown in Exhibit 1. Most recently, Anheuser- Busch has announced several agreements with other leading brewers around the world, including Modelo in Mexico, Antarctica in Brazil, and Tsingtao Brewery in China. These agreements are part of A-BII s two-pronged strategy of EXHIBIT 1 TOP TEN BEER BRANDS WORLDWIDE, 2000 Share of World Beer Brand Company Market Budweiser ABI 4.4% Miller Lite Miller Brewing Co. 1.7% Kirin Lager Kirin Brewery 1.7% Bud Light ABI 1.5% Brahma Chopp Companhia 1.4% Cervejaria Coors Light Coors Brewing Co. 1.4% Heineken Heineken NV 1.3% Antarctica Antarctica Paulista 1.3% Polar Cerveceria Polar SA 1.2% Asahi Super Dry Asahi Breweries 1.2% investing internationally through both brand and partnership development. Through partnerships, A-BII will continue to identify, execute, and manage significant brewing acquisitions and joint ventures, partnering with the number-one or number-two brewers in growing markets. This strategy will allow A-BII to participate in beer industries around the world by investing in leading foreign brands, such as Corona in Mexico through Modelo. A-BII s goal is to share the best practices with its partners, allowing an open interchange of ideas that will benefit both partners. LATIN AMERICA The development of Budweiser in Latin America is one of the keys to long-term growth in the international beer business, for it is one of the world s fastest growing beer markets and is a region with a growing consumer demand for beer. Anheuser-Busch products are sold in 11 Latin American countries Argentina, Belize, Brazil, Chile, Ecuador, Mexico, Nicaragua, Panama, Paraguay, Uruguay, and Venezuela with a total population of over 380 million consumers. In particular, the three countries showing the fastest growth in total beer consumption in the period are Brazil (+200 percent), Colombia (+130 percent), and Mexico (+100 percent). In Brazil and Mexico the two largest beer markets in Latin America Anheuser-Busch International acquired an equity position in their major local breweries. Brazil. Anheuser-Busch International recently made an initial investment of 10 percent in a new Antarctica subsidiary in Brazil that consolidates all of Antarctica s holdings in affiliated companies and controls 75 percent of Antarctica s operations. Anheuser-Busch will have an option to increase its investment to approximately 30 percent in the new company in the future. The amount of the initial investment was approximately $105 million. The investment has established a partnership that gives Antarctica a seat on the board of Anheuser-Busch, Inc. and gives Anheuser-Busch International proportionate representation on the board of the new Antarctica subsidiary. The two brewers will also explore joint distribution opportunities in the fast-growing South American beer market. According to Scott Bussen (South American representative for A-BII), A-BII is currently in the process of signing a deal that calls for establishing an Anheuser-Busch controlled marketing and distribution agreement between the two brewers to support sales of Budweiser in Brazil. The deal makes Anheuser-Busch the first American brewer to hold an equity stake in the Brazilian beer market, which is the largest in Latin America and the sixth-largest in the world. Last year the Brazilian beer market grew by more than 15 percent. Its potential for future growth markets is one of the most important global beer markets. The second component of the partnership will be a licensing agreement in which Antarctica will brew Budweiser in Brazil. The joint venture will be 51 percent owned and controlled by Anheuser-Busch and 49 percent by Antarctica. Antarctica s production plants will produce Budweiser according to the brand s quality requirements. Local sourcing of Budweiser will allow more competitive pricing and increased sales of the brand in Brazil.

15 Case 3 Anheuser-Busch International, Inc.: Making Inroads into Brazil and Mexico 635 Antarctica, based in São Paulo, controls 35 percent of the Brazilian beer market. Its annual production in 1998 was about 20 million barrels of beer. Antarctica has a network of nearly 1000 Brazilian wholesalers. Prior to its investment in Antarctica, Budweiser had achieved a distribution foothold in the Brazilian beer market in cooperation with its distributor, Arisco. Brazil has a population of 175 million people, with per capita beer consumption in Brazil estimated to be 40 liters per year. With Brazil s population growing by 1.7 percent a year, reduced import duties, and free market reforms, Anheuser- Busch is expected to do well in the Brazilian market over the next decade. The combined strengths of Anheuser-Busch and Antarctica in the booming Brazilian environment will lead to increased sales for both companies products, resulting in a more competitive beer market, which benefits consumers, suppliers, and distribution in Brazil over the long term. Since 2003 the company has not significantly increased its investment in Brazil. Mexico. In a further move to strengthen its international capabilities, Anheuser-Busch companies purchased a 37 percent direct and indirect equity interest for $980 million in Grupo Modelo (located in Mexico City) and its subsidiaries, which thus far are privately held. Modelo is Mexico s largest brewer and the producer of Corona, that country s bestselling beer. The brewer has a 51 percent market share and exports to 56 countries. In connection with the purchases, three Anheuser-Busch representatives have been elected to the Modelo board, and a Modelo representative has been elected to serve on the Anheuser-Busch board. As of 2002, Anheuser Busch owned approximately 50 percent of Grupo Modelo (directly and indirectly). Its brands Budweiser and Bud Light sales volume grew 25 percent in Mexico in Mexico is now the company s largest export market as well. In 2003, Anheuser-Busch s sales volume in Mexico saw doubledigit growth for the fifth consecutive year. In addition, the agreement includes the planned implementation of a program for the exchange of executives and management personnel between Modelo and Anheuser- Busch in key areas, including accounting/auditing, marketing, operations, planning, and finance. Modelo will remain Mexico s exclusive importer and distributor of Budweiser and other Anheuser-Busch brands, which have achieved a leadership position in imported beers sold in Mexico. These brands will continue to be brewed exclusively by Anheuser-Busch breweries in the United States. Currently, Anheuser-Busch brews beer for Mexico at its Houston and Los Angeles breweries, which are not very far away from Mexico but add to the markup of A-BII brands. All of Modelo s brands will continue to be brewed exclusively in its seven existing Mexican breweries and a new brewery in North Central Mexico. U.S. distribution rights for the Modelo products are not involved in the arrangement. Corona and other Modelo brands will continue to be imported into the United States by Barton Beers and Gambrinus Company and distributed by those importers to beer wholesalers. Modelo is the world s tenth-largest brewer and, through sales of Corona Modelo Especial, Pacifico, Negra Modelo, and other regional brands, holds more than 51 percent of the Mexican beer market. Its beer exports to 56 countries in North and South America, Asia, Australia, Europe, and Africa account for more than 69 percent of Mexico s total beer exports. Modelo is one of several companies that distribute Budweiser besides Antarctica in Brazil and other local importexport companies in other Latin American countries. Modelo is the exclusive importer and distributor of Anheuser-Busch beers in Mexico. The newest brand, Ice Draft, will be the fourth ABl brand distributed in Mexico by Modelo, joining Budweiser, Bud Light, and O Douls. The Modelo agreement is significant because beer consumption has grown 6.5 percent annually in Mexico in the past few years. Mexico s beer consumption is the eighthlargest in the world but still only half of U.S. consumption. The per capita beer consumption rate in Mexico is estimated at 44 liters, compared to 87 liters per person in the United States, which is high given that Mexico s per capita income is one-tenth that of the United States. The Mexican market is expected to grow at a rapid rate. Anheuser-Busch does not have control over pricing. The local wholesalers and retailers set prices for Budweiser. A-BII also does not have plans to set up a full-scale production facility in Mexico at this time. At present Budweiser is imported, whichmakesittwotothreetimeshigherinpricethanlocal beers, so it is largely an upscale, niche market brand at this time. An equity arrangement in another brewery or an agreement with Modelo could lead to local production and make A-BII brands more competitive with the local beer brands. In 2002, Budweiser brands made up 34 percent of the beer imports in Mexico. In 2002, net income for the company s international beer operations rose 6.3 percent in the third quarter, which the company claimed was due to the performance of Grupo Modelo. Besides the 11 Latin American countries mentioned, Anheuser-Busch has signed agreements with the largest brewers in Costa Rica, El Salvador, Guatemala, and Honduras to distribute and market Budweiser in their respective countries. Local breweries (Cervecería Costa Rica in Costa Rica, La Constancia in El Salvador, Cervecería Centroamericana in Guatemala, and Cervecería Hondureña in Honduras) distribute Budweiser in 12-ounce bottles and 12-ounce aluminum cans. These distribution agreements will allow Budweiser to expand its distribution throughout the rest of Central America. These countries have an extensive national distribution network and, more important, have local market expertise to develop Budweiser throughout the region. Under the agreements, the Central American brewers will import Budweiser from Anheuser-Busch plants in Houston, Texas, and Williamsburg, Virginia. Anheuser-Busch will share responsibility for Budweiser s marketing with each of its Central American partners, supported by nationwide advertising and promotional campaigns. ADVERTISING Event Sponsorship. Given Budweiser s advertising approach, which is traditionally built around sports, the decision to hold the 1994 World Cup tournament in the United States gave A-BII a perfect venue to pitch Budweiser to Latin Americans. The company signed a multimillion-dollar

