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De La Salle University- Dasmariñas College of Business Administration and Accountancy

Analysis of San Miguel Corporation: A Michael Porter’s Industry Structure Model Approach

A Final Output Presented to the subject in B-ECON002 (Managerial Economics) Allied Business Department College of Business Administration and Accountancy De La Salle University – Dasmariñas Dasmariñas City, Cavite

February 2021

Analysis of San Miguel Corporation:

Abstract San Miguel Corporation was developed in 1890 as a single brewery at No. 6 Calzada de Malacanang Manila San Miguel District, founded by Don Enrique Maria Baretto. San Miguel Corporation has been one of the wealthiest companies and best-selling beer in the Philippines. With over 18,000 employees and more than 100 manufacturing facilities in the Philippines and abroad, the SMC Group has been market leader with their existing businesses such as beverage, food, and packaging industries. For in-dept study regarding the company of San Miguel we conduct a study. This study aims to show an analysis on San Miguel Corporation where in we indicated the San Miguel Corporation’s Porter five forces in determining the relevant factors that affects their business and industry namely competitive rivalry, threat of new entry, threat of substitution and others. With this we also have shown their competitive advantages, their strengths weaknesses opportunities, and threats (SWOT) while also providing you with information about their major income streams and strategy. At the end of this you would be able to see a valid conclusion on what affects the business and how San Miguel was able to be a household name from 1890 up until now. Keywords: Buyer Power, Market Share, Supplier Power, Threat of New Entrants, Threat of Substitute Products, Royalty Brand, and Competitive Rivalries.

Introduction According to the San Miguel Corporation (SMC) website they were established in 1890, La Fabrica de Cerveza de San Miguel, as Southeast Asia’s first brewery who produced and bottled what would eventually become one of the bestselling beers in the region because by 1914, San Miguel Beer was already being exported from its headquarters in Manila to Shanghai, Hong Kong and Guam while also being a pioneer in Asia, San Miguel became the first local brewer in the crown colony. By 1913, imported beer represented only 12% of the total consumption in the Philippines; San Miguel held an 88% share of the industry. Also, according to the PSE, The Company's product portfolio includes beer; spirits; non-alcoholic beverages; poultry; animal feeds; flour; fresh and processed meats; dairy products; coffee; various packaging products; and a range of refined petroleum products. SMC has strategic partnerships with international companies, among them are Kirin Holdings Company, Limited for beer; Hormel Foods International Corporation for processed meats; Nihon Yamamura Glass Company, Ltd., Fuso Machine & Mold Mfg. Co. Ltd. and CanPack S.A. for packaging products; and Korea Water Resources Corporation for its power business. San Miguel has partnered with major international companies who have given the Company access to the latest technologies and skills. San Miguel’s joint venture partners has further enhanced San Miguel’s competitive position in Asia, a region in which it is already well placed.

STRENGTHS AND WEAKNESSES OF THE SAN MIGUEL CORPORATION IN THE FIVE COMPETITIVE FORCES Threat of New Entry – Barrier to Entry (Low) Since San Miguel has expanded all over Asia the threat of new entrants for the industry is relatively low even more so since the economic downfall that has been caused by the pandemic that started from the late months of 2019, with this came the alcohol ban that was instilled by the government of the Philippines nationwide. Economies of Scale San Miguel from the 1900s was already a pioneer in Asia, San Miguel established a brewery in Hong Kong in 1948, the first local brewer in the crown colony making bestselling beers from the get-go with it being number 1 brewery in the Philippines and 901 in the world. With that said and done Business news reporter James A. Loyola has also stated that even with the pandemic “Diversified conglomerate San Miguel Corporation (SMC) posted a net income of P15 billion for the third quarter of 2020, a full turnaround from the P4.0 billion loss incurred in the first half following the easing of restrictions starting July” (2020). Specialist knowledge SMC upholds the principle of total development covering business/management skills, technical/functional skills, task and people orientation, values and attitudes. Corporate Human Resources is responsible for continuous learning in the Corporation. Managers have the major accountability for creating ongoing learning opportunities in their respective work units. Employees are also accountable for their own learning and initiative to learn. With this also comes with how SMC has the knowledge of operating for already 130 years now still not likely to fall behind the trends.

