Analysis of Supply Chains in the Consumer Packaged Goods Industry by Marc-Elliott Finkelstein Master of Business Administration University of Toronto (2004) Submitted to the Zaragoza Logistics Center on May 16, 2005 for partial fulfillment of the requirements for the degree of MASTER OF ENGINEERING IN SUPPLY CHAIN MANAGEMENT AND LOGISTICS in the MIT-ZARAGOZA INTERNATIONAL LOGISTICS PROGRAM at the ZARAGOZA LOGISTICS CENTER, A RESEARCH INSTITUTE ASSOCIATED WITH THE UNIVERSITY OF ZARAGOZA May, 2005 © 2005. Marc-Elliott Finkelstein. All rights reserved. Author:_____________________________________________________________ MIT-Zaragoza International Logistics Program Zaragoza Logistics Center May 16, 2005 Certified By:__________________________________________________________ Dr. Paul M. Thompson Professor of Logistics Systems, MIT-Zaragoza International Logistics Program Thesis Supervisor Accepted By:_________________________________________________________ Dr. Maria Jesus Saenz Academic Director MIT-Zaragoza International Logistics Program Analysis of Supply Chains in the Consumer Packaged Goods Industry By Marc-Elliott Finkelstein Master of Business Administration University of Toronto (2004) Submitted to the Zaragoza Logistics Center on May 16, 2005 for partial fulfillment of the requirements for the degree of MASTER OF ENGINEERING IN SUPPLY CHAIN MANAGEMENT AND LOGISTICS in the MIT-ZARAGOZA INTERNATIONAL LOGISTICS PROGRAM at the ZARAGOZA LOGISTICS CENTER, A RESEARCH INSTITUTE ASSOCIATED WITH THE UNIVERSITY OF ZARAGOZA Keywords: 2020, InBev, beverage, Interbrew, AmBev, supply chain 2 Abstract A contribution to the MIT Supply Chain 2020 research project, this paper attempts to delineate factors in the supply chain of InBev which are “excellent”. Using the framework provided by Michael E. Porter in his article What Is Strategy?, InBev will be analyzed based on the effectiveness of its underlying operating activities and how they, cohesively, support its competitive strengths. InBev operates in the consumer packaged goods industry, in a segment called beverages. Manufacturing beer, soft drinks, isotonic beverages, and several others, InBev competes in nearly all categories, against such prominent firms as: Coca- Cola, Diageo, Anheuser-Busch, Pepsi, and several others. InBev has a presence in 140 countries, producing over 200 brands, and holds a 14% global market share. Broken into five autonomous business units, InBev’s operations are almost entirely disconnected, except for the movement of global brands. InBev outsources several of their functions in several regions, including information technology, transportation, and other “non-core functions”. InBev claims that brewing is their core competency, despite outsourcing the brewing of their flagship brands in several countries. Through licensing and reciprocal agreements, most beverage firms are outsourcing some of their production as a means to gain entry into desired markets. In reconciling the research findings to the Porter framework, it is found that the operations in Belgium do not comprise an “excellent” supply chain, and 3 consequently lack an activity system which is supportive of business practices. In fact, InBev Belgium is found to have no competitive advantage at all, only distinction in their brewing methods. Some degree of “consistency” is apparent, but the chain lacks solid first- and second-order fit. Comparing InBev’s Belgian operations to their Brazilian operations (AmBev), yields significant differences. AmBev possess a strong competitive advantage, which has resulted in tremendous market dominance in most of South America. AmBev’s support activities are intricate and numerous, and all work to reinforce and strengthen their competitive position. Finally, this paper examines the future of the beverage industry, remarking on the present trend towards homogeneity. Prognostication takes into account current trends, describing potential outcomes under several conditions. 