16 636 Case 3 Anheuser-Busch International, Inc.: Making Inroads into Brazil and Mexico sponsorship deal with the World Cup Organizing Committee, making Budweiser the only beer authorized to use the World Cup logo. The World Cup has become a vehicle for us to reach Latin America, said Charlie Acevedo, director of Latin American marketing for Anheuser-Busch International. For 10 months, soccer fans in South America saw the Bud logo on everything from soccer balls to beer glasses. Soccer fans collected a World Cup bumper sticker when they purchased a 12-pack of Bud. When they watched the game on television, they saw Budweiser signs decorating the stadiums and a glimpse of the Bud blimp hovering overhead. According to Charlie Acevedo, the goal is to make Budweiser a global icon like McDonald s golden arches or Coca-Cola. Anheuser-Busch just signed its second two-year agreement with ESPN Latin America. Being able to buy on a regional basis gives a consistent message that is very reasonable in terms of cost, said Steve Burrows, A-BII s executive vice president of marketing. Latin America offers promise with its youthful population and rising personal income. Half of Mexico s population is under 21, and other Latin American countries have similar profiles, offering opportunities for advertisers to reach the region s 450 million population. The biggest new advertising opportunities in the Latin American market are Fox Latin America, MTV Latino, Cinemax Ole (a premium channel venture with Caracas cable operator Omnivision Latin American Entertainment), USA Network, and Telemundo (a 24-hour Spanish-language news channel). Marketers will have yet another pan-regional advertising option. Hughes (the U.S. aerospace company) and three Latin American partners Multivision in Mexico, Televisao Abril in Brazil, and the Cisneros Group in Venezuela launched a $700 million satellite that will beam programs in Spanish and Portuguese into homes across the continent. The service is called DirectTV. Because of this satellite, Central and South America have added 24 new channels; with digital compression technology, its capability could reach 144 cable channels. In the past, Anheuser-Busch used CNN International as its only ad vehicle, but with all the new opportunities, The company will begin adding a local media presence throughout EXHIBIT 2 PENETRATION OF PAID CABLE TV CHANNELS TV Penetra- Households Paid tion Location (in millions) Subscribers Rate Brazil ,300,000 15% Mexico ,700, Argentina 9.0 4,300, Chile ,000 6 Venezuela ,000 3 Uruguay ,000 5 Ecuador ,000 5 Paraguay ,000 9 Latin America, said Robert Gunthner, A-BII s vice president of the Americans region (see Exhibit 2). Anheuser-Busch will be using ads originally aimed at U.S. Hispanics, most of which were created by Carter Advertising of New York. A-BII will let the local agencies pick its messages, customize advertising, and do local media planning. In the past, there has been much criticism of ABl s ethnocentric approach to marketing Budweiser; however, because of the world obsession with American pop culture, they feel they don t need to tone down their American image. In Costa Rica, A-BII will use JBQ, San Jose; in El Salvador, Apex/BBDO, San Salvador; in Guatemala, Cervecería s inhouse media department; and in Honduras, McCann-Erickson Centroamericana, San Pedro. Imported beers cost two or three times as much as locally brewed beers in South America, but thanks to cable television and product positioning in U.S. movies, Budweiser was already a well-known brand in South America when the company began exporting to the continent. Strategy. According to Charlie Acevedo, Anheuser-Busch has seen double-digit increases in Latin American sales in the past five years. The gains came from both an increase in disposable income and increasingly favorable attitudes EXHIBIT 3 GDP PER CAPITA IN SELECTED LATIN AMERICAN COUNTRIES (2005) 8000 US$ ,856 3,912 Argentina 3,543 Uruguay Chile 6,506 4,148 3,417 2,349 Brazil Mexico Venezuela Peru Country

17 Case 4 Volkswagen AG Navigates China 637 toward U.S. products, especially in Argentina, Brazil, Chile, and Venezuela. Because Latin America has a very young population, Anheuser-Busch expects this market to grow at 4 percent annually. Furthermore, with NAFTA and a free trade zone, the company expects to see a significant rise in personal income in Latin American countries, which translates to great growth potential for Anheuser-Busch brands. The GDP (gross domestic product) per capita in 2005 is presented in Exhibit 3. North American products and lifestyles are very much accepted in South America, but beer consumption still lags far behind U.S. levels. Argentines consume about 30 liters annually per capita. Brazilians 40 liters, Chileans 50 liters, and Venezuelans 65 liters, compared to 87 liters per person annually in the United States. The international focus will be almost completely on Budweiser because there is a worldwide trend toward less-heavy, less-bitter beers, and Jack Purnell, chair and chief executive officer of Anheuser-Busch International. They re counting on the American image to carry their beer, therefore opting for a universal campaign with American themes as opposed to tailoring Budweiser s image for local markets. In the past, A-BII has tinkered with its formula and marketed Budweiser under different names to give a local flavor to their beer but had absolutely no success. Purnell said, What the market does not need is an American brewery trying to make up from scratch, new European-style beers. Bud should be Bud wherever you get it. OPPORTUNITIES Mexico offers the U.S. exporter a variety of opportunities encompassing most product categories. Mexico is continuing to open its borders to imported products. Mexico s population of approximately 105 million is the eleventh-largest in the world and the second largest in Latin America (after Brazil and Argentina). Mexico is a young country, with 69 percent of its population under 30 years of age. In addition, the Mexican government has adopted new privatization policies decreasing its involvement in the country s economy. As a result, private resources, both local and foreign, are playing a greater role in all areas of the Mexican economy. NAFTA, which aims to eliminate all tariffs on goods originating from Canada and the United States, is expected to create a massive market, with more than 360 million people and $6 trillion in annual output. DEMOGRAPHICS Mexico s overall population in 2004 was estimated at 105 million people. Based on 2000 statistics, the age breakdown is as follows: under 15, 38 percent; 15 29, 29 percent; 30 44, 17 percent; 45 59, 9 percent; 60 74, 5 percent; 75 and over, 2 percent. The average age of the Mexican population was 23.3 years. Between 1970 and 1990, the ratio of the population living in localities with between 100,000 and 500,000 inhabitants grew from 12 to 22 percent. This was largely due to rural urban migration. More than 71 percent of the population lives in urban areas of Mexico. In 1990, 22 percent of the national population lived in Mexico City and the State of Mexico. The Mexican population is expected to rise to 112 million in the year CASE 4 VOLKSWAGEN AG NAVIGATES CHINA On December 11, 2001, China joined the World Trade Organization. This was a momentous occasion for many. To any large, small, or mid-sized global entrepreneur, the idea of the additional demand of over one billion people is very attractive. After all, there are not many countries in the world that have populations even near the size of China s. WTO press release archives contain the excitement and anticipation of China s accession. In order to be approved for accession, China committed to economic language like opening, liberalizing, stabilizing, integrating, cooperative, which is like fresh blood in the shark tank of world economics. The WTO Director-General, Mike Moore, voiced a healthy outlook by saying, Now this economy will be subjected to the rules-based system of the WTO, something which is bound to enhance global economic cooperation. This case was prepared by Elizabeth Eckhardt, Asaad Faquir, Neeraj Kulkarni, Keith Mandia, Manoj Raghunandanan of the Fox School of Business and Management at Temple University under the supervision of Professor Masaaki Kotabe for class discussion rather than to illustrate either effective or ineffective management of a situation described (2004). Similar to many other industries, hopes of a freer market had automobile manufacturers practically salivating, because the Chinese auto market held much potential. In 2001, China had only 1.5 cars per 1,000 people, which is well below the global average of 90 cars per 1,000 people. Although it would not be wise to assume that Chinese demand for automobiles will grow by 5,900% and catch up to the global average for cars/per 1,000 people, production outputs continue to reflect positive growth for Chinese automakers. For the 12-month period ending July 2003, motor vehicle output was up over 33%. Thirty-three percent growth is impressive regardless of the industry, but can automakers really expect to sustain growth in China, a country whose government can be viewed as controlling, yet influential? Peering into the Chinese automobile market might leave an analyst somewhat puzzled. For some, they may be overwhelmed and encouraged by the tremendous upside potential (large population for demand and production), but others may not be able to see the trees through the forest (a confusing maze of bureaucratic regulations and low-skilled workforce).

