The Ub Group1

Conglomerate Strategy (First Draft)

The UB Group By Group 6, FMG 18b

The United Breweries Group Based in Bangalore, it is a conglomerate of different companies with a major focus on the brewery (beer) and alcoholic beverages industry. The company markets most of its beer under the Kingfisher brand and has also launched Kingfisher Airlines, an airline service in India, with international flights operating recently. It is also present in the sporting industry by the way of buying a team in the Indian Premier League (cricket) from their hometown i.e. Bangalore by the name of Bangalore Royal Challengers. The group has also made India’s first team entry into Formula One by being the joint owner team Force One (India’s first-ever Formula One Team) with the Netherlands based Mol Family. United Breweries is India's largest producer of beer with a market share of around 48% by volume. The group is a multi-faceted conglomerate with business interests in Beverage Alcohol, Pharmaceuticals, Media, International Trading, Aviation, Fertilizer, Research & Development, and Infrastructure Development. After Vittal Mallya's death in 1983, his son Vijay Mallya assumed the mantle of the group. Vijay Mallya inducted professional management and consolidating the Group into individual operating divisions. In 1988, UB Group acquired the global Berger Paints Group with operating companies across four continents. The paints business was divested for significant value in 1996. After India adopted economic liberalization in 1991, the UB Group decided to retain interests in only those businesses that were globally competitive and did not depend upon fiscal tariff protection. Today, UB Group is the third largest manufacturer of Spirits products in the world. In 2005, the Group entered aviation sector with the launch of Kingfisher Airlines Limited. Within a short time the airlines has captured an impressive market share and has established a niche identity for itself.

Business Interests of UB Group Beverage Alcohol: The UB Group is 3rd largest spirits marketer in the world, with overall sales of 60 million cases. The company offers 140 brands at varying price points. Some of the famous brands of the UB Group are: Bagpiper Whisky, McDowell's No.1 Whisky, Director's Special Whisky, McDowell's No.1 Brandy and McDowell's Celebration Rum. The group owns the Mendocino Brewing Company in the United States.It has also acquired Glasgow-based distillers Whyte & Mackay for nearly £500 million (Rs 4,350 crore) This would brought the brands of W&M like The Dalmore, Isle of Jura, Glayva, Fettercairn, Vladivar Vodka, and Whyte & Mackay Scotch under its portfolio. Pharmaceuticals: The group's company Aventis Pharma Limited is the second largest pharmaceutical multinational in India. It develops and markets branded prescription drug and vaccines. Media: The UB Group also has a shareholding in Asian Age Holdings Ltd, the company that owns and manages daily newspaper, The Asian Age.In August 2007, the group made a first-ofits-kind media alliance for the promotion of NDTV Good Times, a lifestyle television channel . International Trading: The Group's company UB Global Limited is a recognized export house engaged in the export of Beer, Spirits, Leather Footwear and Processed Foods. The Company also exports Pharmaceutical Products and customized perfumeries. Fertilizer: Mangalore Chemicals & Fertilizers Limited is under UB Group's management. It has a manufacturing capacity of 2,17, 800 MT of Ammonia and 3,80,000 MT of Urea.

Research & Development: Vittal Mallya Scientific Research Foundation (VMSRF) was established in 1987 with the objective of developing newer and novel technologies that will have substantial application in industry and health care. The foundation is it is recognized by the Departments of Scientific & Industrial Research (DSIR), Dept. of Biotechnology (DBT), Council for Scientific and Industrial Research (CSIR) and the Ministry of Finance, Govt. of India.

