Davor Topolčić
Institute of Social Sciences ‘Ivo Pilar’
Zagreb, Croatia
e-mail:
Research project:
‘Eastern Enlargement – Western Enlargement.
Cultural Encounters in the European Economy and Society
after the Accession–DIOSCURI’
Field 1 Case 3
Analysis of the restructuring process in Croatian companies
taken over by a Western investor
The Croatian brewing industry: Case study of two breweries
Zagreb, January 2006
Contents:
1. Introduction ……………………………………………………………………………………… 3
1.1. The Croatian beer market ………………………………………………………………………… 4
2. Methodological remarks ……………………………………………………………………… 7
3. Case-study Company 1 ………………………………………………………………………… 9
3.1. Basic data about the Karlovacka pivovara (Karlovacka brewery) …………………… 9
3.2. Ownership transformation and first encounter ……………………………………………… 10
3.3. Second encounter – take over by Heineken and expectations …………………………… 13
3.4. Culture encounter and the time frame of changes ……………………………………… 16
3.5. Outcome of the encounter ……………………………………………………………………… 21
4. Case-study Company 2 ……………………………………………………………………… 22
4.1. Basic data about Carlsberg Croatia (ex Panonska pivovara)……………………………… 22
4.2. Ownership transformation and culture encounter ………………………………………… 23
4.3. Outcome of the encounter ……………………………………………………………………… 28
5. Croatian vs. the “Western” economic culture ………………………………………… 29
6. Conclusions ……………………………………………………………………………………… 31
1. Introduction
The story of cultural encounters in our case study is the story of a long tradition of cultural encounters. The history of Karlovacka pivovara (Karlovacka brewery) in the 19th and first half of the 20th century is connected with owners of foreign nationality. After an initial period of 50 years marked with discontinuity in production, when a few different owners tried their business luck, the story of success begins with the employment of young foreign beer expert. In 1908 new technical director, Wambrechtshamer, brought new expertise from Germany and Austria with a considerable effect on quality and sales of beer. Mr. Wambrechtshamer later becomes one of the owners of the brewery.
On the other hand, Carlsberg Croatia does not have such a long tradition. It was established in 1971 as the Panonska pivovara (Panonska Brewery). At first it was a part of a big company Podravka from Koprivnica and, later it became a daughter company of Podravka. In agreement with the licensing contract, the Tuborg brand was presented to the Croatian market in 1972. That involved compliance with strict standards of quality and a prolonged period of (limited) exposure to the Danish/Western business culture.
Ownership transformation in both breweries started in the first half of the 1990s, with a different pace and, ended in the first half of the 2000s. The process was faster in case of the Karlovacka pivovara. In 1994, a majority shareholder in the Karlovacka pivovara became the Southern Breweries Establishment. As of April 2003, Heineken is the majority owner of the Karlovacka pivovara. Foreign capital moved in the Panonska pivovara at a slow pace. Since 1993, Carlsberg Breweries has been a minority shareholder in the Panonska pivovara. In 2002 Podravka sold its shares and Carlsberg Breweries became the majority owner of the company.
In the case of both breweries included in the research there is a prior history of cultural encounters with the Western business culture before ownership transformation and, since ownership transformation in 1994 there was almost a decade of the greater or smaller influence to blend in a Western way of doing business. Second, the economic position of both breweries was less than good, marked with an unsatisfactory/stagnating position on the Croatian beer market. So, in both breweries employees welcomed the take over because the new owner’s good reputation and hope for improvement of economic/beer market position of the brewery.[1] Third, foreign managers from Heineken and Carlsberg sent to resume a leading position in the breweries were managers with respectable international experience and they came reasonably well informed about the Croatian beer market and the brewery. The mother-company also made certain that they had a short introductory culture course about Croatia.
All that prepared the stage for the take over by leading players in the world beer industry; it minimized culture shocks and eliminated any possibility of persistent “clashes of civilizations”. The mental baggage was light in terms of preliminary expectations by the actors concerning the cultural specifics of the other side. The sequence of the encounter deviates from the main hypothesis of the DIOSCURI project about the process of cultural adjustment that follows the sequence: the original expectations – tensions/frictions/conflicts – coping strategies – final compromise. In that sense the sequence of the culture encounter is irregular and the process of cultural adjustment was rather easy-going, causing very little friction and tensions between partners at management level.