18 638 Case 4 Volkswagen AG Navigates China Regardless of whether you are an adventurous risk-taking, first-to-market type, or the conservative, mainstream-adopter type, the Chinese auto market offers an abundant supply of evidence for your case to justify your market globalization recommendation to senior management. CHINESE AUTOMOBILE MARKET For adventure seekers, the upside potential seems blinding. According to the China Automobile Industry Association, China s automobile industry has hit a ten-year record high for vehicle production. The 3.25 million vehicles produced in 2002 represented a 38.5% increase over Sales reached 3.24 million, a 36.7% increase over The increase in demand for private cars has been the main factor stimulating growth. China s GDP per capita reach $900 in 2002 and in some areas of the coastal areas it topped $3,000. The fervor of the Chinese auto market has been well publicized internationally. In the Japanese press, a staff writer for the Nikkei Weekly reported, The Chinese automobile industry is about to enter an era of all-out battle for market share, where all aspects of an operation, ranging from raising cash to financing to the release of new models to flexible production systems that can turn out a number of models at the same time, to sales networks, are tested. 1 In the United States press, a Fortune magazine reporter wrote, After nearly a quarter century of economic liberalization, car ownership is suddenly within reach of millions of ordinary Chinese. An economic rise, new car prices plummet, and the government adds new roadways. In 2002 passenger car sales topped one million for the first time. In the first six months of this year, China s new car sales surged 85% over the same period last year. 2 With mounting upside potential many of the world s largest automotive manufacturers are stepping up their efforts in China. For example, GM plans to build Cadillacs in China for the luxury car market, Ford and partner Mazda announce a $500 million investment plan, Nissan plans to launch 5 new models in China by 2006, and BMW has founded a joint venture with Brilliance China Automotive Holdings. The surge in the Chinese automobile market can be seen in Exhibit 1 below. According to CSM Worldwide projections, there will be over 6.3 million vehicles produced in China by the year That represents 133% growth over the 2.7 million produced in Not only is substantial domestic production expected, but supply will also be bolstered by foreign car imports. For example, GM, Ford, and DaimlerChrysler have all recently announced plans to increase automobile exports to China. The recently announced agreement is worth over $1.3 billion to GM over the next few years. GM plans to send mostly luxury models to China and Ford will send mostly SUVs. The European Union is also hoping to export more cars to China. According to the EU Chamber of Commerce in China, as of April 2002 EU car makers had cumulatively invested more than $3.3 billion in China and commanded an overall market 1 Shanghai GM Gaining Momentum. Nikkei Weekly, December 24, China Goes Car Crazy, Fortune, August share of 65% of domestically made car sales, but were limited to just a 40-45% share of China s auto imports. EXHIBIT 1 PASSENGER VEHICLE PRODUCTION IN CHINA Millions of Units Regardless of the political and economic maneuvering by American, European or any other auto makers, China s car imports rose over 76% in 2002, and China has already promised to abolish their import quota system in 2006, which opens the supply ceiling even further. An official of Beijing Asian Games Village Auto Exchange predicted that prices will fall by an average of 8%-10% by the end of the Tariff decreases are the other factor expected to increase the supply of cars in China, because foreign firms will find it cheaper to export vehicles and parts into the country. By July 2006, small-engined automobile tariffs are scheduled to fall to 25%, as compared to their 2000 level of 63.5% (see Exhibit 2 below). Over the next 3 5 years, the combination of increased domestic production, increased imports, and lowered tariffs means that there will be many global entrepreneurs vying for their own respective share of the percolating Chinese auto market. Stimulating the positive growth in the automobile market, as well as others, has been the Chinese government s public demonstration of meaningful policy adjustments in order to integrate its economy with the global economy. Policy moves ranging from loosening its regulations pertaining to Wholly Foreign Owned Enterprises selling their goods in China, to establishing Special Economic Zones, which offer many incentives to foreign enterprises including tax benefits such as a 5-year gradual taxation scale on profits. Clearly, there are many positive overtures by China s Communist regime to adhere to the agreed upon terms of their WTO accession and to elevate China into a global economic powerhouse. Yet despite the encouraging regulatory beacons from China, there still seems to be enough regulatory fodder for skeptics to question whether or not the Chinese government is fully committed to facilitating an open-door automobile industry. One example of the Chinese government s conservativegrowth approach was published when the Chinese State Development and Reform Commission recently circulated policy on

19 Case 4 Volkswagen AG Navigates China 639 EXHIBIT 2 CHINA S WTO AUTOMOBILE TARIFF REDUCTION SCHEDULE (%) Engine Size /2006 7/2006 Large 77.5% 61.7% 50.7% 43.0% 37.6% 30.0% 28.0% 25.0% Small 63.5% 51.9% 43.8% 38.2% 34.2% 30.0% 28.0% 25.0% auto import distribution. The July 2003 announcement would require foreign automakers to maintain separate distribution outlets for imported and domestically produced cars. Bernd Leissner, President of VW s AG Asia-Pacific operations, criticized the policy as stupid and old-fashioned, because it will require international auto manufacturers to build separate showrooms for their imported vehicles, thus increasing operational costs. The other point of discontent for international automobile manufacturers is financing. Pursuant to China s WTO accession, non-bank financial institutions are supposed to be permitted to provide auto financing without any market access or national treatment limitations. To date, the Chinese government has curtailed financial service competition. Currently only 10% 15% of purchasers in China have auto loans, and any loans have had to have been written by one of four Chinese Banks: the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China or the Bank of China. Industry pundits are arguing that the Chinese banks have already substantially benefited from the increase in car financing, with the volume of car loans increasing over 286% between 1998 and In essence, this could negatively impact purchasing power of the Chinese consumers (especially the middle and lower classes) if there is lack of competition between financial institutions. The Chinese middle class is expected to balloon to 200 million in Since many of the manufacturers are putting forth affordable models aimed at the middle class, the lack of financing competition and the inability to facilitate loans for its middle class consumers could impede sales. VOLKSWAGEN GROUP The Volkswagen Group did not wait until the Chinese WTO in December 2001 or the well-publicized potential before entering the Chinese car market. VW forged established themselves in China in As an organization, they have the following mission statement: It is the goal of the Group to offer attractive, safe, and environmentally friendly vehicles which are competitive on an increasingly tough market and which set world standards in their respective classes. Company Overview The Volkswagen Group with its headquarters in Wolfsburg is one of the world s leading automobile manufacturers and the largest car producer in Europe. In 2002, the Volkswagen Group achieved the second-highest profit before tax in the company s history at 4.0 billion and attained a global market share of 12.1 percent. It is the parent company of all other companies in the Volkswagen Group, which are either wholly owned subsidiaries or companies of which Volkswagen AG has majority ownership. The Group operates 44 production plants in eleven European countries and seven countries in the Americas, Asia, and Africa. Around the world more than 320,000 employees produce over 21,500 vehicles or are involved in vehicle-related services. The Volkswagen Group sells its vehicles in more than 150 countries. Key Numbers: 2002 Sales (mil.) $91, Year Sales Growth 16.2% 2002 Net Income (mil.) $2, Year Net Income Growth 4.9% 2002 Employees 324,892 1-Year Employee Growth 0.9% Brand Groups The Volkswagen Auto Group is comprised of the Audi, the Volkswagen and the Volkswagen Commercial Vehicle Brand Groups. The Audi and Volkswagen Groups encompass the company s passenger car business and are responsible for the results of their respective Brand Group worldwide. Audi s Brand Group is made up of the Audi, Seat and Lamborghini brands and places an emphasis on sporty values. The Volkswagen Brand Group is made up of the Volkswagen, Škoda Auto, Bentley and Bugatti brands and stands for more classic values. Each brand retains its differentiated brand-image and operates as an independent entity on the market. Together, the product ranges extend from the low-consumption 3-liter vehicle to luxury class vehicles. The Group s commercial vehicle products are the responsibility of the Volkswagen Commercial Vehicles brand. Sustainable Development & Corporate Responsibility As the presence of Volkswagen AG expands around the globe, so too does the company s commitment to social responsibility. Volkswagen AG has identified that a company can only practice sustainable development if it is constantly aware of the social, economic and ecological dimensions and consequences of its corporate activities. For Volkswagen, sustainability and responsibility to society mean the ability to develop solutions for economic, environmental and social problems. Dialogue and cooperation are important principles in this process. The Volkswagen Group is a founding member of the World Business Council for Sustainable Development (WBCSD) and the business-tobusiness network for Corporate Social Responsibility (CSR Europe).

