Grand Metropolitan plc (A)Williamson and Rix (1993). European Cases in Strategic Management. London: Chapman & Hill.

PRESENTATION BY:ANGEL SHARMAGITANJALI BISTADHIRENDRA SHRESTHAARJUN KUNWAR

Background In four years prior to 1988, Grand Metropolitan had disposed of over 25

businesses. A chunk of £1.3 billion had gone.

Allen Sheppard, was the CEO who took over in Nov. 1986 (adding the chairmanship in July 1987) thought it was new era : one of internally driven growth and focus on four core activities.

Grand Met was selling but buying on the other hand. It was buying undervalued property assets.

In 1987, it bought Hublein Incorporated and its Almaden wine interests for £855 million – Smirnoff brand!

In the same year, £340 million (equivalent to 6% sales and 75% of pre-tax profits) went into group’s marketing budget for developing its existing consumer franchise.

IN AND OUT OF CITY FAVOUR Because of major portfolio shifts, the City financers’ assessments of Grand

Met had been mixed.

Despite good profitability in core business, the EPS steadily declined between 1982 and 1986.

Sheppard had taken over as CEO at a time when people in the city thought Grand Met would itself be soon taken over and broken up.

The challenge was to throw off the image of a loose conglomerate lacking strategic direction and replace it with a conviction that the group could be relied for consistent profitability and above average earnings growth.

The Asset Escalator Despite market capitalization which ranked it number 14 in the UK by 1987, Grand Met was

only 25 years young.

It was founded by late Sir Max Joseph in 1962 as holding company for chain of hotels he had been building since WWII.

Joseph was born in East End of London in 1910 and began his working life with local firm of estate agents.

At the age of 20, he started his own agency backed by borrowed money.

His venture flourished and by 30 he owned a Rolls Royce and a house on Hampstead Heath – was a ‘natural entrepreneur’.

In 1947, purchased his first hotel – Mandeville and despite high gearing, strong cash flows and rising property values, he made a second purchase in 1950 – The Washington in Mayfair.

Purchased Mount Royal at Marble Arch with 712 bedrooms and 600 rooms (very ambitious).

Further, acquired Gordon Hotels in 1964, the May Fair; the Metropole in Monte Carlo, the Carlton in Cannes; the Paris Lotti and Scribe hotels in 1966; the Manhattan in New York; the Castellana in Madrid; and three properties in Amsterdam in 1970.

During 1960s, Grand Met had little corporate structure and absence of finance department – it was run by a triumvirate (Joseph, Grinstead and Sharp) who were all appointed as Joint Managing Directors in 1967.

The basic strategy was to acquire trading property assets in exhange for debt.

Inflation led to rising values of property while depreciating the real debt burden.

Borrowing capacity was therefore automatically renewed, permitting the next acquisition.

From Hotels to Foods and Drinks Through experience in Hotels, Grinstead and Sharp felt that Grand Met had acquired

considerably skills in managing catering and food. It was a large buyer of drinks and knew what made them sell.

The catering business of Levy & Franks was purchased in 1966 which included pub-restaurants, grocery and off-license store – backed chain of Chef & Brewer.

In July 1969, Joseph made a £32 million bid for Express Dairy only 48 hours after learning that there was an opportunity to acquire.

Express daily served (1/4) of all households in Britain through door-to-door distribution of milk and dairy products and also owned a portfolio of restaurants, grocery stores and supermarkets.

The company had £18 million turnover and 16000 employees.

Berni Inns – chain of 130 restaurants and hotel properties was acquired for £14 million in 1970. With Chef & Brewer chain, Grand Met was UK’s largest hotel and catering group ahead of arch rival Charles Forte who had pulled ooff a merger with Trust Houses.

In for a penny; in for a pound

For a price of £33 million, Joseph acquired Mecca – the gaming company as Joseph felt bingo halls, dance halls and casinos brought new food, drink and leisure operations.

Since Mecca had a network of high street betting shops, Grand Met had netted a new catch of real estate assets,

All of the acquisitions had been on friendly terms except Express daily as Joseph invited former owners to join Grand Met board which resulted in a growth of main board to 18.

Buying into the ‘BEERAGE’ Joseph set his sights on Truman Hanbury Buxton, a medium sized brewery

with an extensive property portfolio in Lodon including 986 public houses, 138 off-licenses and 21small hotels and motels.

Joseph was seeking to buy into a conservative and tight-knit industry run by a small group of families (known as ‘the beerage’).

The brewing unions, who favored Joseph were becoming stronger.

Grand Met’s initial bid for Truman was blocked by one of its larger ‘beerage’ brethren – Watney Mann acting as a ‘white knight’.

After 14 bids, Truman board recommended Grand Met’s offer of £48 million.

Ironically, nine months down the line a banker offered Joseph a stake in former ‘white knight’ Watney Mann.

As Britain’s 4th largest brewer, Watney Mann enjoyed a 12% share and a massive portfolio of 4400 tenanted pubs.

Being determined to fight the bid to the last, the board of directors at Watney Mann decided to increase their stakes.

Before the bid, they had only (1/3) shares in International Distillers and Vintners (IDV), an amalgamation of some of the oldest and most respected names in the wines and spirits business including Croft, W&A Gilbey and Justerini & Brooks (J&B Scotch).