4 Acknowledgements I would like to thank all parties who contributed directly or indirectly to the completion of this thesis. • My thesis advisor, Dr. Paul M. Thompson, who helped immensely in providing insight, imparting wisdom and helping smooth the rough spots. • Dr. Larry Lapide, leader of the Supply Chain 2020 project, kept me inspired and eager to be involved in this project. He added clarity, frankness and understanding to this experience, and he always went out of his way to assist his researchers. • The supportive and skilled staff at InBev, all of whom were highly cooperative and professional. Notable contributions came from Koen Goossens, Paul Timmermans, Sofie Aernouts, and Marie-Jeanne Lambrechts. • The other Supply Chain 2020 researchers, who patiently listened to all presentations, and offered new insight through their intelligent and thought-provoking questions. • The helpful and articulate individuals at SAP who provided assistance in painting a picture of the CPG industry: Emiel Van Schaik, Stefan Boerner and Wolfgang Peter. • And lastly and most importantly, my beautiful wife Simone Finkelstein, who had the patience and devotion to endure my hectic schedule and boring supply chain stories, all the while keeping my side of the bed warm, despite being across the Atlantic. 5 6 Table of Contents Abstract 3 Acknowledgements 6 Table of Contents 7 Operating Definitions 10 Chapter 1: Introduction 11 Chapter 2: Literature Review 12 Chapter 3: Industry Overview 13 3.1 Industry Trends 14 3.2 Five Forces Analysis 18 3.2.1 Rivalry Among Existing Competitors 18 3.2.2 Threat of New Entrants 20 3.2.3 Bargaining Power of Suppliers 22 3.2.4 Threat of Substitute Products or Services 23 3.2.5 Bargaining Power of Consumers 24 3.3 Industry Drivers 25 3.4 Industry Evolution 29 3.5 Top Four Companies 32 3.6 Coca-Cola 33 3.6.1 History 33 3.6.2 Operations 35 3.6.3 Geographic Performance 37 3.6.4 Challenges & Opportunities 43 3.6.5 Summary 46 3.7 Nestlé 47 3.7.1 Overview 47 3.7.2 Logistics 49 3.7.3 Challenges 52 3.7.4 Summary 54 3.8 Anheuser-Busch 56 3.8.1 Overview 56 3.8.2 History 56 3.8.3 Marketing 59 3.8.4 Challenges & Opportunities 59 3.8.5 Summary 61 3.9 Diageo PLC 62 3.9.1 Strategy 63 3.9.2 History 64 3.9.3 Sales 64 3.9.4 Logistics 65 3.9.5 Challenges and Opportunities 70 3.9.6 Summary 72 Chapter 4: InBev Position in the Industry 74 4.1 History 74 4.2 Brands 75 4.3 Strategy 77 4.4 Operations 78 4.5 Supply Chain 79 4.6 Challenges & Opportunities 81 Chapter 5: InBev’s Specific Supply Chain 83 7 5.1 Brands 85 5.2 Plants 86 5.3 Channels 88 5.4 Customer Segments 90 5.5 Competitive Positioning 90 5.6 Products 91 5.7 Sourcing 91 5.8 Performance 95 5.9 Transportation 96 5.10 Quality Control 97 Chapter 6: Supply Chain Analysis 98 6.1 Analysis 99 Chapter 7: AmBev Specific Supply Chain 104 7.1 History 104 7.2 Performance 105 7.3 Risk Factors 105 7.4 Market Conditions 107 7.5 Brazilian Beer Market 108 7.5.1 Low Per Capita Beer Consumption 108 7.5.2 Channels 109 7.5.3 Prevalence of Returnable Packaging 109 7.5.4 Pricing 110 7.5.5 Seasonality in Sales 110 7.6 Brazilian Soft Drink Market 111 7.6.1 Soft Drinks Consumption 111 7.6.2 Flavours 112 7.6.3 Packaging 112 7.6.4 Channels 113 7.6.5 Pricing 113 7.6.6 Seasonality 114 7.7 Brazilian Non-Alcoholic and Non-Carbonated Beverages Market 114 7.7.1 NANC Consumption 114 7.7.2 Seasonality 115 7.8 Business Strategy 116 7.9 Products and Brands 118 7.10 Beer Sales in Brazil 118 7.11 Carbonated Soft Drinks Sales in Brazil 119 7.12 International Operations 120 7.13 Distribution and Sales 121 7.13.1 Distribution 121 7.13.1.1 Third-Party Distribution Network 123 7.13.1.2 Direct Distribution System 