20 640 Case 4 Volkswagen AG Navigates China GERMAN TRACTION: VOLKSWAGEN IN CHINA Volkswagen realized the potential for the Chinese market for automobiles some 19 years earlier, and from this vision sought out to establish a joint venture that would make them the first major foreign car company in China. Although this relationship had humble beginnings, the fact is that the immense growth and increased demand in automotive industry have led Volkswagen to be the most established foreign car brand in China. Looking back, VW s efforts in China may have been susceptible to criticism, because getting in first in China has often proved foolish. Many early joint ventures were ill-advised partnerships between overconfident foreigners and inexperienced, often greedy locals. VW, however, played its cards right and enjoyed a bit of luck. Volkswagen has been able to position itself as the primary brand in the passenger vehicle market. In 1999, it was believed that VW controlled 60% of the passenger-car market. As recently as August 2003, Volkswagen was still recognized as China s biggest foreign automaker and currently holds a 37% market share in China. Clearly, Volkswagen was ahead of the curve in China since much of the recent press depicts many of the other foreign automakers are still quickly trying to establish themselves in a market that is booming. Major players in this industry like GM and BMW are still no where near as established as VW. So much so, that GM has now established a joint venture with the same production company as VW used 19 years ago. The fact is that although many companies see the benefit of entrance in the automotive market in China few have the same established brand, and brand equity that VW has in the market. VOLKSWAGEN S ENTRY STRATEGY A major reason why VW has been able to dominate in China is due to their joint ventures established with prominent players in China s automotive industry. VW co-owns Shanghai VW with Shanghai Automotive and FAW-VW with First Automotive Works Corp. VW was the first foreign carmaker to set up a joint venture in China back in 1985, in Shanghai. VW established ties with powerful local partners at a time when there was little competition but a surging demand for cars. Better yet, the government in Shanghai shielded VW from central government meddling and gave the joint venture quite a bit of business at a time when institutions rather than individuals bought most cars. Now, for 2001, VW s two joint ventures will turn out more than 400,000 Audis, Jettas, Passats, Santanas, and Polos. Everybody in China knows Volkswagen, says Credit Suisse First Boston analyst Catherine Zhu. These partnerships have allowed VW to localize production, which in turn minimizes production costs, and creates a more efficient method of distribution. VW can expect to remain the market leader in China for a few more years. Other carmakers will find it hard to beat VW s prices, kept lower by the fact that 90% of its cars parts are locally produced. Competitor General Motors Corp. s new $44,000 Buick GS sedan has only 60% of its components made in China, and its sales have been disappointing. SAIC is the largest and most successful automotive manufacturer in China and when VW established a relationship with them, they established a relationship with a trusted brand amongst the Chinese market, and a powerhouse within the industry. Shanghai VW formed in 1985 boasting brand names like Polo, Passat and Santana 2000 series. Shanghai Volkswagen has won the confidence of Chinese consumers with its high quality and good after-sale service, said the official, stating that apart from weighing up between price and high quality, Chinese consumers are now paying more attention to brand and service. FAW-VW, formed in 1991, makes the Jetta, Bora and Golf sedans, plus the Audi A4 and A6. CURRENT LANDSCAPE OF VW S POSITION Volkswagen has suffered a decreasing market share over the past few years, but as noted in Exhibit 3 below, VW s sales have increased during that same time period. Increased competition from Honda, Toyota, GM, Ford, and Mitsubishi has eroded VW s market share. China has become an integral part of Volkswagen s earnings. In fact, investment firm Goldman Sachs believes that because VW s profitability in China is slipping the German car maker s overall performance could be hurt. The investment firm believes that China represented over 80% of Volkswagens 2003 first-half earnings. Proof of China s importance to VW was evident in April 2003 when Volkswagen CEO Bernd Pischetsrieder announced that VW sold more new vehicles in China than it did in Germany. This is the first time in its 65-year history that VW sold more cars in a foreign country than in Germany in a given period. VW PRODUCTION While their competitors, like GM, are attempting to establish their first production facility in China, VW has already established two, with plans to open a third facility to manufacture engines for domestic use and export. Volkswagen believes this plant will help them reach their goal of doubling annual production by A Volkswagen official said the company plans on investing more than EUR 6 billion in China region over the next five years. The main reason why this is possible, EXHIBIT 3 VW S FALLING MARKET SHARE IN CHINA Projected 2003 Manufacturer Unit Sales %) 2002 Unit Sales (share %) 2001 Unit Sales (share %) TOTAL MARKET 1,680,000 (100%) 1,266,000 (100%) 717,945 (100%) Shanghai VW 359,000 (21.3%) 308,000 units (24.3%) 230,050 units (32.1%) FAW-VW 241,000 (14.3%) 205,000 (16.1%) 124,399 (17.3%)

21 Case 4 Volkswagen AG Navigates China 641 and why it can happen so expeditiously, is because the relationships and financial stability of these joint ventures, which have been in place for a combined 30 years. Another aspect of the Chinese market from which VW, and other foreign carmakers, have benefited is the low-cost manufacturing. Unfortunately for carmakers there is a reason for the low cost, and that is low skills. The Chinese government is probably aware of this and is enthusiastic about the flourishing auto industry, which requires above average workforce skills. One instance of poor manufacturing has already been identified, and it involved ignition coils on VW China s Bora model. Although this is only one instance of poor manufacturing, this is an inherent weakness of the current Chinese workforce. Infrastructure also remains a challenge, because the market seems to be growing faster than the roads and highways to support it, more roads are necessary to handle the booming auto sales. Major traffic jams on the roads in cities have been cited. Who Makes What Where? Existing/Planned Major Assembly Operations in China Auto Maker Chinese Partner Products Plant Location BMW Brilliance China 3-, 5-Series Shenyang DaimlerChrysler Beijing Automotive Jeep Cherokee and Grand Beijing Cherokee; Mitsubishi Pajero Sport, Outlander, Lancer and Cedia; Mercedes C- and E-Class Fiat Yuejin Automotive Palio, Palio Weekend, Siena, Nanjing Ducato Ford Chongqing Changan Auto Fiesta, Mondeo, Ikon Chongqing Ford Jiangling Motors Transit Nanchang GM Shanghai Automotive Buick Century, Sail, GL8 and Shanghai Excelle; Opel Corsa, Zafira and Combo GM Brilliance China Chevrolet Blazer, Tahoe, Shenyang TrailBlazer GM Shanghai Automotive, Chevrolet Spark Liuzhou Wuling Automotive Honda Guangzhou Automotive Accord, Odyssey, Fit, Civic, Guangzhou CR-V, Mobilio Honda Guangzhou 1L-1.5L cars Guangzhou Automotive/Dongfeng Motor Hyundai Beijing Automotive EF Sonata, Elantra, XD, Beijing Click/Getz, Lavita, Matrix, Trajet XG Isuzu Changfeng Motor Rodeo Younghou Isuzu Qingling Motors/ Rodeo Nanchang Jianxi Motors Mazda First Auto Mazda6 Changchun Mazda First Auto Premacy, 323, Familia Haikou Mitsubishi Changfeng Motor Pajero Younghou Nissan Dongfeng Motor/Fengshen Bluebird, March, Sunny, Cefiro, Guangzhou Nissan Zhengzhou Paladin, Navara, March, pickups Zhengzhou PSA Peugeot Dongfeng Motor Citroen Elysee, Xsara Picasso, Wuhan Citroen ZX, Saxo and Berlingo; Peugeot 307, Platform 2 Suzuki Chongqing Changan Auto Alto, City Baby, Gazelle, Chongqing Happy Prince, Cultus Suzuki Jiangxi Changhe Swift Jingdezhen Automobile Toyota First Auto Land Cruiser Changchun Toyota First Auto Crown/Camry Tianjin Toyota Sichuan Motor Land Cruiser Chengdu Toyota First Auto/Tianjin Motor Vios, Corolla, Crown, Vitz Tianjin Source: Wards Auto, November 1, 2003.