After Joseph’s attack, they purchased the other 67% of IDV.

To acquire Watney Mann, in 1972 Joseph would have to pull off the largest even industrial acquisition in the Uk, doubling the size of Grand Met.

115 days, 3 offers, 5 letters and a telegram to all 30000 of Watney’s shareholders. Grand Met’s holding passed the critical 50.1% mark.

The total cost was estimated at £435 million (2000 million pints at the prices then!)

As part of the Watney takeover, Joseph had been negotiating with Sir John Davis of the Rank Group to dispose of IDV.

The deal fell through because of that.

This added to huge quantity of paper Grand Met was forced to issue to finance the move.

In addition to £220 million of convertibles, its debt equity ratio was pushed to the limit.

UK brewing and retailing UK beer market declined sharply.

A radical reassessment of cost structures, capacity, and the returns on the brand and retail property assets became necessary.

Since his appointment as the head of Watney's in 1975, Sheppard had been strengthening the management team.

The brewing and wholesaling functions (WMTB) were separated from the pub retailing business.

Contd. The production and wholesaling divisions began to implement an

aggressive rationalization programme to put costs in line with revenue.

WMTB cut its workforce by 5000 (50% of the former total).

The early 1980s also saw major innovation and expansion of WMTB's brand portfolio.

Returns on the pub real estate portfolio were carefully analysed and improved.

Contd. These moves culminated in 1987 with the complete managerial

separation of three distinct activities:

Grand Met Brewing and Branding (responsible for production and marketing)

Grand Met Estates (which owns the entire estate portfolio)

Grand Met Retailing (which is responsible for running the non-tenanted pubs).

Specialist management is employed in each company:

a 'property man' runs Grand Met Estates a 'retailer' manages Grand Met Retailing.

This permits a clarity of separate objectives.

Express FoodsRevenues dropped by more than half from

1980/1981 to 1983/1984.

Morale was low, the management structure highly centralized, and distribution systems failing.

• A four-part plan was put into action by the new team.

Firstly, improved product quality and cost reductions. Secondly, new computer systems with a customer service orientation were introduced. Thirdly, the peripheral businesses were disposed of. Lastly, a far-reaching product development and marketing programme.

Contd. Express became a leader in additive-free products following the trend

to more healthy, natural products.

By 1985/86 profits had recovered to £39 million with a further £100 million cash contribution to the group flowing from disposals and reduced working capital.

THE LIGGETT AND MECCA DISPOSALS

The UK brewing and food operations had been the first to undertake a systematic disposal of businesses aimed at focusing the portfolio and concentrating development effort.

Mecca Leisure, which operated bingo halls, catering, entertainment, and UK holidays, was also sold off.

The rationale here was twofold.First, the nature of its markets and expertise.

Second, its success depended largely on hands-on, entrepreneurial style.

DEVELOPMENTS WITHIN IDVAfter acquisition, as the part of Watney mann (1972) there was increase in trading profits from £12 million to £147 million(1985) on turnover of one Billion pounds. Despite ,world major spirit market was declining but IDV showed the strong performance.

IDV success derivationSeveral key policies IDV launched

Firstly emphasis in direct sales to retailers in contrast to the industry standard policy.

Benefits: Improved assess to market intelligence and aiding launch of new brands.

Second key policy: Stronger commitment to new product development

55 new products(1980-1986)

Among seven world leading spirits they are accounted for 32%

Company had developed the strong culture of discounting as anathema connected to strong belief market analyst and customers.

Other key policiesThey sped more on brand marketing that was above 33% of industry norms

Segmentation of products Vodka Tequila Liqueurs and cocktails

Forming alliances as the success factor

This was the way to assess to the powerful brands Amaretto di saronno and cinzano .

Purchasing marketing rights ,equity as well as forming joint marketing companies

The Sheperd era

A J G sheperd appointed as CEO in 1986

Executive directors 4 members

Tagg-uk divisions

Halford-publicaffairs

Strowger –finance director

Cawdron- ex merchant banker-strategic plannng

They were supported by the strong group o f non executive directors like,

Chairman and CEO of BOC groupChairman of ICI Chairman of British airways

Operation declutterUnder the management of sheperd they undergo different disposals:named as decluteer .

Disposal of US branded services were major and it was rationalized.

For instance: Quality care(purchased in $115 million and sold for $102 million including children world was sold for $117 million

Reasons for disposal according to sheperdDoubted in brands ability in strong franchise and

sustained profitability

Managers if those disposed brands divert the core business activities and he doubts in strategic fit in his organization.

Contract services-largest disposal(1987) £160 million despite money making business reason;he doubted for scope for true consumer branding

In 19988 with disposal of us pepsi bottling they successfully completed the declutter process.

The Heublein acquisition$1.3 billion acquisition which was larger acquisition where Grand

mets showed its ability by acquiring Heublein.

IDV held license with Heublein brand over 30 years ,where management have strong rapport with each other .

Heyblein had similar operating strategies at opertting level as IDV like product divisions ,product lines ,no discounting .

The fit between this two bussiness have been highly complementary.

Benefit to IDV because of this acquisitionIdv had avoided the US market but this collaboration leads to 11.5% US wine market.

Because of trade difficulty in US ,number of major players like national distillers and chemicals and seagrams withdrew from market where IDV acts as cost leader in the market .

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