Crown, Cork And Seal In 1989

Name

Roll no

Rajul Garg

E13

Shweta Gupta

E18

Amit Kariwala

E21

Aakriti Rai

E43

Nikita Singla

E55

Ricky Sundrani

E56

One of the World’s leading packaging manufacturers  Makers of 1 out of every 5 beverage cans in the World  Also produces aerosol cans, specialty packaging, can ends and crowns  223 mfg. plants situated in 49 countries  60% of revenues from outside US 

• An Idea for better bottle cap gives rise to Crown, Cork And Seal Company 1891 • Bought By Competitor Charles McCanus due to bankruptcy following patent expiry 1927 1930

• Diversification into Can-Making

• Bankruptcy again – Co. taken over by John Connelly 1957

Target Markets •Domestic niche in growth segments •International – Pioneer rights •Exits Motor Oil Can Market

Financial Control •Reduce debt •No Cash dividends •Stock Repurchase

Manufacturing •Small plants located close to customer •Process innovation\cost reduction •Just in Time

Cost Efficiency and Improving Quality

Labor and Personnel •Lean and Mean •Low Salaries •Stock Option incentives

R&D •Work closely with customers •Not expend heavily on R&D

Marketing •Close ties with customers •Provide technical assistance at customer’s plant

Represented 61% of packaged products in US in 1989  Included cans, crowns, screw caps, bottle lids etc for industrial and consumer goods  During 1980’s Aluminium can growth averaged 8% annually while steel shipment fell by average 3.1% per year  Aluminum took over steel in 1980 - 89 

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In-house Manufacturing – Captive Plants (25% of total can output) › Followed by large brewers to reduce costs, but not widespread in soft-drink sector

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Plastics › Initially showed great growth due to light weight, handling convenience resulting in customer acceptance › Challenges - Manufacturing difficulty, Carbonation retention, preventing oxygen penetration, recycling problem resulted in slow growth post 1987 › Market comprised mostly of small players with few exceptions e.g. Owens Illionis

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Glass › Lost cost advantage on plastic due to rising resin costs › Metal was preferred for cans due to logistical, economic, transportation benefits etc

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Dominated by 5 firms – 61% Market Share Pricing › Extremely Competitive › Cost reduction attempts via volume discounts, over-capacity, shrinking customer base resulted in lower operating margins

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Customers › Coca-Cola, Pepsico, Anheuser Busch etc

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Distribution › Cost Components – Raw Material, Direct Labour, Transport › Manufacturing plants located close to customers to minimize transport costs › Aluminum was preferred over steel due to low shipping costs

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Suppliers › Largest Aluminium Producers – Alcoa, Alcan, Reynolds Metals

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Reasons for Diversification › Low Profit Margins › Excess Capacity › Rising Material Costs

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Diversification across › Spectrum of Rigid Containers to supply major end-users (Foods,

Beverages) › Non-Packaging Businesses (Energy, Finance)

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American Can  Insurance, ultimately selling off can business to Triangle Industries Continental  Energy Exploration, Research, Transportation National Can  Glass Containers, Canning etc Ball Corporation  High–Technology Market

Challenges

• Newly appointed CEO • Growth Slow down in metal containers • 1977: Ozone controversy & trends towards legislative regulation of non returnable containers was threatening Crown’s business • Plastic was only growing segment • Problems in merger of America Can and National Can

Convenient handling Higher acceptance with customer

Recycling was not a closed loop

Glass

Plastic

Light weight

Cost advantage Faster filling speeds

Light weight Compact for inventory Transportation efficiency Beer category had love affair with long neck bottles

To go or not to go for growing opportunities in plastic closures and containers To bid or not to bid for Continental Can

Entering plastic business either by building internal capacity or acquiring Expanding metal container lines to reduce focus on beverage and aerosol cans

Exit or sell the business Diversify into other packaging materials or product categories

Crown versus Larger Competitors in 1983

Revenues COGS Gross Margin SG&A Operating Income

CC&S American National ($ mm) % of Sales ($ mm) % of Sales ($ mm) % of Sales 1298 100% 3346.4 100% 1647.5 100% 1116 86% 2721 81% 1432.2 87% 182 14% 625.4 19% 215.3 13% 43.1 3% 501.8 15% 121.8 7% 138.9 11% 123.6 4% 93.5 6%

•CCS has higher operating income as compared to its competitors •Low investment in R&D has resulted in higher ROE for CCS (Exhibit 5)

Supplier Power • 3 major Al suppliers, so more concentration of suppliers • Acquisition of Continental Cans would reduce Supplier’s bargaining power in the metal can industry

Buyer Power • Buyers pose a credible threat of backward integration • Products are indifferent, so buyers face no switching cost • Buyers are large and buy in large quantities • Continental acquisition would increase its market share thereby reducing buyer bargaining power Threat of Substitutes • Threat of Substitutes would be reduced by diversification into plastic containers

Potential Entrants • Low capital investment • No switching cost and brand loyalty • Acquisition of Continental would further increase economies of scale • Access to newer distribution channels Industry Competitors • Continental has a market share of 18% in the metal can industry as compared to CCS’s 7%. So the acquisition would reduce competition for CCS

Strengths • Just in time delivery • Located close to customer • High quality • Customer driven • High profit margins • Low costs • Focus on specialized product lines • International sales

Opportunities

• To be market leader can maker • Expand globally • High potentials of growth • Few competitors • High operating margins(sales 44%, profit 54%)

Weaknesses • Rely on metal can, not diversified • Smaller than its competitors • Few R&D initiatives • No.4 in US

Threats • Backward and forward integration by buyers and suppliers • Little growth in metal can industry • Customer base decreasing • Price pressure

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Post Acquisition : Double the sales to $ 3.6 billion Analysts expect demand to increase from the soft drink business CCS current debt to equity ratio is 12% which would rise to 38% post the acquisition But the repayment of debt for the acquisition should be easy – Connelly’ frugality and Crowns’ strong cash flow As a result of the acquisition, stock price could rise to $70

Parenting Matrix Ballast Business

Heartland Businesses (CCS acquisition of Continental Can Company)

Fe el Alien Business

Value Trap Business

Benefi t

Buy out/ merge with opposition  Diversify into plastic and glass business  Recruit / develop knowledge base of the plastic industry  Pursue alternative customers  Research and development  Migrate current principles & strategies into growing markets 

William Avery –CEO- 1989 • 1990 consolidation – acquired Continental Can • 1992 entered into plastic container industry – acquired Constar & became leader in PET products ( plastic ) • 1993 – food canning – acquired Van Dorn • 1996 – packaging – acquired Carnuad Metalbox •