22 642 Case 4 Volkswagen AG Navigates China VW S COMPETITION Every carmaker wants to be in China. With a population of over 1.2 billion and with the second largest in terms of purchasing power parity, China presents a highly attractive market. The Chinese accession into the WTO, coupled with falling car prices in China and rising incomes seems to have fueled an unprecedented boom in the Chinese market. It is predicted that the Chinese auto market will grow 9% annually for the next five years and 15% a year after that. That would mean Chinese consumers will be buying 2 million cars annually, three times the current total. Foreign carmakers have rushed to take advantage of the market, teaming up the local car manufacturers in China. General Motors The world s biggest car manufacturer started with a local alliance with the Shanghai Automotive industry in It introduced the Buick in the Chinese market in 1998 with manufacturing done locally in Shanghai. Subsequently it also introduced the Chevrolet in the market. Their current manufacturing capacity in Shanghai is around 150,000 units of which about 75% is dedicated to manufacturing Buicks while the rest is utilized for the manufacture of the Chevrolet. The Buick Regal is currently priced at $29,455 (RMB 243,800) while the Buick GL2.5 is priced at $31,871(RMB 263,800). GM currently has an 8.2% share of the China car market and ranks second to VW in terms of overall market share. About 1/3 of its cars have an average selling price of around $30,000. This suggests that the Chinese consumer perceives GM to be a premium carmaker. Understanding these current aspirations of the Chinese consumers to own upscale cars, GM is planning to introduce Cadillacs in China. Cadillacs will be assembled alongside Buicks at GM s Shanghai plant, which will hike capacity by 50 percent to 300,000 vehicles by the end of Ford Though the Ford T model was first launched in China in 1914, Ford hasn t made any major inroads in China till date. Infact, it only entered China through a local alliance with Changan Automobile group in Ford has pledged to invest more than $1 billion over the next two years in China and intends to be the second biggest player in China by 2007 with about 10% market share. Its current car manufacturing capacity is around 50,000 units and it plans to raise that to about 150,000 units by next year. The Fiesta, their present offering in China is a four-door sedan and is targeted to the middle class price conscious consumers. However, they have been outclassed in the market by the VW Golf and Bora, and the GM Buick, which also caters to the same consumer. Ford actually suffered a loss of $25.3 million in the third quarter this year. However it still is extremely optimistic about its future in China and now plans to shift its focus to the luxury car market segment. Ford plans to sell its premium brands like Mondeo and Maverick and also plans to introduce the Volvo, Aston Martin, Land Rover and Jaguar in this market. This is a strategic move to strengthen the company s brand position in the increasingly competitive Chinese market. However competition is intense 3 in the luxury market with the likes of the Audi, Mercedes, and BMWs with GM and Nissan planning to introduce its own luxury brands in this market. Ford will have to continuously invest in product quality and service networks if it wants to be a leading player in this market. Toyota In a car market that is dominated by European and US car manufacturers, Toyota is the one of the first Japanese companies to lead the charge for Japanese car entry in this market. However, Toyota the world s third largest car manufacturer entered the Chinese car market only recently in the year 2002 through a local alliance with FAW. From almost a standing start in 2001, Toyota has built up a significant presence and charted massive expansion plans in China. By 2005, it expects to have plants from the country s northeast to its deep interior, producing 250,000 vehicles a year about 10% of the vehicles Toyota and its affiliates produce outside Japan today. By 2010, Toyota executives hope to sell a million vehicles in China, an important piece of Toyota s broader strategy to grab 15% of the world market and be the no.1 auto manufacturer in the world. I d resign from Toyota if I couldn t pull it all off in China, said Mr. Akio Toyoda, the grandson of the founder of Toyota motors in a recent interview with Wall Street Journal reporter. 3 Currently the company makes Vios small cars for the middle class private consumers in China. Its current selling price is around $17,000. However Toyota and its FAW plan to invest around 3 billion Yuan (US$360 million) to produce four new models at their local joint ventures (JVs) in the economy and the luxury SUV segments by the end of The new models, to be produced within two years, will be the Crown, Corolla, Land Cruiser, and Land Cruiser Prado. The company is also in negotiations with Guangzhou Automobile group to produce Camry Sedans for the upscale consumers. The company is currently in negotiations with several local car manufacturers, and also intends to expand its current dealer network to penetrate throughout China. PRICING From a pricing perspective, the combination of increased imports and increased localized production by foreign carmakers is driving down prices. Manufacturers such as Volkswagen, GM, Honda and Dongfeng Peugeot had to cut prices in 2003 due to the increasing supply of cars across all market segments. For example, GM has dropped the price of its 2.5 liter Buick sedan and its compact Sail model, and VW has dropped the price on its upscale Passat as well as its mid-sized Bora. Overall, Chinese car prices are expected to fall by an average of 8 to 10% by the end of With the current pricing strategy, VW is attempting to address all the consumer markets in the China. The Golf and the economy versions of the Polo are priced to attract the mass markets that aspire to own a car but can t really afford to buy an expensive car. With the Santana, a taxi like car, and the high end Passats VW has targeted the niche fast growing luxury car market currently targeting state-owned enterprises and the affluent class in China. The Bora is actually targeting a completely a new segment in the Chinese market the private consumers. According to the National Bureau of Statistics latest report in May 2003, 360,000 cars were sold in China during the first four months this year, with about 60% bought by individuals.

23 Case 5 Wal-Mart Opeartions in Brazil: An Emerging Giant 643 VW Pricing Model Price($) Price(RMB) Model Type Capacity Golf $12, RMB Automatic economy model 1.4 lts Bora $19, RMB Automatic compact model 1.5 lts Bora $27, RMB Automatic compact model 1.5 lts Passat $25, RMB Automatic luxury model 1.8 lts Passat $39, RMB Automatic economy model 2.8 lts Santana $21, RMB Automatic economy model 1.4 lts Polo $15, RMB Manual economy model 1.4 lts Polo $15, RMB Manual economy model 1.4 lts Polo $16, RMB Manual luxury model 1.4 lts Polo $16, RMB Automatic economic model 1.4 lts Polo $16, RMB Automatic economic model 1.4 lts Polo $17, RMB Automatic luxury model 1.4 lts The idea of supply increasing and prices falling is basic macroeconomics, but the Volkswagen Group is expected to withstand the market s move to cut prices better than its competition. VW has already established strong local production and offers a wide range of models to the Chinese shoppers (currently offers 11 models with an additional 4 planned to hit the market in 2004). LOOKING DOWN THE ROAD Simply stated, VW has more positioning and production leverage. For example, with so many models, VW can be very versatile when it comes to continuing and discontinuing models as necessary based on competition and consumer purchasing power. Also, with such a large portfolio, VW can adjust the positioning of its models to keep the competition off balance. As Volkswagen attempts to slow their market share erosion, they have expanded their marketing efforts on sponsorships. They are focusing their efforts on social awareness in the form of one million Yuan to help fight SARS and its third annual tree planting day, music events, and Chinese auto shows. Volkswagen s 50% market share in 2001 is already down to around 36% in 2003, and the likes of the Japanese, North Americans, South Koreans, other Europeans, and Vietnamese are waking up to the potential VW acted upon years ago. Even though Volkswagen China s general manager, Zhang Suixin, has admitted It is an unrealistic goal for us to control 50% of China s car market according to the current market development, VW will undoubtedly attempt to hold onto as much market share as possible. CASE 5 WAL-MART OPERATIONS IN BRAZIL:AN EMERGING GIANT INTRODUCTION In September 1994, Brazil was experiencing a new thrust in its economy. After several years of hyperinflation, the Real Plan, implemented in March 1994, an economic stabilization program that indexed the Brazilian currency to the U.S. dollar, began to reduce inflation to reasonable levels. In February 1994, the annual inflation rate was 40 percent, whereas by September of that same year, it was a relatively low 3 percent. A lower inflation rate was viewed as a viable step in improving the purchasing power of the Brazilian people, particularly those in the lower socioeconomic stratum. Professor Masaaki Kotabe, Louie Pranic, and Richard Smith of the Fox School of Business and Management at Temple University and Kleber G. de Godoy and Moacir Salzstein of Fundação Getúlio Vargas, São Paulo, Brazil, prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective management of a situation described, (2006). The optimistic scenario encouraged many foreign companies to make new investments in Brazil. If Brazil is the leading economy in Latin America with a population of more than 170 million, why not invest there, now that a better business horizon lies ahead in this continental country? Wal-Mart Stores, the world leader in retailing, announced on May 9, 1994, that it had decided to invest heavily in Brazil through a partnership with Lojas Americanas, Brazil s leading department store chain. Following the implementation of Real Plan in 1994, and subsequent stabilization of Brazil s economy, appreciation of the U.S. dollar in the late 1990s and a global economic slowdown due to the Asian crisis forced the country to float its currency in January As a result, inflation increased moderately from 3 percent to 8.9 percent but has steadily declined since, with a 8 percent inflation rate at the end of In addition, with estimated economic growth of 5 percent for 2005, Brazil was viewed as a viable investment opportunity

24 644 Case 5 Wal-Mart Opeartions in Brazil: An Emerging Giant by foreign investors. As an illustration of Brazil s economic prospects, it must be pointed that the year 2000 showed a record amount of direct foreign investment in Brazil from abroad, amounting to US$30 billion. However, a recent energy crisis presents significant problems to Brazil s economy and its retail industry, in lieu of changes in consumers purchase behavior and income allocation. WAL-MART OPERATIONS Sam Walton entered the retail business through a small store in Newport, Arkansas, in 1945, as a variety store franchisee. Six years later, he decided to open his own stores with the name Walton s Five and Dime, referring to the coins that could have value to the customers. As of 2005, there were 5,379 Wal-Mart units around the world, with 3,752 located in the United States, 706 in Mexico, 291 in the United Kingdom, 261 in Canada, 89 in Germany, 152 in Brazil, 54 in Puerto Rico, 47 in China, 11 in Argentina, and 16 in Korea. Net sales for the year 2004 totaled $287 billion (see Exhibits 1 and 2). Wal-Mart also owns a 37.8 percent interest in Japan s Seiyu Ltd., which operates 403 stores in Japan. Wal-Mart operates with five different divisions within the United States: Wal-Mart Stores, Wal-Mart Supercenters, Sam s Club, McLane s Company, and Wal-Mart International. Wal-Mart Stores is the division accounting for about 55 percent of total company revenues. Wal-Mart Supercenters generates 10 percent of total company revenues and is the fastest growing division. In the United States, there are three different Supercenters: Wal-Mart Supercenters, Hypermart USA s, and Bud s Warehouse Outlets. Supercenters are stores with more than 10,000 m 2 of area and a minimum of 40,000 items. Sam s Club is the division responsible for 25 percent of revenues. The first Sam s Club a buyers club, namely, a store where the consumer pays an annual fee to have access was opened in By the end of 2005, there were already more than 500 Sam s Clubs in the United States. McLane s Company is Wal-Mart s distribution company. Wal- Mart acquired this company, a leading distribution company, in In 1995, McLane s represented 6 percent of Wal- Mart s total revenues. McLane s has 14 distribution centers in the United States and caters not only to Wal-Mart needs but also to 25,000 other retailing stores in the United States. EXHIBIT 1 WAL-MART STORES (2005) Korea 16 Korea Argentina China Puerto Rico Brazil Germany Canada UK Mexico U.S Argentina China Puerto Rico Brazil Germany Canada UK Mexico Worls U.S 0 2,000 4,000 6,000 Number of Stores Worls EXHIBIT 2 WAL-MART NET SALES Net Sales (in billions) $300.0 $250.0 $200.0 $150.0 $100.0 $50.0 $165.0 $ $ $ $177.0 $191.0 Total Sales International Sales $ Year