Aviation: UB Group entered aviation sector in 2005 with the launch of Kingfisher Airlines Limited. Kingfisher Airlines has captured an impressive market share and has established a niche identity for itself. On 19 December 2007, it was announced that Air Deccan would merge with Kingfisher Airlines. The merger became effective April 2008, with Vijay Mallya becoming the Chairman and CEO of the new company, while G. R. Gopinath became its Vice-Chairman. Engineering: UB Engineering Limited is the group's engineering business arm. It undertakes EPC Projects, Infrastructure, On-site fabrication of structures, Installation, Testing and Commissioning of Electrical and Mechanical Equipments, Piping etc. for large Industrial projects such as Power, Refineries, Steel, Cement, Fertilizer, Petrochemical and Desalination Projects. The company was initially established as Western India Erectors in 1963 and came under the UB Group in 1988. IT consulting: The group entrance to the IT sector had also been marked by the formation of UBICS, Inc. The company provides IT consulting, services and professional IT products to business companies. United Breweries now has greater than a 40% share of the Indian brewing market. UB financed a takeover of the spirits business of the rival Shaw-Wallace company giving it a majority share of India's spirits business. United Breweries is India's largest producer of beer with a market share of around 48% by volume. The company markets most of its beer under the Kingfisher brand and has also launched Kingfisher Airlines, an airline service in India, with international flights operating recently. The Group is the third largest manufacturer of spirits products in the world, only after Diageo PLC and Pernod Ricard. UBL is one of only three in the world to own seven millionaire brands and at least five brands rated by Drinks International, UK, to be amongst the ten fastest growing brands in the world in their respective categories. The market share of the Spirits Division in India is currently 60% and exports to the Middle East, Africa and Asian countries are growing rapidly. The UB Group’s Brewing Entity - called United Breweries Limited (UBL) - has also assumed undisputed market leadership with a national market share in excess of 50%.

Through a process of aggressive acquisition and market penetration, The UB Group today controls 60% of the total manufacturing capacity for Beer in India. The flagship brand, Kingfisher is now sold in over 52 countries worldwide having received many accolades for its quality. Sales of the UB Spirits Division have crossed 90 million cases (9 litres each) during the fiscal year 2008-09. In this report we would be trying to understand the strategy of United Breweries, Kingfisher Airlines and the sports business for the UB group.

United Breweries Limited and United Spirits

PORTERS FIVE FORCES MODEL

Competitors: The competitors like Seagrams, Fosters, Johnie Walker offer stiff competition to Kingfisher. In rivalry competitors try to grab each other’s market share by introducing price wars, advertising battles and new product introductions. Currently United breweries are the market leader in beer segment which places it ahead of its competitors. This is because of its investment in the Research and Development sector in liquor industry which enables it to introduce new brands rapidly. It has been present in India for many decades which give it an advantage of strong brand loyalty and also a strong brand image.

Threat of new entrants: There are many other emerging brands which are coming up in India. As the lifestyle in urban areas is increasing the per capita liquor consumption is also increasing. These trends are inviting a lot of new foreign companies who willing to expand in the growing Indian market. Several foreign brands have made brand associations and are marketing their brands aggressively through various point-of-sale promotions throughout their distribution networks. Buyers: As the liquor consumption in India increases the customers also see their power increasing. In alcohol industry the brand loyalty is not there. So when more and more brands enter the market the customer goes for the cheapest brand in the same volume and alcohol limit bracket. Substitutes: In India the primary segments are beer and whiskey. So there is a threat from other substitutes like Vodka, Wine and Rum. If the competitors decide to make these segments more popular then there is a threat for the dominant market share of UB group in the liquor segment. Suppliers: The UB group is dependent upon barley producer for their beer production. Any change in barley prices affects the price of beer.

SWOT ANALYSIS

Strengths: 1. Market share of 48 % in beer segment. 2. Market share of 59 % in spirits segment. 3. Strong brand image in India. 4. Global presence of the brand. 5. Known for quality and innovation. 6. Aggressive advertising. 7. Financial backing from UB group. Weakness: 1. Over leveraged position leading to short term cash flow problems. 2. Dominant single brand Kingfisher. 3. Expensive brand maintenance. 4.

Static market growth rate.

5. Long development cycles. Opportunities: 1. Growing beer market. 2. Demand for better quality. 3. Increase in disposable income. 4. Low per capita beer consumption. 5. Any deregulation in the excise policies with reference to taxation and duty on beer which could drastically push up the demand for beer.

Threats: 1. 2. 3. 4. 5. 6. 7.

Advertising and market restrictions. Entry of foreign liquor brands. Cloning of successful brands. Growth in substitutes. Economic downturn. Negative perception of alcohol in India. High taxes.

