LUCCHETTICase 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 1960’s : 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

Quinenco’s Strategy

“To maintain its position as Chile’s 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

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LucchettiCarozziOthers

Lucchetti’s 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 Packaged pasta

Nascent stage Competitors just started off packaged pasta 95% of sales was bulk selling

Competitors Offered low quality pasta Old/outdated production facilities Made of inferior raw material

Prices (per ton) $900 in US, $1000 in Chile, $1200 in Argentina

Lucchetti’s 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

Lucchetti’s main competitor in Peru Also decided to enter Peru Instead of exporting it purchased a Peruvian

company ‘Molitalia’ (18% market share) Didn’t 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, LP’s 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 LP’s 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. During 2000

A political disturbance took place in Peru. This had a direct impact on LP in the following years.

2001

August 23 – The city of Lima revoked LP’s 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 LP’s 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 EnvironmentR

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tTHE FIRM

The 5 Forces Model

Industry Rivalry(Molitalia,

Alicorp etc.)

New Entrants

Substitutes

Suppliers(Ricardo Custer y

Compania)

Buyers

Internal Factor Evaluation Matrix

Internal Strengths Weight Rating Extended

Management Expertise

.10 3 .30

Product Quality .10 4 .40

Industry Presence .10 3 .30

Facility design .10 3 .30

High Profit Margins .10 4 .40

Partnership for Sales and Distribution

.02 3 .06

Quality Standards(ISO)

.03 3 .09

Leading Brand in Peru

.05 3 .15

Internal Capabilities

.02 3 .06

Internal Weakness Weight Rating Extended

Decision making .02 2 .04

Lawsuits .03 1 .03

Low Gross margin .05 1 .05

High distribution costs

.07 1 .07

Capacity utilization(plant size)

.05 2 .10

Operating Loss .10 1 .10

Increase in Operational Expenses

.03 2 .06

Negative ROE and ROI

.03 2 .06

Total 1.00 2.57

EFE Matrix

Key External Factors Weight Rating ScoreOpportunitiesPeruvian pasta market -ripe for harvesting; consumption rates per capita ,identical to those of Chile

0.05 4 0.20

Very little packaged pasta, mostly demand was in bulk; Lucchetti can lead the market with its packaged pastas

0.07 3 0.21

The main players offered lower quality pasta that was produced in older production facilities. Thus an opportunity to offer pastas marketed at higher ranges of the price spectrum

0.10 4 0.40

Peruvian pasta was generally made of flour rather than from the higher-quality semolina.Peruvians consumers gaining greater spending power and learning to appreciate higher-quality pasta products, thus a potential demand for it which could be exploited

0.03 3 0.09

Prices for pasta were nearly US$900 per ton compared to US$1000 per ton in Chilean market thus clearly there is an opportunity for Lucchetti to enter the market

0.02 3 0.06

Relations with international lenders were good and foreign investment pouring in Peru. Economy was growing and inflation was low

0.02 3 0.06

With the order to shutdown plant, several local mayors in other parts of Lima offered to allow Lucchetti to relocate to their districts at preferential prices with favorable tax terms. There’s an opportunity to rebuild and try to take advantage of market share

0.05 2 0.10

EFE Matrix …

Key External Factors Weight Rating ScoreThreatsNo room to expand in the Chilean market 0.05 1 0.05Major competitor is Alicorp. SA, - dominant market leader in wheat, flour, cookies, and crackers, pasta, edible oils, and margarines and shortening

0.05 2 0.10

Alicorp has a massive distribution network that reached 90% of all points of sale carrying 400,000 tons of goods per year

0.05 2 0.10

While Lucchetti was having problems with its plant, Alicorp was in the process of building an advanced plant with a mill

0.04 2 0.08

Milatolia, another competitor, is upgrading some of its plants 0.04 2 0.08

Carrozzi, Lucchetti’s main competitor in Chile holding 39% market share, had also decided to enter Peru

0.03 2 0.06

Fragmented market of Peru 0.07 1 0.07Aggressive competitive pricing in Peru 0.06 2 0.12Continuing high costs of importing pastas 0.06 2 0.12Unstable local authorities and uncertain legislations and a lot of political upheavals that could directly affect Lucchetti’s Plan

0.13 1 0.13

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

0.08 2 0.16

Total 1.00 2.19

Competitive Profile Matrix

Lucchetti Alicorp Molitalia

Success factors Weight

Rating

Score

Rating

Score

Rating

Score

Market Share 0.20 1 0.20 4 0.8 2 0.40

Pricing Strategy 0.10 3 0.30 4 0.4 2 0.20

Financial Position 0.10 1 0.10 3 0.3 2 0.20

Gross Margin 0.15 1 0.15 4 0.6 3 0.45

Product Quality 0.10 4 0.40 3 0.3 2 0.20

Brand Equity 0.10 3 0.30 4 0.4 2 0.20

Technology 0.10 4 0.40 2 0.2 3 0.30

Sales Distribution 0.15 2 0.30 4 0.6 3 0.45

Total 1 2.15 3.6 2.40

SPACE MATRIX - CompetitiveInternal Strategic Position External Strategic Position

AXIS

X

Competitive (CA) Industry (IS)

Management Expertise -2 Comparable Consumption rates

5

State of the art facilities -2 Greater Spending Power 5

Quality Standards -1 High Foreign Investments 2

Competitive Prices -1 High Import Costs 1

Distribution Network -2

X Axis Total Score = -1.6+3.25 = 1.65

AXIS

Y

Financial (FS) Environmental (ES)

Increase in Debt 1 Growing Economy -3

Decrease in Sales 1 Low Quality Competitors -2

Decrease in ROE Bulk Demand -2

Increase in Net Loss 1 Available Products was of low price

-2

Aggressive Competitive Pricing

-5

High Import Duty -5

Y Axis Total Score = 1-3.17 = -2.17

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