25 Case 5 Wal-Mart Opeartions in Brazil: An Emerging Giant 645 Wal-Mart International, the fifth division, accounts for 17 percent of Wal-Mart s total revenues, with net sales of $35 billion for the year The international division is the fastest growing, with over 41 percent increase in net sales from the year INTERNATIONAL EXPANSION In the second half of the 1980s, Wal-Mart began its international expansion in Mexico, Canada, Argentina, Hong Kong, and Brazil, among others. The company expected that all its strengths and retailing knowledge could leverage operations abroad as well as the efficient logistics and communication systems. The company considered that with a prospective of market globalization, the brand Wal-Mart could be a competitive advantage in many countries where it would operate. The company also decided that the entry strategy in each country should be through a partnership with local companies. A brief summary of Wal-Mart s international operations in Mexico and Canada is provided in order to ensure better understanding of Wal-Mart s operation in Brazil. Mexico Mexico was the first country in which Wal-Mart initiated its international expansion. The first store was opened in The local partner was Cifra, a Mexican retailing leader. It is undeniable that Wal-Mart has had some difficulties adapting to and understanding Mexican culture and consumer habits. For example, Mexican consumers prefer to buy Mexican food and other goods rather than American products. Wal-Mart insisted on prioritizing imported goods from the United States for a long time. Another problem in Mexico is related to the Mexican habit of buying food in small stores rather than in supermarkets. Despite its initially disappointing performance, Wal-Mart is currently Mexico s largest retailer. This success was achieved only after the company changed its name from Cifra to Wal- Mart de Mexico, and spread its operations into six different retail formats and the country s largest sit-down restaurant chain. Wal-Mart de Mexico s six retail formats allowed the company to meet the needs and purchase behaviors of various customer segments. In November 2004, Wal-Mart opened a massive 7.5 acre Superstore a mile from Mexico s holy area, Teotihuaćan, just outside of Mexico City. Canada In Canada, Wal-Mart preferred to acquire a local chain Woolco instead of having a local partner. Due to the maturity of the Canadian retail market, and due to significant income and cultural similarities between the United States and Canadian markets, acquisition was arguably the easiest way for Wal-Mart to tap into Canada. Since most Canadians live near the U.S. border, they were already familiar with the company. Hence, Wal-Mart leveraged this high brand recognition into customer acceptance and loyalty by introducing its Everyday Low Prices approach to a market accustomed to high/low retail pricing. Coincidence or not, Canada is the most successful Wal-Mart operation abroad. Nevertheless, out of the 196 stores in Canada, 122 were originally Woolco stores. By the year 2002, Wal-Mart was Canada s number one retailer with revenues of approximately $8.75 billion, just eight years after its entry into Canada. In early 2005 Wal-Mart shut down its only unionized store in Canada, claiming it was due to dropping sales and the problem of dealing with a union. ENTRY INTO BRAZIL Wal-Mart s original intention was to achieve the number one retailer position in the Brazilian retail market through a partnership with a local player in a very short period of time. In order to achieve this ambitious goal, Bentonville headquarters planned a logistics and communication infrastructure capable of supporting no fewer than 80 stores in the Brazilian market. In addition, the headquarters intention was to export its expertise and practices in the form of an extensive set of operational manuals that proved successful in the United States, including product assortment and internal space utilization as well as its product mix. Wal-Mart began its operation in Brazil in spectacular fashion. The first five stores were opened in a few months and, through a very aggressive pricing strategy, attracted thousands of enthusiastic consumers ready to empty the shelves. Another attraction was employees disposition to help consumers, as well as wide product offering. Overall, during its initial periods of operation in the Brazilian market, Wal-Mart had captured a very favorable image from consumers and, subsequently, had painted a dark picture for its competitors future. The initially aggressive and promising entry strategy came to a halt after Wal-Mart immediately encountered severe unexpected operational problems. Long checkout lines, a high stockout rate (40 percent), unreliable supply lines, faulty management-performance measures, traffic congestion, competitors reactions, and governmental forces were responsible for Wal-Mart s initial failure in the Brazilian retail market. Following Wal-Mart s disappointing performance in the Brazilian retail market, the company had to revise its originally aggressive strategy. To accomplish this, some valuable lessons learned from Wal-Mart s international expansion into Mexico and Canada had to be incorporated into the redesigned strategy for Brazil. Consequently, Wal-Mart s strategy revision planned for adoption of a more conservative and controlled expansion, consolidation of distribution lines, and improved assimilation into the Brazilian culture. An example of Wal- Mart s revised strategy included the opening of only 10 stores from 1995 to 1997, down from the initial 80-plus stores. Furthermore, Wal-Mart intended to acquire an existing retail chain instead of exploring other partnerships, as was originally planned. In addition, the company wanted to acquire experienced managers from other competitors. CHALLENGES IN BRAZIL The challenges that Wal-Mart has experienced in Brazil may be grouped into six categories: state of the economy, cultural differences, management, advertising, logistics and distribution, and competition. Economy Since Wal-Mart s entry into the Brazilian retail market in 1994 until the end of 2001, Brazil s economy has been all but stable. The Real Plan, implemented in 1994 to curb the currency hyperinflation brought the inflation rate from 40 percent in the year it was instituted to 3 percent in Thanks to

26 646 Case 5 Wal-Mart Opeartions in Brazil: An Emerging Giant the appreciation of the U.S. dollar, the Asian financial crisis, and a resulting global economic slowdown, Brazil floated its currency in 1999, as was the case prior to the Real Plan of This caused the inflation to increase moderately to 8.9 percent in 1999, but it was brought down to 5.3 percent at the end of However, triggered by the national currency depreciation, inflation increased again in 2002 and had crossed 8 percent by The Brazilian economy was recently struck with the energy crisis. The crisis was the result of Brazil s electricity consumption exceeding its production, thus forcing the import of electricity from Paraguay. Although the current state of the Brazilian economy could be characterized as somewhat stable as compared to that before 1994, the future outlook of the economy does not provide any guarantees on a long-term basis. Cultural Differences Brazilian retail consumers consider product quality the most important factor in the decision-making process of purchasing, followed by product price, customer service, store cleanliness, and store distance. Most Brazilians prefer shopping in small- to medium-sized neighborhood stores. Nevertheless, they also enjoy the occasional shopping trip to a big discount supercenter. This trip, however, occurs only once a month, and thus making so-called monthly purchases, instead of weekly as in the United States. Yet the current energy crisis has forced most Brazilians to turn off their freezers and to adjust their shopping habits accordingly. Namely, food-related trips to the store in Brazil have increased in frequency but decreased in the quantity of food purchased, especially in perishable goods. Despite the unbelievably bad traffic jams, the average São Paulo residents are willing to take the long trip to a specific Supercenter if they perceive it as cost efficient and need satisfying. Similarly, Brazilian consumers do not greatly appreciate the notion of having to pay a membership fee in order to shop at Sam s Club, especially when shopping at a buyer s club is not perceived as providing greater savings and overall extra benefit to the end-consumer. The product mix in Wal-Mart s supercenters should reflect the needs of Brazilian consumers as closely as possible. Offering products popular in the United States such as golf equipment, vacuum cleaners for garden leaves, American footballs, and food grinders shows complete ignorance to Brazilian consumers since they have little or no use for these items. Assigning 25 percent of supercenter space for food in a country where food represents 60 percent of supermarket sales is another example of Wal-Mart s cultural ignorance. Management Because of dissimilarities in income and culture between U.S. and Brazilian markets, a greater degree of managerial autonomy may be desirable for Wal-Mart in Brazil. In addition, Wal-Mart in Brazil has not made full use of the concept of getting back to the basics, or in other words, implementing Sam Walton s Management by Walking Around concept. A faulty product mix and store-space misallocation present examples of bad management policies. Moreover, Wal-Mart s overall corporate grip on its subsidiary in Brazil can best be exemplified by the fact that performance of the local managers in Brazil was based primarily on store sales volume. Thus, managers set prices below cost to artificially stimulate demand and inflate sales volume numbers. Managers should have greater freedom in managing on a micro level. Wal-Mart, recognizing the need to hire professionals, has recently started a head-hunting campaign to acquire proven professionals from local competitors. This move should reduce Wal-Mart s need to micromanage the Brazilian effort. Advertising Many Brazilian consumers, housewives in particular, listen to the radio during the day while cooking and/or cleaning the house. Radio advertisements, therefore, should be used to reach and attract potential shoppers. Contrary to logic, however, Wal-Mart did not use radio as a medium for communicating to its customers. The company uses some television and newspaper advertising, but the resources allocated to the overall advertising campaign amount roughly to only 2 percent of Wal-Mart s revenues. Although Wal-Mart has hired a Brazilian advertising agency, the lack of autonomy given to the agency defeats the whole purpose of going local through advertising. Logistics and Distribution Initially, Wal-Mart experienced an alarming 40 percent stockout rate in Brazil, as compared to 5 percent in the United States. Although the stockout rate has decreased since then, the problem is far from being completely eliminated. Namely, Brazilian suppliers are lagging behind their U.S. counterparts in logistics technology, thus making computerized inventory management systems useless. In addition, constant traffic jams present another major obstacle to consistency and predictability in supply of both Wal-Mart stores and distribution center(s). Competition Since Wal-Mart entered the Brazilian retail market in 1994, competition has been ever increasing, and all to the benefit of end-consumers. Many retailers are focused on expansion into different retail formats, with the purpose of targeting different customer segments. Increasing the number of stores across the country is another way retailers compete in Brazil. Thanks to Wal-Mart, price wars are the most visible effects of fierce competition. According to 1995 data, Brazil s entire retail industry accounts for 6.6 percent of GNP, with total consolidated sales of US$43.7 billion. The top five retailers in the Brazilian retail market account for roughly US$11.2 billion. The 1997 data show that Wal-Mart s major competitors are Carrefour, Companhia Brasileira de Distrubuição (Pão de Açucar), Royal Ahold, and Makro Atacadista. In addition, some smaller retail chains and a large number of individually owned stores account for the remaining portion of the Brazilian retail market. Carrefour. Carrefour, a giant French retailer that entered the Brazilian retail market in 1974, is the oldest and most established foreign competitor. This company has fully adapted to Brazilian culture and thus is not viewed as a foreign company. Carrefour currently controls 20 percent of the Brazilian market, with 229 stores total. Interestingly enough, the French retailer purchased 23 supermarkets from Wal-Mart s entry