STRATEGY 1. The UB group should increase the profitability of their breweries unit in line with the FMCG industry. This can be done by increasing the market share in high price liquor brands in scotch and whisky segments. They should also continue to innovate new liquor brands to strengthen their grip on the market share in normal priced brands. 2. They should be aiming to increase their exports. There is a large market potential in African countries. This will make their brand more global in nature. They have already making inroads into Europe and USA by manufacturing and exporting grain based whisky. 3. They should make their wine segment more popular in India and abroad. Wine is both abundantly consumed in Europe and is also costly. So it offers high return on investment plus it also strengthens the global brand image of the company.

UB Group Sports Entities Vijay Mallya has investment in a lot of major sports like Cricket, F1 Racing and Football, but all of them do not come under the umbrella of UB group as yet. Though plans are in the pipeline to consolidate all sports assets. Royal Challengers: Royal Challengers' Sports, the UB group company which owns the Bangalore Royal Challengers IPL team, is a wholly-owned subsidiary of United Spirits, of which Vijay Mallya is the chairman. Vijay Mallya wanted to associate one of his top-selling liquor brands, either No. 1 McDowell's or Royal Challenge with the team. The latter was chosen, hence the name. The jersey colours of the team are red and golden yellow, the same as the Karnataka state flag , and the logo consists of the RC emblem with "Royal Challengers Bangalore" in standard format. Achievements:  Runner up in IPL 2009 Strategies 1. Promotional strategy: Advertising is a major component of the cost structure of Indian made foreign liquors (IMFL) brands. United Spirits spends nearly Rs 350 crore on advertisement and considering this, the exposure through IPL is a great publicity that comes along free of cost. 2. On the working capital, it expects to break even, even in the current fiscal. The revenue is expected from media rights, gate collection, merchandise etc. The franchisee right is perpetual and therefore, a capital asset that can, if necessary, be sold in future. Force India: Force India Formula One Team Limited, trading as Force India F1, is a Formula One motor racing team. The team was formed in October 2007, when a consortium led by Indian businessman Vijay Mallya and Michiel Mol bought the Spyker F1 team for € 88

million. Force India F1 represents increased Indian participation within Formula One, with Delhi set to host the first ever Indian Grand Prix in 2011. Achievements:  Finished second in the 2009 Belgian Grand Prix.  Finished fourth at the Italian GP 2009.

Strategies

1. Promotional Strategies: Formula one is watched in an estimated 70 countries across 6 continents. Whenever a TV show is beamed and it shows a car, all sponsors’ names get displayed as well. Now thats excellent brand promotion 2. Revenue through merchandise: There is a huge opportunity with respect to merchandise. If distribution mechanisms are strengthened, we would soon find IPL/Formula 1 t shirts flooding the textile markets across Indian cities. Kingfisher East Bengal: One of the most well known football clubs in India, East Bengal is also one of the most successful football clubs in India. In 1998 its name was changed to Kingfisher East Bengal after United Breweries obtained a 50% stake in the club, essentially to promote their Kingfisher Beer. Achievements:  Only Indian Club to win a major tournament outside India  First Indian club to win back to back National Football League titles (2003&2004) Future of Sports Entities  UB to consolidate all sports properties and offer stake to investors – Hindu Business

Line, July 2009  Vijay Mallya to merge sports businesses – Economic Times, Sep 2009

As per an Interview of Mr. Vijay Mallya dated 12th Sep 2009, he has said that an achievable target could be the first quarter of next year. If this plan is realized then it would be the first publicly-held sports company and also the only Indian corporate with assets across major sporting fields.

We have tried to study the competitive forces using the Porter Model and also tried to do a SWOT analysis on such a consolidated sports entity.

PORTERS FIVE FORCES MODEL

1. Competitors – It would be the first of its kind corporate entity, hence there would be no

existing competition. 2. Threat of New Entrants – If this company would taste success, then a lot of threat could

be posed by new entrants like Red Chillies owned by Shahrukh Khan and corporate giants like GMR Sports and Reliance all of whom own a IPL franchisee team. 3. Suppliers – In such an entity the requirement would be of infrastructure for world class

sports. Since there is no shortage of such infrastructure their power is considerable less. 4. Buyers – These would comprise of the Investors and the audience. Investors are

important because they would want a good return on their investment. The audience is very important as they are the prime source of income. For any sport/team it’s very important to do well and win. This ensures a fan following and a constant source of income.

