LUCCHETTI

Case Analysis and Presentation F10011-F10020

Who is Andronico Luksic

Strategy
Clear

Vision Support of the best people

Reputation
The

Midas touch

The case deals with the failure of pasta in Peru (1996 -2003) : Lessons to be learnt what went wrong?

Luksic Group
1950 : Founded in Northern Chile by Andronico Luksic Sr. 1960 : Expanded from mining to power, manufacturing, shipping, agriculture, fishing, food and forestry 1970-1973 : Restriction for private sectors in Chile, expansion in Argen, Columbia and Brazil 1974 : Restrictions eased in Chile new sectors

Quinenco
Established in 1957 Logging and wood supply Mid 1960s : Luksic Sr. acquires major interest 1996 : Luksic group ownership structure changes : Quinenco took control on financial and industrial markets 1997 : Quinenco raised $2280m on NY and Chilean stock exchange

Quinencos Strategy
To maintain its position as Chiles leading diversified company in , to strengthen the value creation potential and continue expanding into while seeking opportunities for entry into new and complementary products or industry sectors

Strengthen value creation in core biz.

Create value for share holders
Growth

& market leadership Restructuring Best practices Identification of synergy across biz units Attraction and retention of quality personnel

Managed Expansions (2 approaches)

Location

of facilities, product and distribution systems Believed in high growth opportunities outside Chile in terms of economy and market share

Form strategic alliances Diversified group of complementary business

Lucchetti
1990 Founded as Lucchetti Empresas S.A 1965 Purchased by Luksic group 1996 93.7% subsidiary of Quinenco Products Pasta, Edible oils, Soups and broths Reputation Quality, Nutrition value, competitive pricing High profit margins Strategy : making most of its brand name

Pasta Market - Chile

23 38
Lucchetti Carozzi Others

39

Lucchettis decision
Expansion outside Chile Argentina : Successful distribution and marketing Peru : Very little presence and promising market. Previous success in Madeco (1993 through acquisition) Very little packaged quality pasta Wanted to improve product and distribution network Volume growth outside Chile = Overall market growth * increase in market shares

Market Opportunities in Peru

Appeared attractive for harvesting Consumption level was 8-9 kg/individual/year

identical to that in Chile Nascent stage Competitors just started off packaged pasta 95% of sales was bulk selling Offered low quality pasta Old/outdated production facilities Made of inferior raw material $900 in US, $1000 in Chile, $1200 in Argentina

Packaged pasta

Competitors

Prices (per ton)

Lucchettis View
Saw an opportunity to enter the market by selling pasta imported from Chile Once critical mass was reached wanted to build plant in Peru. Wanted to gain higher margins by offering products at higher prices.

Competition in Peru
Alicorp S. A (part of Romero group) Carrozzi

Alicorp S.A.
4th largest company in Peru Banking, port handling, consumer product distribution Massive distribution network reached 90% of all points of sale
Key strategic advantage 10% of sales in super markets Rest in mom & pop stores

Market leader in wheat flour, cookies and crackers Alicorp won Lucchetti in acquiring La Fabril and hence Lucchetti missed a point of entry

Carrozzi
Lucchettis main competitor in Peru Also decided to enter Peru Instead of exporting it purchased a Peruvian company Molitalia (18% market share) Didnt change name or build new facility Hence, they were still considered a domestic company Luchetti considered buying Molitalia, but rejected the idea since it lacked production facilities and reputation of offering high quality pasta

Politics in Peru
Fujimori
Elected President of Peru A man of strong will and many surprises Fujishock economic shock programme Made lie difficult for domestic manufacturing, workers and poor On the other hand, economy was growing, inflation was low Relationship with international lenders was good and foreign investment was flowing in Fujimori appeared to have a strong grasp on the political machinery and hence political risk seemed minimal

Timeline Peruvian operations (1995)

Entry via imports to be followed by start of plant in Peru Wanted to have its own distribution channels Prices

Set at close to parity with competitors brands to generate exposure and volume

Gross Margin
Negligible Cost = sales

High importing cost  Low launch or introductory price



1996
Demand in Peru outstrips excess Chile capacity Imports from Italy Low pricing, high costs Fasten plant setup Assumptions on market share, distribution and marketing costs Increase in import duties (15-20%)+5% Alicorp was gaining market share Mayor grants license Three acquisitions by Alicorp