Brand Loyalty As said in the introduction, San Miguel was established in the 1890s which gave them more time to develop a stronger brand and customer loyalty with this, they have already established a hundred- and thirty-years’ worth of trust in their products knowing that SMC made it. Industry Growth Today, San Miguel Beer is one of the largest selling beers and among the top 10 beer brands in the world. While brewing beer is the company’s heritage, San Miguel eventually branched out into the food and packaging businesses, from the original cerveza that first rolled off the bottling line, San Miguel Corporation has since expanded its portfolio to produce a wide range of popular beverage, food and packaging products which have–for over a century–catered to generations of consumers’ ever-changing tastes. It has also diversified into heavy industries including power and other utilities, mining, energy, tollways, and airports. Quality Differences SMC’s quality Management is focused on continuous improvement and enhanced customer relations. The culture of quality has permeated the San Miguel organization for more than four decades now. Total Quality Management (TQM) is a business philosophy related to an organization’s management system that leads to a stronger competitive position, increased productivity, and improved customer satisfaction. Nevertheless, despite of the pandemic alcohol prohibition, the SMC threat to new entrants still seems to be low. Competitive Rivalry (Mixed)

According to a website, San Miguel Corporation is southeast Asia's largest food, beverage, and packaging company with a diverse asset of businesses . Aside from that SMC is the most valuable Filipino brand with a lot of subsidiary's companies around the world, and one of the world's single biggest selling beer by volume. However, San Miguel Corporation (SMC) has a quite low rivalry locally when it comes to Beer, Food and Beverages, Retailing Businesses especially to Electricity, considering that SMC is one of the market leaders with the products mentioned and Electricity is naturally having such monopoly franchise. It is impossible to have rivals since SMC Group is the leading enterprise in our country. Nevertheless, the telecommunications, packaging, and oil Sector provide moderate or high rivalry due to Company Industry growth rate has slowed down and the primary providers overwhelm the market. However, due to pandemic and liquor restriction, the company is experiencing low industry growth for this year, particularly to beer. As described in one of the San Miguel Food and Beverage (2020) news, the industry has improved gradually from the first two months of the year. Even though SMC reported of 14% declined compared to P194,56 billion for the first nine months of the year and reached the 26% which lower than last year for the last three quarters. However, at the end of the same year, the net profits of the firm stood at P14.36 billion which is less compared to previous profits. Bargaining power of Supplier. (Mixed) Supplier is one of the main reasons why businesses became successful. Suppliers play a huge role in the business industry. Without them, the company will struggle on what to offer to their target market. Considering this, since the suppliers of San Miguel Corporation is being normalized in other country, consequently, it could not buy its supplies locally if it is not approved by the standards of the company as stated by (Liu, 2009).

San Miguel is one of the diversified combination companies in the Philippines with revenues that accounted for about 5.9% of the country’s GDP in 2018 through their operations in food and beverages, packaging, fuel and oil, power, and infrastructure. Moreover, the SMC have forged strategic partnerships with some of world leaders in their respective businesses including Kirin Brewery Co., Ltd., Nihon Yamamura Glass, US-based Hormel Foods Corporation, and Korea Water Resources Corporation. Beyond the Philippines, the company's manufacturing activities extend to Hong Kong, China, Indonesia, Vietnam, Thailand, and Malaysia. Its goods are shipped to the world's major markets. Continuing a product consistency tradition, San Miguel capitalizes on its unique brand and distribution strengths to integrate its products more deeply into the fabric of daily life. With a direct workforce of 28,586 workers as of December2018, they are one of the largest employers in the country. Many extra jobs are provided by manufacturers, dealers, retailers and other business partners for each job created within the San Miguel system. At present, the Philippines, Southeast Asia, China, Australia, and New Zealand have more than 100 major facilities. Bargaining Power of Buyer. (High) The San Miguel Corporation (SMC) is a top seller and big company that has relatively few competitors. Also, SMC provides innovative products with few subsidiaries. As a result, the consumer is the price determinants of SMC since they have no strong rivals, and their consumer has high power to influence the price of their products. One of the goals of San Miguel Corporation is to offer the best quality of the products they sell that can enjoy by their valued customer as mentioned on the SMC website. SMC is one of the largest and most diversified conglomerates in the Philippines, with over 100 facilities operating in Southeast Asia.