27 Case 5 Wal-Mart Opeartions in Brazil: An Emerging Giant 647 partner, Lojas Americanas, in 1998 when that company exited the grocery business. In addition, Carrefour merged with Promodes SA, the rival Brazilian retailer, in 1999 in an attempt to achieve an even stronger position in that market. Decentralized management style and effective advertising campaigns continue being Carrefour s competitive strengths. Companhia Brasileira de Distrubuição (CBD). CBD, the second largest food retailer in Brazil, currently operates more than 500 stores in Brazil with over US$4.7 billion in total sales for The company is grouped into hypermarkets, supermarkets, an electronics and home appliances division, and an e-commerce division. The supermarket division consists of two retail formats: Pão de Açucar and Barateiro Supermercados. Pão de Açucar s total 2000 sales were similar to those of Carrefour. When adding the sales of Barateiro Supermercados, the division that caters to the lower class, CBD s total sales make it the number one competitor within Brazil. With regard to the ownership of the company, France s Casino Group currently owns minority share (40 percent) in CBD. Use of Sam Walton s Management by Walking Around concept continues to be one of CBD s advantages. Royal Ahold. Royal Ahold is a Dutch firm specializing in supermarket retailing. Surprisingly enough, the company entered the Brazilian retail market through a joint venture with Brazil s fourth largest retailer, Bompreco, in The company has since purchased Bompreco and is currently the leading food retailer in the northeast region of Brazil, with 108 hypermarkets and supermarkets. Royal Ahold s 2002 sales totaled 16.4 billion euros (approximately US$17 billion). Local retailer flexibility and rich product mix present the company s source of advantage. Makro Atacadista. Makro Atacadista is another Dutch retailer whose wholesale outlets represent direct competition to Wal-Mart s Sam s Club. Established in 1972, the company currently operates more than 30 stores across most of the country. It has over 1.3 million registered users, of which 80 percent are small business owners and the remaining 20 percent are individual customers. Unlike Sam s Club, Makro Atacadista charges no annual fee to its members. Selling third-party products under its own brand name (thus achieving economies of scale in advertising) continues to be a major advantage for the company. WAL-MART NOW Since originally entering the Brazilian retail market in 1995, Wal-Mart has revised its strategy and has consequently gained a substantial share of the marketplace. Although Wal-Mart is currently the sixth largest retailer in Brazil, it still holds a relatively small share of the retail market, which is dominated by the French retailer Carrefour. Still, future prospects are looking good for Wal-Mart in Brazil. As of 2005, Wal-Mart had a total of 152 stores in operation (see Exhibit 3) and 7 percent of the market. Out of 152 Wal-Mart stores in Brazil today, it operates under three different formats: 16 Supercenters, 11 Sam s Clubs, and 2 Wal-Mart Todo Dia stores in the states of São Paulo, Rio de Janeiro, Minas Gerais, and Parana (AOL Latin America Announces Marketing Alliance with Wal-Mart Brazil, 2001). To add to that is the newly acquired 118 Bompreço unit formats. Bompreço stores are operated under various formats. Bompreço stores sell apparel, food, and general merchandize. Prior to this acquisition, some industry analysts believed that Wal-Mart was facing problems succeeding in Brazil because it had not made an acquisition. As previously stated, Wal-Mart s first revised strategy called for the opening of only 10 stores from 1995 to 1997, down from initial plans of over 80 stores. Looking back, Wal-Mart actually opened only three stores over that same time period. Most of the expansion occurred within the two years until 2001 (see Exhibit 4 for store openings). Wal-Mart revealed its EXHIBIT 3 NUMBER OFWAL-MART STORES IN BRAZIL (2004) 16 Supercenter 11 Sam's Club 2 Todo Dia 118 Bompreco

28 648 Case 6 Louis Vuitton in Japan: The Magic Touch EXHIBIT 4 BRAZIL STORE OPENINGS No. of Stores Opened Year revised plan for expansion in Brazil in July According to the plan, the company would inaugurate five stores in Brazil. However, by the end of 2002, the total number of stores in operation continued to be 22. But, in the next few years until 2005, Wal-Mart added a whopping 130 stores to bring the total to 152. Most of these stores (118) were acquired from Royal Ahold in In May of 2001, Wal-Mart opened the Barueri distribution center in São Paulo. Wal-Mart previously had three rented, limited-capacity distribution centers. The new distribution center has 35,000 square meters of storage space and is built on a 200,000 square meter lot owned by Wal-Mart. This new facility is designed to easily supply 20 local stores at its current size; it gives Wal-Mart better control over supply lines and allows for future building expansion. In May of 2001, Wal-Mart also opened its first Todo Dia store in the eastern São Paulo section, Sapopemba. Since the Sapopemba section of São Paulo is inhabited mostly by a lower income segment of the population, this move signals that Wal-Mart is looking to increase its market share through catering to different market segments. Another Todo Dia store opened on October 10, 2001, in the Taboao de Serra region of São Paulo, with a third store scheduled for opening by the end of the fiscal year As opposed to a Wal-Mart Supercenter which carries 60,000 items, Wal-Mart s Todo Dia carries only 12,000 items. Besides being a smaller format store, Todo Dia s inventory is stored directly above display shelves. It is reasonable to suspect that Wal-Mart s introduction of the Todo Dia store format is being used to test the market in Brazil for future expansion into local and extremely value-conscious neighborhoods. This strategy is similar to that of Wal-Mart de Mexico where the company currently dominates the retail market with six retail formats. In line with Wal-Mart s revised strategy which called for improved assimilation into Brazilian culture, the company is currently involved with local communities, supporting social programs such as Special Olympics Brazil and Mesa São Paulo. Wal-Mart s latest move is the announcement of the marketing alliance with AOL Latin America whereby AOL Brazil will be promoted in all Wal-Mart and Sam s Club units in Brazil. This marketing partnership is a logical strategic response to the current growth of the e-commerce sector. The value of business-to-consumer (B2C) e-commerce sales is forecasted to reach $4.3 billion in The number of Internet users in Brazil is expected to jump to 29 million in The Wal-Mart executive team in Brazil will be meeting with business consultants in a few weeks. In the meantime, they are wondering whether they have made the right moves for further expansion in the Brazilian market. CASE 6 LOUIS VUITTON IN JAPAN: THE MAGIC TOUCH It was a hot August night on the streets of the swank Omotesando district, but that did not deter 1,400 people from waiting in a mile-long line for the grand opening of the new Louis Vuitton store. As Japanese movie star Ryoko Yonekura made her appearance, the crowd cheered in anticipation of entering the store for an early opportunity to pay $700 for a knapsack or above $1,500 for a suitcase stamped with the LV trademark initials. Opening day sales were $1.04 million, setting the company s single day sales record. Louis Vuitton is a classic French brand of luxury handbags, luggage, and accessories such as scarves and belts. It is the star brand of the LVMH group, the world s largest luxury goods producer. Some other brands carried by LVMH include Fendi, Celine, and Marc Jacobs. The fashion and leather goods Melanie Neault, Philip C H Lee and Philippe Nivelle from the Japanfocused MBA program at University of Hawaii at Manoa prepared this case under the supervision of Professor Masaaki Kotabe, solely as the basis for class discussion (2005). The case is not intended to serve as endorsement, sources of primary data, or illustration of effective or ineffective management. division of LVMH has seen its sales driven by Louis Vuitton s dynamic growth, especially in Japan where it is number one in terms of market share of luxury handbag sales. Japan accounts for 31 percent of worldwide net sales for LVMH Fashion and Leather goods. This can be attributed to the cult like obsession with Louis Vuitton in Japan. Walk down the street in the Ginza district of Tokyo, and you will see dozens of handbags bearing the golden LV logo carried by trendy women. Half of all young Japanese women own a Louis Vuitton handbag, and 90 percent own a Louis Vuitton item. In Japan status symbols such as Louis Vuitton are treated almost like a necessity. HISTORY OF LOUIS VUITTON The founder, Louis Vuitton, was born in the French countryside on August 4, At age 16 he went to Paris looking for work and became an apprentice for Monsieur Marėchal, a famous trunk maker and master packer. 1 By age 30, Louis 1 A master packer is a specialist who packs gowns and suits in a manner that prevents them from wrinkling.