5. Substitutes – The investment has been done in crucial sports keeping in minds its long

term popularity. A threat could come from the increasing popularity of other sports or decreasing popularity of existing sports due to over exposure.

Strength: First mover advantage as it would be the first of its kind entity and also the increasing popularity of 20-20 cricket and F1 in India. Weakness: It is an untested market since no other sports company is listed till now. Also with such a model, the performance of a team would directly affect the share price and would lead to a lot of fluctuations. Opportunity: The popularity of F1 racing, 20-20 cricket and football has been consistently increasing. A majority of companies are sponsoring such events and teams as they provide great visibility. Threats: As described above, there would be an evident threat of new entrants and buyers(investors and audience).

Kingfisher Airlines Kingfisher Airline is a private airline owned by Vijay Mallya of United Beverages Group. It is a subsidiary of Bangalore based UB group. Kingfisher Airlines commenced its business on May 9, 2005 with a fleet of 4 Airbus A320 aircrafts. It is engaged in rendering aircraft passenger services including charter services. Promoters have major share holding in the company. Kingfisher airlines launched its domestic air service operations in May 2005.KFA was promoted by UB group and offered a single class- “Kingfisher Class”. KFA successfully leverage the youthful and vibrant image of its kingfisher beer brand and called its airlines as ‘Funliners’ to emphasize the fun-filled experience. Within the first six months of its launch, KFA managed to corner a 6% market share in the domestic air travel mark. KFA started its operation in May 7, 2005, positioning itself as a budget carrier and not as Low Cost Carrier (LCC). Mallya made it clear that KFA would not be positioned as a low cost carrier as passengers would attribute the features of low cost carriers like low quality of service, delayed flight timings, etc., to KFA as well. Hence, the airline was called a budget airline and not an LCC. Fares were above those of LCCs but lower than the economy class fares of Jet, Sahara, and IA. KFA also allowed multiple fare options and auctioning of tickets on all traffic routes. The destinations covered by Kingfisher Airlines are Bangalore, Ahmedabad, Jaipur, Cochin, Guwahati, Kolkata, Pune, Agartala, Mangalore Mumbai, Delhi, Goa, Chennai, Hyderabad, and Dibrugarh.

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Company has a market share of around 27%

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It came up with a very appealing promotional line “Fly the good times” and it reflected in the experience the company offered to its passengers.

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KFA is also launched Kingfisher express in order to tap into the growing LCC segment.

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It planned to re-launch its commercial air service called UB Airway again which it had to withdraw it due to government restrictions.

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The company gave best services to its customers that were like providing world class interiors, and in-flight entertainment systems.

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The company continue to provide following classes of services- Kingfisher class (premium economy class), Kingfisher class(premium business class) and Kingfisher red (low fair basic).

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Having more leg space for passengers when compared to normal economy class flights.

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The company started addressing its customers as “GUEST” rather than passengers.

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The company made its mark by providing its guests with more legroom and bigger seats so as to provide better comfort.

KFA has set its sight to become India’s largest airline both is capacity and in market share. KFA’s Promotional Strategies As part of its promotional strategy the marketing team of KFA showcased the airline as “the new flying experience”. The following initiatives were taken as part of its promotional strategy.

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Advertisements hoardings at airports depicted the stylish interiors of the “Funliners”, which conveyed youthful, fun-filled, and world class image.

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INOX multiplexes in Mumbai publicized KFA’s special offers for a month.

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KFA was the official travel airlines for the cast and crew of “Mangal Pandey”- the movie.

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KFA made use of various fashion shows, celebrity golf matches, New Year parties all to build its “Kingfisher” brand.

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The UB groups monthly magazine called “Pegasus” published information about KFA along with other information related to UB group.

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KFA launched many attractive offers to promote its sales like the “King Card” in association with ICICI Bank, in August 2005. This was meant to create loyal customers for KFA by providing benefits like privileged access to lounges, restaurants, free refreshments at airports, access to 180 golf clubs across India, special invites for lifestyle shows.