124 7.13.2 Sales 124 7.13.2.1 Points of Sale 124 7.13.2.2 Terms of Sale 124 7.13.2.3 Sales Force 125 7.13.2.4 Pricing 125 7.13.2.5 Marketing 126 7.13.2.6 Packaging 126 7.14 Competition in Beer 127 7.15 Competition in Soft Drinks 128 7.16 Procurement 129 7.16.1 Beer Ingredients 130 8 7.16.2 Soft Drink Ingredients 131 7.16.3 Packaging 131 7.17 Property, Plant and Equipment 132 7.18 Logistics 135 7.19 Innovation and Knowledge Management 136 7.20 Environmental Matters 136 7.21 Employees 137 7.22 Training 138 7.23 Industrial Relations 138 7.24 Profit-Sharing Plan 138 7.25 Commodity Risk 139 7.25.1 Foreign Exchange Risk 139 7.26 Financial Performance 2001-2003 140 Chapter 8: AmBev Supply Chain Analysis 141 8.1 Analysis 141 8.1.1 Complementarity 148 Chapter 9: Comparison and Contrast - AmBev Versus Interbrew Belgium 151 Chapter 10: Predictions for the Beverage Industry for 2020 155 10.1 Trends 155 10.2 Innovation 157 10.3 Summary Predictions 157 Sources Consulted 159 Appendix 1 – Diageo’s Geographic Presence 163 Appendix 2 – The Diageo Way of Brand Building (DWBB) 164 Appendix 3 – Porter’s Five Forces Industry Analysis: Beverages Industry 165 Appendix 4 – Map of AmBev’s South American Operations 166 Appendix 5 – Beer Brewing Process 167 Appendix 6 – Ale Family of Beers 168 Appendix 7 – Lager Family of Beers 169 Appendix 8 – Definitions of “Fit”, “Consistency” and “Complementarity” 170 Appendix 9 – AmBev Activity System Map 173 9 Operating Definitions Competitive Advantage – “Competitive advantage is a function of either providing comparable buyer value to competitors but performing activities efficiently (low cost), or of performing activities at comparable cost but in unique ways that create greater buyer value than competitors and, hence, command a premium price (differentiation).” (Porter, 1986) Competitive Strategy - “Competitive strategy is about being different. It means deliberately choosing a different set of [business] activities to deliver a unique mix of value.” (Porter, 1996) Core Competency – “Core competencies are the collective learning in the organization… [they] are enhanced as they are applied and shared. But competencies still need to be nurtured and protected; knowledge fades if it is not used. Competencies are the glue that binds existing business.” “Three tests can be applied to identify core competencies in a company. First, a core competency provides potential access to a wide variety of markets.” “Second, a core competence should make a significant contribution to the perceived customer benefits of the end product.” “Finally [and most importantly], a core competence should be difficult for competitors to imitate.” (Prahalad and Hamel, 1990). Core Adjacency – “[Core] Adjacency expansion is a company's continual moves into related segments or businesses that utilize and, usually, reinforce the strength of the profitable core.” “What makes adjacency expansion different from other growth strategies is its use of existing customer relationships, technologies or core business skills to build competitive advantage in a new area. Companies pursuing new growth initiatives without jeopardizing a strong core can benefit from methodically inventorying and mapping out their adjacent opportunities.” (Zook, 2004) Corporate Strategy – “Corporate strategy is what makes the corporate whole add up to more than the sum of its parts.” (Porter, 1987). Fit – See Appendix 8 Operational Effectiveness – “Operational effectiveness means performing similar activities better than rivals perform them.” (Porter, 1996) Strategy - “The essence of strategy is in the activities – choosing to perform activities differently or to perform different activities than rivals. Otherwise, a strategy is nothing more than a marketing slogan that will not withstand the competition.” (Porter, 1996). 10