1997
At the beginning of 1997, LPs market share had grown to 20%. April 11 preliminary approval ISO 9002 and 14001 Environmental concerns July The Municipality of Chorillos issued an order to stop the construction. Permitted to continue construction Ordered to stop in August The mayor of Lima urged Peruvians to boycott all the LP products. He also hired the International Union for the Conservation of Nature which did not have any significant recommendations about LP. October 23 Municipality of Lima again ordered to stop the construction. December 26 The stop order was revoked. At the end of 1997, the market share of LP had grown to 25% in Peru and 30% in Lima. Cost of goods >> Sales

1998
January 2 The city of Lima declared all permits and licenses null. After March, the construction was started again. By August, the factory was completed and production was scheduled to begin at the end of 1998. November Import duties on imported wheat products were increased from 18% to 25% and price continued to fall. Till this time $65 million was invested in LP. At the end of 1998, market share of LP was 23%. In December, the production had started in the new plant.

1999-2000
During 1999

LPs sales grew to US$36 million. Gross margins were positive for the first time after starting business in Peru. But net losses for the year exceeded US$15 million because of the increase in net operating expenses. A political disturbance took place in Peru. This had a direct impact on LP in the following years.

During 2000

2001
August 23 The city of Lima revoked LPs operating license citing environmental reasons and gave one year to move the plant. At the end of 2001, sales had dropped from US$ 45 million to US$ 34 million. Also accumulated losses from operations was now above US$33 million and net loss was nearly US$61 million.

2002
December 16 The city council of Lima voted the plant to be shut down due to environmental damage even though LP had renewed its ISO 14001 certificate. The council finally revoked LPs operating license. Sales dropped to US$25 million with net losses of about US$5 million. Accumulated losses were US$34.5 million and net losses were over US$ 65 million.

2003
January 6 Mayor of Chorillos gave 7 days for LP to shut down the plant. Later many other local Mayors of Lima offered to allow LP to relocate to their districts with favorable tax terms. LP had two option:

Take advantage of the existing market share and move to another location in peru. Absorb a US$150 million write off availing tax benefits and leave the country.

Analysis of The External Environment

The 5 Forces Model

New Entrants

Suppliers
(Ricardo Custer y Compania)

Industry Rivalry
(Molitalia, Alicorp etc.)

Buyers

Substitutes

Internal Factor Evaluation Matrix

Internal Strengths Management Expertise Product Quality Industry Presence Facility design High Profit Margins Partnership for Sales and Distribution Quality Standards(ISO) Leading Brand in Peru Internal Capabilities Weight .10 .10 .10 .10 .10 .02 .03 .05 .02 Rating 3 4 3 3 4 3 3 3 3 Extended .30 .40 .30 .30 .40 .06 .09 .15 .06

Internal Weakness Decision making Lawsuits Low Gross margin High distribution costs Capacity utilization(plant size) Operating Loss Increase in Operational Expenses Negative ROE and ROI Total

Weight .02 .03 .05 .07 .05 .10 .03 .03 1.00

Rating 2 1 1 1 2 1 2 2

Extended .04 .03 .05 .07 .10 .10 .06 .06 2.57

EFE Matrix
Key External Factors Weight Opportunities Peruvian pasta market -ripe for harvesting; consumption rates per capita ,identical to 0.05 those of Chile Very little packaged pasta, mostly demand was in bulk; Lucchetti can lead the market 0.07 with its packaged pastas The main players offered lower quality pasta that was produced in older production 0.10 facilities. Thus an opportunity to offer pastas marketed at higher ranges of the price spectrum Peruvian pasta was generally made of flour rather than from the higher-quality semolina. 0.03 Peruvians consumers gaining greater spending power and learning to appreciate higherquality pasta products, thus a potential demand for it which could be exploited Prices for pasta were nearly US$900 per ton compared to US$1000 per ton in Chilean 0.02 market thus clearly there is an opportunity for Lucchetti to enter the market Relations with international lenders were good and foreign investment pouring in Peru. 0.02 Economy was growing and inflation was low With the order to shutdown plant, several local mayors in other parts of Lima offered to 0.05 allow Lucchetti to relocate to their districts at preferential prices with favorable tax terms. Theres an opportunity to rebuild and try to take advantage of market share Rating 4 3 4 Score 0.20 0.21 0.40