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In October, KFA launched “Chill Times Offer” in the month of August 2005 and September 2005.

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In October they launched the “King Saver Offer” which said “Fly like a King, don’t play like one”.

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KFA targeted the frequent fliers business traveller segment, which was dominated by Jet Airways. By offering a “King Saver Booklet”, This booklet contained six free flight tickets and was presented as a free gift if the passenger bought two such booklets each worth Rs. 26,999.Passengers could avail off this offer if they showed there Jet Privilege Member (Gold or Platinum) card.

Financial strategies: KFA came up with many new financial strategic moves that made it one of the leaders of aviation industry the company had adopted following strategies: •

It raised Rs 363.2 crore through IPO.

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Northway Aviation Limited ceased to be subsidiary of the company from yr 2009

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It purchased brand new A320 aircrafts powered by the cockpit that was a paperless environment.

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In June 2005 KFA planned to order US$5 bn at the Paris Air Show, for 5 new A350-800 aircraft, and five A330-200 aircraft.

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KFA was first Indian carrier to place an order for A380s.

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In November 2005 it placed an order for 30 A 320 and 20 ATR72-500 aircraft at the Dubai Air Show. This ATR72-500 was worth US$750.

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To further its expansion plan KFA put in its bid to buy Sahara in November 2005.How ever negotiation came to a standstill when KFA felt the valuation of Sahara Airlines of around US$750mn to US$1 bn. was too high. .

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KFA set up Kingfisher International Inc. (KII), a subsidiary in US for its international operations. KFA plans to operate international routes by end of 2007. But KFA had yet to receive permission from the Indian government.

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According to Indian government domestic air carriers are not allowed to fly international routes without five year of domestic flying experience. But Mr. Mallya said if he failed to convince the government to change its rules, it would start an airline in a foreign country and fly it to India.

Human Resource Strategies •

Prior to launch, KFA signed a “non-poaching alliance” with Air Deccan under which both the airlines agreed not to hire each other’s employee. KFA’s flight attendants called “Flying models” were selected through a national level model contest.

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KFA also stressed the fact that its employees had to be capable enough to meet the airlines’ high service standards.

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Among one of the biggest HR move for KFA was addition of Nigel Harwood as Chief Operating Officer with effect from August 1, 2005, to strengthen its management team.

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Mr. Mallya said “Kingfisher Airlines Limited has a first class management team not just at top most level but also in the second line. This is part of the UB group’s commitment to human resources”.

SWOT Analysis

Strengths: •

Strong brand value and reputation in the minds of customers.

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Quality of service.

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Route rationalisation.

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First airline to have a new fleet of airbuses.

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In-house training facility

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Adequate infrastructure and large network

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Dedicated departure terminal at Delhi airport.

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Optimization of human resources including cross-utilization

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Active management of fuel consumption.

Weakness: •

Running in losses.

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Huge investment in infrastructure

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High overheads

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High ticket pricing.

Opportunity: •

The expanding tourism industry.

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The non penetrated domestic market.

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International market.

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Untapped air cargo market.

Threats: •

Infrastructure Issue.

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Over capacity in certain domestic routes

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Fuel price hike.

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Economic slowdown.

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Promotion and sponsorship declining.

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Competition

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Low cost airlines PORTERS FIVE FORCES MODEL

Competitors:

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Jet group is a major rivalry of Kingfisher airlines

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Trying to grab maximum market share through price wars,

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Share of Kingfisher airlines is 27% and of Jet group is 25%

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Ahead of competitors due to strong brand loyalty and adequate modern infrastructure

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Threat to competitors in all domestic segments

Threats of New Entrants: •

Increasing customer base may attract new player to enter the market and try to capture market share of the existing company.

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Relaxation in FDI policies may attract new foreign players to explore this market

Buyers: •

Due to availability of many carriers, buyers have many options to reach desired destination. The company has to price its services accordingly.

Suppliers: •

Airbus and Boeing are the two major supplier of aircraft.

Substitutes: •

Development of road and railways infrastructure

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Reduce time to travel by road to nearby cities

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Improvement in rail connectivity as well as services