Case study: Rethinking an expansion strategy

The story
In the 1980s and 1990s, Gujing Distillery transformed itself from an unknown local distillery into Gujing Group, a multibillion yuan company.

In the 1980s Gujing expanded, funded by debt and helped by China’s transition to a market economy. By 1995 it was the second-most profitable liquor producer in China, with pre-tax profits of 595m yuan. In 1996 it became China’s first publicly listed distiller, with its listing on the Shenzhen Stock Exchange, and it began to diversify into sectors ranging from pharmaceuticals to hotels.

The challenge
The 1997 Asian financial crisis hit the group hard. Investments – both at the distillery and group level – went sour, the group was plagued by allegations of unfair distribution of stock ownership and its consecutive losses placed the distillery in danger of being delisted.

The once-promising Gujing Group was facing an existential crisis and had to rethink its aggressive expansion and its diversification plans.

The strategy
On August 29 2007, Gujing Distillery held an extraordinary meeting of shareholders and dismissed three directors. A new, young management team was appointed, headed by Cao Jie as chairman.

This kick-started Gujing Distillery. The new management put forward a “refocus and revitalisation” development plan, in which the strategy was to “refocus on the core liquor business and reoccupy the top-end market share”, as Mr Jie put it.

First, it eliminated low-profit, low-end products and put more emphasis and money into marketing its top-end drinks, such as Gujinggong and Gujing Tribute Liquor.

Second, in addition to building up a bigger and better marketing team and strengthening its distribution network, the company revamped its market research to gain deeper insights into the market dynamics and consumers’ changing demands. It wanted to focus on the segments in which it had the best chance to dominate and to win the biggest margins.

By 2008 it had cut the number of brands to 250, down from more than 870 just a year before.

Third, Gujing worked with the China Liquor Industry Association, the body officially sanctioned by the government to set industry standards. As a large, influential member of the organisation, It successfully lobbied to establish a new category of “light-flavoured” liquors in which Gujinggong became the default reference for standards.

Fourth, in 2009, Gujing Group began to extricate itself from enterprises that were less relevant to its core business. These included the unprofitable and investment-intensive agriproduct processing sector, a lossmaking printing business and the hotel industry.

Fifth, having achieved more focus, Gujing wanted to cut the cost of operations. It devised 75 cost-saving programmes, such as integrating the purchase function, strengthening internal control systems on quality, pricing bidding, purchase and payment, and including clear targets on cash
flow, receivables and inventory levels in budget management. This included slashing procurement costs by about 15 per cent.

Meanwhile, the company established an internal audit department to oversee budget management with a special focus on cash flow, accounts receivable, inventory and so on.

The overall aim was to improve performance measurement and budget management by combining management objectives with key performance metrics.

Results
Gujing Distillery reported profits of 166m yuan in 2009, up more than 118 per cent on the year before. The company had found its way back to profitability.

Key lessons
First, do not lose sight of your core business. Second, if you do lose that focus on what you are good at, act decisively to correct it and do not spare any department or big strategic decision.

In Gujing’s case, this meant focusing on its original liquor business by making disposals, improving the quality of the products and cutting costs.
- Financial Times, 13 Feb 2012