0.09

3 3 2

0.06 0.06 0.10

EFE Matrix
Key External Factors Threats No room to expand in the Chilean market Major competitor is Alicorp. SA, - dominant market leader in wheat, flour, cookies, and crackers, pasta, edible oils, and margarines and shortening Alicorp has a massive distribution network that reached 90% of all points of sale carrying 400,000 tons of goods per year While Lucchetti was having problems with its plant, Alicorp was in the process of building an advanced plant with a mill Milatolia, another competitor, is upgrading some of its plants Carrozzi, Lucchettis main competitor in Chile holding 39% market share, had also decided to enter Peru Fragmented market of Peru Aggressive competitive pricing in Peru Continuing high costs of importing pastas Unstable local authorities and uncertain legislations and a lot of political upheavals that could directly affect Lucchettis Plan In an effort to support established Peruvian pasta makers who were losing market share, the Peruvian government increased import duty tariff to 20% and additional 5% on wheat derivative products, exacerbating the need to build domestic production Total Weight 0.05 0.05 0.05 0.04 0.04 0.03 0.07 0.06 0.06 0.13 0.08 Rating 1 2 2 2 2 2 1 2 2 1 2 Score 0.05 0.10 0.10 0.08 0.08 0.06 0.07 0.12 0.12 0.13 0.16

1.00

2.19

Competitive Profile Matrix

Lucchetti Success factors Market Share Pricing Strategy Financial Position Gross Margin Product Quality Brand Equity Technology Sales Distribution Total Weight 0.20 0.10 0.10 0.15 0.10 0.10 0.10 0.15 1 Rating 1 3 1 1 4 3 4 2 Score 0.20 0.30 0.10 0.15 0.40 0.30 0.40 0.30 2.15 Alicorp Rating 4 4 3 4 3 4 2 4 Score 0.8 0.4 0.3 0.6 0.3 0.4 0.2 0.6 3.6 Molitalia Rating 2 2 2 3 2 2 3 3 Score 0.40 0.20 0.20 0.45 0.20 0.20 0.30 0.45 2.40

SPACE MATRIX - Competitive

Internal Strategic Position A X I S X Competitive (CA) Management Expertise State of the art facilities Quality Standards Competitive Prices Distribution Network A X I S Financial (FS) Increase in Debt Decrease in Sales Decrease in ROE Y Increase in Net Loss 1 1 1 -2 -2 -1 -1 -2 Environmental (ES) Growing Economy Low Quality Competitors Bulk Demand Available Products was of low price Aggressive Competitive Pricing High Import Duty Y Axis Total Score = 1-3.17 = -2.17 -3 -2 -2 -2 -5 -5 External Strategic Position Industry (IS) Comparable Consumption rates Greater Spending Power High Foreign Investments High Import Costs 5 5 2 1

X Axis Total Score = -1.6+3.25 = 1.65

GOOD STRATEGY PLAGUED BY MURPHY'S LAW..??

Good strategy..?? Yes!! Successful in most ventures But it certainly is not a case of murphy's law Its a classic case of using a generalised strategy while overlooking certain key factors

WAS THERE SOMETHING LUCCHETTI SHOULD HAVE KNOWN??

THEY SHOULD HAVE HAD A BETTER UNDERSTANDING OF THE POLITICAL SCENARIO THEY EVALUATED THE POLITICAL SCENARIO FROM A NATIONAL LEVEL THEY SHOULD HAVE TRIED TO UNDERSTAND THE RELIGIONAL LEVEL POLITICAL IMPLICATIONS THEY SHOULD HAVE UNDERSTOOD THE PERUVIAN MARKET BETTER THEY SHOULD HAVE UNDERSTOOD THE UNIQUENESS OF THE MARKET IN TERMS OF DISTRIBUTION AND PRICE POINTS

WAS THERE A WRONG DECISION??

Failure in la fabria and molitalia Acquisition poor selection of site for plant overlooked ecological issues Poor understanding of regional political interlinkages Lobbying with politicians for favours