Furthermore, San Miguel Corporation has extremely High Bargaining Power of Buyer considering that SMC is a monopoly in the Philippines and leading to several products they sell like breweries, food, and beverages and so on. Since SMC is monopoly, the price of San Miguel Corporation is highly influenced by their customer as SMC claims that they want to provide inexpensive and enjoyable products for their customers. Owing to the monopoly in the Philippines, San Miguel has considerably high negotiating power for its customers. Threat of Substitution (Mixed) High threat of substitution explains that multiple alternatives exist for a given commodity, while Low threat of substitution indicates that there are few alternatives from which to choose. Even though beer gives same purpose, but it varies the consistency of flavor and style of the products. Furthermore, customers can easily switch the beer to another beer, which provides a certain satisfaction. The opportunity to switch goods will negatively affect the company's profitability, therefore this threat must be recognized by the company (IvyPanda, 2020). Since San Miguel Corporation is the preferred brewery in the country and considering that Meralco has the monopoly franchise for electricity and transferring costs in the mining and electric enterprises are high. So, the beer, manufacturing, mining, and electric enterprises of SMC indicates of low threat of substitution. However, in the food and beverages and telecommunications sector are visible to high threat of substitution due to switching costs are incredibly low, and consumers are inclined to prefer the substitutes if they find the products inadequate. Current Competitors

Since San Miguel is one of the largest companies, it collectively leads the market and investment in the various enterprises. Although SMC is an Oligopoly Market structure in the beer industry, but it is still maintaining to be the number 1 in the Philippines when it comes to producing beer, however SMC Group has a Monopoly business structure market structure. However, according to a website, San Miguel currently has international competitors and their revenue in dollars per year. Coming up first the Wahaha Corporation based on Hangzhou, Zhejiang, China they have as of now 30,000 employees. They were naturally in the liquids department and boasted 17 billion dollars in yearly revenue. Secondly, the Mahou-San Miguel Group with 1 billion and currently has 4,250 employees based on Madrid, Spain, also Spain’s leading beer brand with its founding the same year as San Miguel which leads to them having the same amount of loyalty in customers the date they came out, with Danone group acquiring San Miguel while Mahou buying 70% of it. Asahi Breweries with a revenue of 8 billion from Adumabashi, Tokyo currently with 5,949 employees a Japanese global beer, spirits, soft drinks and food business group Japan’s leading beverage company. However, SMC encountered its first major competitor in the Philippine beer market in 1982 with the entry of Asia Brewery, Inc. The rivalry between Asia Brewery and SMC came to a head in 1988, when Asia Brewery introduced a bargain-priced brand called simply, "Beer". The product looked and tasted like San Miguel Beer, playing upon the fact that in the Philippines, the San Miguel brand was synonymous with beer. It was a creative counter to SMC's notoriously aggressive and sometimes cutthroat competitive strategy, which had reportedly included "attempts to sabotage Asia Brewery's sales network and smash its empty bottles." Asia Brewery even hired away San Miguel's brewmaster.

Ayala Corporation is another company from the Philippines with a revenue of 5 billion and currently has 40,500 employees initially the whole company is a holding company but part of it has delved into the food and beverage part of the Philippines which is their Ayala malls.