29 Case 6 Louis Vuitton in Japan: The Magic Touch 649 EXHIBIT 1 COMPARISONBETWEEN SALES OF LVMH IN JAPAN AND JAPAN S GDP 200, , , , , ,000 80, , , , , , ,000 Sales of LVMH Fashion and Leather Goods in Japan ( mil) GDP Japan ( bn) Vuitton became a dress packer for Empress Eugenie, wife of Napoleon III. A few years later, in 1854, he started making trunks and opened his first luggage store. Louis Vuitton soon became the leading luggage maker for aristocracy. He made luggage not only for Empress Eugene but also Pasha of Egypt, and French explorer Pierre Savorgnan. In 1892 Louis Vuitton started selling handbags. He also died that same year and his son Georges Vuitton took over the company. Georges Vuitton can be credited for expanding the company overseas, turning it into a world recognized brand, masterminding over 700 LV designs, and designing the Monogram Canvas pattern. The Monogram Canvas pattern was inspired by Japanese floral print, reflecting that era s fascination with Japan. The four-petal pattern on the LV logo is seen today on many Louis Vuitton bags. The new intricate pattern was designed not only to update LV s image but to thwart competitors from copying Louis Vuitton handbags. When George died in the 1930s, his son Gaston took over. His creativity and love for the arts spurned many new products. Throughout the years that George and then Gaston ran the company, Louis Vuitton items became increasingly popular among the elite of society, such as Charles Lindbergh, opera singer Marthe Chenal, the Duke and Duchess of Windsor, Ernest Hemingway, and Prince Borghese. In 1977, Henry Racamier married a Louis Vuitton descendant and was named to run the family business. He was a savvy marketer who expanded the business, broadened the product mix and promoted the brand via advertisements. In 1987 with ambitions to further grow the company, Louis Vuitton merged with a financially strong business partner Moët Hennessy. LVMH was born. Louis Vuitton was to remain independently managed by Racamier, however disputes erupted between him and other executives. The dispute ended in 1990 with Racamier being forced out of the company and the Vuitton family selling its 27 percent ownership in LVMH. THE JAPANESE MARKET When a sales office first opened in Japan, Gaston s intentions were not for Louis Vuitton to become Japan s most popular luxury brand, rather he was trying to curb the production and sales of counterfeit goods in the Asia region. In the 1960 s, Louis Vuitton experienced a high number of fakes being made, especially overseas. Gaston Vuitton decided that a good way to combat the production of these fakes would be to open a sales office in Asia, the very place where these fakes were being made. In 1968 Asia s first Louis Vuitton sales office was opened in Tokyo Japan. Ten years later with increasing popularity of LV products, two stores were opened in Tokyo and Osaka. This was just one year after the Louis Vuitton SA holding company was created to assist with a new international development strategy to control and integrate distribution. Since the opening of the two stores in Japan, the company had rapidly continued to expand its international market. By 1981 Louis Vuitton Japan KK was incorporated. Today, Louis Vuitton is the most popular luxury brand in Japan and enjoys a 28 percent share of the Japanese market. Sales from Japan account for about 30 percent of Louis Vuitton s worldwide sales in In spite of the hefty price tag on a Louis Vuitton bag, around $500-$5000, Japanese women cannot get enough of it. THE TWO TIERED ECONOMY IN JAPAN Japan s economy has been shaky since the burst of the economic bubble that formed in the 1980s. Over the past decade, Japan has been faced with rising unemployment, numerous bankruptcies, deflation, drops in consumer spending, and declining income (refer to Exhibit 2 3). In a time when people are feeling less economically secure, 100-yen shops 2 and discount brands such as Uniqlo have become increasingly popular. One would expect that in such dire 2 Japan s equivalent of a Dollar store in USA.

30 650 Case 6 Louis Vuitton in Japan: The Magic Touch EXHIBIT 2 JAPAN UNEMPLOYMENT RATE STATISTIC BUREAU OF THEMINISTRY OF INTERNAL AFFAIRS AND COMMUNICATIONS 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% EXHIBIT 3 ANNUAL AVERAGE OF MONTHLY HOUSEHOLD INCOME AND EXPENDITURE BY YEARLY INCOME QUINTILE GROUP STATISTIC BUREAU MINISTRY OF INTERNAL AFFAIRS AND COMMUNICATIONS (Workers Household Values in Yen) Persons per Living Disposable Year Household Income Expenditure Income , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,185 times, consumption of luxury goods would decline. However, the opposite has been the case in Japan. The luxury business continues to boom and over the past five years, Louis Vuitton and its competitors Hermes, Gucci, Burberry, Versace, Chanel, and Rolex, have all opened lavish boutiques in Tokyo. In 2002, European luxury brands rang up record sales in Japan in spite of its negative GDP growth and an unemployment rate that was climbing towards a record high. THE COMPETITION While Louis Vuitton enjoyed a great sales performance in Japan, so have the luxury brand competitors. Some of Louis Vuitton s key competitors in Japan include, Gucci, Prada, Coach, Hermes, and Chanel to name a few. Recession or no recession, a stunning 94.3 percent of Tokyo women in their 20s own something made by Louis Vuitton, according to Saison Research Institute. Goods made by Gucci sit in the closets of 92.2 percent of Tokyo twentysomethings; 57.5 percent own Prada and 51.7 percent Chanel. GUCCI Gucci was founded during the roaring 1920s in Florence Italy as a saddle and luggage maker. In the 1960s Gucci opened stores worldwide and became a popular brand among high profile people such as Princess Grace of Monaco and Jacqueline Kennedy. A decade later Gucci opened its first store in Japan. Today Gucci is owned by Gucci Group, one the world s

31 Case 6 Louis Vuitton in Japan: The Magic Touch 651 EXHIBIT 4 LV AND COMPETITION IN 2003: HOW LOUIS VUITTON MATCHES UP The century and a half old company is not only the number 1 luxury brand in Japan. It is bigger, richer, and faster growing than most competitors worldwide Brand 2003 Sales in Billions Percent Change Operating Margin Louis Vuitton $ % 45.0% Prada Gucci Hermès Coach Source: Business Week, March 22, 2004 EXHIBIT 5 AGRAPHICAL ILLUSTRATION OF LOUIS VUITTON S SUCCESS BY BUSINESS WEEK,MARCH 22, 2004) leading multi-brand luxury goods companies, which includes brands such as Stella McCartney and Yves Saint Laurent. Japan accounts for 20 percent of the Gucci Groups total worldwide sales. Gucci s image is very sexy and provocative. This image is portrayed in Gucci s controversial advertisements that contain sexual innuendos (refer to Exhibit 6). The price range for a Gucci bag is in the $600-$8500 range, similar to LV. PRADA In 1913 Mario Prada founded a luxury leather goods boutique. Although an Italian brand, Mario Prada started making Luxury leather goods in the USA and other parts of Europe before moving to Milan. Today Prada remains a family ran company and is currently managed by Mario Prada s daughter Muccia and her husband. Prada s image portrayed in ads is very mod,

32 652 Case 6 Louis Vuitton in Japan: The Magic Touch EXHIBIT 6 ADVERTISEMENTS SHOWING DIFFERENT IMAGES OF THE BRANDS Louis Vuitton Prada Coach