Molson Aquisition of Kaiser

1. Executive Summary

Molson is one of the 2 giant competitors on the monopolistic Canadian beer market. Due to shifts in the external environment (changing Canadian demographics, global trend towards consolidation, increase in microbrewery and imported beer consumption in Canada) and to internal pressures, the company decided to pursue a strategy of international expansion in 2000.

Molson entered the Brazilian market in two stages.

1. by acquiring BAVARIA in 2000, for $98 million CAD

2. by acquiring KAISER in 2002, for $912 million CAD (for a 80% interest)

After these two acquisitions Molson doubled its brewing capacity and gained a foothold in an important emerging market. As this was Molson's first major foray into a South American market there are considerable risks in the pursuit of this strategy.

The present paper delivers an external and internal analysis, critiques the current strategy chosen by Molson, and delivers a detailed implementation plan to ensure a successful completion of the chosen strategy. The implementation plan is designed to ensure a smooth integration of the Brazilian acquisitions with Molson's current operations in Canada and the USA.

The strategy implementation plan covers the functional areas of sales and marketing, distribution, manufacturing and finance. It will examine the actions needed to be taken in the two markets - Brazilian and Canadian.

2. Background Information

"My beer has been universally well-liked beyond my most sanguine expectations."- John Molson, January 18th, 1786

Molson is one of Canada's oldest company's dating back to 1786. From modest beginnings the company has gone through multiple periods of growth. Through the 1800's the company was involved in multiple businesses such as railroads and banks but began to concentrate on growing their brewing operations from the 1900's onward. Now as the company prepares for the new millennium they have embarked on establishing licensing agreements in the US and have recently made a large push into Brazil with its favourable demographics.

Company Milestones

"We've entered into a completely different realm of opportunity." - Dan O'Neill May 16th, 2002

3. Analysis

3.1 External Analysis

Brazilian Economy

Brazil's economy contributed to around 33.4 % of the GDP for Latin America in 2001. With this, Brazil is the largest economy in South America and is one of the ten largest economies of the world. In 1994, the economy expanded by 6.2 percent and then averaged 3.3 percent growth until 1998, when the economy, in terms of GDP, did not grow at all. During the early months of 1998, a soaring current account deficit and Russia's debt default created unrelenting pressure on the currency, which forced the government to hike annual interest rates above 50 percent.

In January 1999, Brazil made an abrupt shift of course in exchange rate policy, abandoning the strong currency anti-inflation anchor of the Real Plan. During the next two months, the Brazilian currency Real depreciated about 40 percent pulling the economy in to a brief economic recession. Despite this economic setback, the Brazilian government has continued with its economic development program, and the economy has responded by resuming its expansion. As seen in the chart above, in the last two decades the growth rates have declined to 1.8 % per annum. The GDP for 2001 was at 1.5 %.

The weakness in the Brazilian Economy may be due to two factors. The first factor is that the distribution of Income and wealth is highly disproportionate. As a result, in spite of Brazil's productive capacity, more than 50 million people out of 174 million live below the poverty line. Secondly people working in the public sectors earn excessively high salaries and there is a high rate of corruption. The instability in the political system does not allow for stable economic conditions.

The following chart provides an overview the Brazilian economy's performance during the past two decades:

Interest rates & Exchange rates

Since early 1998 the Brazilian interest rate has been stable at 19 %. The emerging slowdown in domestic and global demand coupled with low oil prices in the late 90's are likely to limit further inflationary pressure. This should enable the Central Bank to avert interest rate hikes in the short term.

Exchange rates: Real per US dollar

The above chart shows that during the past five years the Real has depreciated by more than 130 %. Inflation for the year 2001 was 6.6%, which is a little above the Central Bank's estimate of 6%. However, the Central Bank has not been very successful in handling the inflationary cycles. Brazil's 2001 current account deficit in was US $ 23,213 M. Recently, with the Asian financial crisis in 1997 and the Russian bond default in 1998, Investors have become more concerned of the risks posed by emerging markets.

Demographics

Brazilian population is the fifth largest population in the world with a population of 174 million. The population is expected to grow at a rate of 0.98%. Sixty four percent of this population is between 15- 64 years. This indicates a large share of throat number for the beer industry. Brazil's beer drinking population is several times greater than the entire Canadian population.

Canadian Economy

The Canadian economy can be considered as safe but the general beer market environment presents some challenges such as a very high taxes level, increasing competition from soft drinks and a shrinking market.

Since 1987, Canada's inflation rate has fluctuated between 1% and 3%, keeping consumer prices (CPI) relatively steady. Another positive economic metric is that Canada's GDP has been increasing steadily, and that workers in general are increasingly productive, when GDP is broken down on a per capita basis. For the last four years Canada has enjoyed a budgetary surplus due to Canada's high personal tax rates, luxury taxes, and excise taxes (taxes on alcohol and tobacco).

Demographics

Population