Profitability in the Industry According to Euromonitor’s beer in the Philippines report the thirst for beer continued to grow in 2019 despite prices continuing to rise in 2019 which is the industry’s pre-COVID19 performance, Beer though has continued to see strong growth in total volume terms in 2019 thanks to the introduction of new marketing campaigns and effective trade programs by AB Heineken Philippines Inc and San Miguel Brewery Inc. The expansion of foodservice in the Philippines has also brought new opportunities for premium brands as young drinkers of legal drinking age are more likely to upgrade their drinking experiences in bars and restaurants. Flavored/mixed lager, for example, saw double-digit on-trade volume growth in 2019 with San Miguel adding lychee flavor to its range to help stimulate interest. The COVID-19 impact though has given the industry a hard loss with on-trade volume sales of beer expected to fall by 27% in 2020 considering the impact of COVID-19. This compares to an expected 8% rise forecast for 2020 during research conducted in May 2019, i.e., before the spread of COVID-19. As it seems beer is not expected to return to growth until 2022, with social distancing measures and concerns over public gatherings likely to prevail for some time yet. SWOT ANALYSIS

This San Miguel Corporation SWOT Analysis is an important tool that will assist the company to maintain and improve the overall desired goals of the company, and to adapt the changing market criteria. This technique will be evaluated the four aspects of the business which are Strength, weaknesses, Opportunities and Threats. Strengths The following applies to San Miguel Corporation's power and diverse capabilities, which hold

them

competitive

in

the

long

run of

their venture.

These

are

the

factors

that specifically differentiate the SMC from its opponents:

 Globally and Internationally known 

First brewery in the Southeast Asia



Largest Selling beer in the Philippines



Market leader in the fuels and oil industry in the Philippines



Leading food and beverage company



Nation's largest employers



Competence in the local market



The company has a strong reputation in the sector and in existing partnership with several major corporations.



Large group of company



Good quality of products.



Have a tactical management method in the company.

Weaknesses In a company, these are internal traits which might impede the company's progress of success. However, recognizing them will help the managements to reinforce and monitor the

weak points of the business. These are the company's shortcomings that may influence the accomplishment of goals: 

Losing their international assets.



Suffered from credit rating downfall.



Dynamic market environment.



Losing its International assets.



Their planning process is too long.



Competition is very tough.



Susceptible to the developments in the global situation complexities of the country.

Opportunities San Miguel Corporation is one of the Philippines' oldest and biggest companies. It has a strong leadership role in the Philippine beer sector throughout its 100-year history, as well as fruitful forays into other related and unrelated product areas (Marcos, A. and Pano, R.). Moreover, the San Miguel Corporation can continue and innovate their strategies with: 

Outstanding connection between the management and the official in the Philippines.



Growth of international market share in some countries in Asia and Europe.



Expansion of the company will benefit both company and aspiring managers.

Threats In the business industry, there are also challenges that assess the strength of a company. Businesses have risks that we need to prepare some strategies to conquer these threats. For the San Miguel Corporation some of these threats are: 

Meticulous laws, rules and regulations provided by the government regarding in drunk driving cases.



Similar prices among competitors.



New local and international brands rising in the market.



Local economy being possibly affected by global financial crisis. WHAT IS SAN MIGUEL’S COMPETITIVE ADVANTAGE AND COMPETITIVE POSITION?

The San Miguel Brand San Miguel Corporation’s competitive advantage is just being San Miguel because San Miguel has been a household name since the day its scope of Market is the whole of Asia, because San Miguel Corporation is one of the Philippines' most diversified conglomerates, generating a large portion of the country's gross domestic product through its highly integrated operations in beverages, food, packaging, fuel and oil, power, mining and infrastructure. Some other company might be able to produce the same factory and work ethic, but the peoples brand loyalty is too strong. Simply you cannot take over San Miguel’s reign because they are the largest publicly listed food, beverage and packaging company in the Philippines. Since the 1890s the

SMC

ensures

external relationships

were

that its

strategy organizational

adequate to

confront