As the rest of the study will show, similarities between these two breweries end at the shop floor level. Karlovacka pivovara is the bigger brewery with older technology and to achieve corporate (Heineken’s) level of quality, productivity and profitability a larger scale process of restructuring was launched, with substantial investments. This, still on-going process caused various tensions and frictions with some interesting coping strategies and compromises. Carlsberg Croatia is a smaller brewery with new technology and that made transition to corporate standards of doing business and corporate culture easier.
1.1. The Croatian beer market
After the war for independence 1991-1995 ended and inflation was put under control, economic growth has been slow but steady. Generally, such economic circumstances are favorable for the beer market growth as well as for growth of demand for premium beer. Per capita consumption of beer varies between 74 and 82 liters. Recently consumption of beer has fallen down – in first 9 months of 2005 beer market sales was approximately 5% smaller then in comparative period in 2004. This is attributed mainly to restrictive legislation since the end of 2004, which prohibited any consumption of the alcohol for motor vehicle drivers (so called ‘The 0‰ law’).
Table 1
Beer production in Croatia (hl)
Location ofthe brewery / 2004 Production
January - July / 2005 Production
January – July / Index
*Karlovac / 531539 / 554684 / 104
Zagreb / 975048 / 922373 / 92
Split / 173566 / 144506 / 83
*Koprivnica / 260355 / 263966 / 101
Daruvar / 50476 / 51862 / 103
Osijek / 131945 / 124943 / 95
Buzet / 47703 / 41205 / 86
Total / 2190312 / 2103539 / 96
* breweries included in a case study
The Croatian beer market was / is not complex or fragmented market characterized by heavily competition. We have only three big breweries, which operate on a whole national market and export beer, four regional breweries and a few local microbreweries. Additionally, a market is not saturated with imported beer. A set of brands of the imported beer is rather limited and in most cases too expensive for an average Croatian consumer. In a way this was ‘easy’ market, attractive to be captured by the leading brewing groups in the world. On the other hand, The Croatian beer market is specific in a sense that it is regionally segmented and every brewery holds largest segment of the market in the region where is located. E.g. Carlsberg Croatia holds 60% of beer market in its own region.
Croatia is no longer marked by highly unstable economic environment, but rather frequent changes in legislation represent certain risk factor. Factor of the financial risk, nonspecific for beer industry is the problem with the financial discipline, overdue debts and inefficiency of the legal system. E.g. in 2003 Karlovacka pivovara had to file in the local courts the law suits in total amount over 1 million EUR because of overdue debts for sold beer. And it was not clear how much of that money will they eventually get because of the insolvency or bankruptcy of the debtors. In a document (‘Kratki prospekt’) about Karlovacka pivovara of the Varazdin stock exchange, change of tax legislation was singled out as important system risk encountered in the recent past, especially change of profit tax and increased rate of special tax on beer. In a newspaper interview Mr. Pedersen, Managing director of Carlsberg Croatia, also commented ‘extremely high special tax on beer’ as factor that limits organic growth of the beer market. The other limiting factor is so called ‘0‰ law’ which prohibited any alcohol consumption for drivers of the motor vehicles.
Today the largest shares of The Croatian beer market have three breweries in foreign ownership, all being a part of the 10 world biggest brewing companies – Inbew, Heineken and Carlsberg. Presence of influential players on the international beer market has hardened competition on the Croatian market.
Indeed, after Heineken became the majority owner of the Karlovacka pivovara in 2003, in one of his first public statements President of the Management Board Mr. Ypma pointed out two major goals of the brewery: to strengthen the brands of Karlovacko and rise of the profit. On the press conference later that year Mr. Ypma as a goals of the new owner, Heineken, singled out the increase of the Croatian beer market share (than holding 19%) and gaining the leading position on beer market.[2] In 2005 the market share increased to 22% and new President of the Management Board Mr. Schoevers follows the same goals of his predecessor. The other brewery in which we conducted research, Carlsberg Croatia very effectively achieved goal of the increase of the market share. In relatively short period of three years they increased beer market share, from 6% to 15% of the Croatian beer market. Success is even bigger because the reduction of the domestic beer consumption in 2005.
For such ambitious companies that market is rather limited and highly dependent on the economic power of Croatian consumers. That means growing importance of the export for further business expansion. We expect that in future these two breweries will become important regional players. These two breweries as a part of the leading brewing groups in the world must accommodate to the Group’s standards of acceptable/planned profit level. Generally, in the leading brewing group underperforming is tolerated for a short period of time – e.g. in year 2005 Carlsberg announced closing down 15 breweries.
Croatia started negotiations for full membership in the European Union. A perspective of being a part of the European common market means that Croatian beer producers have couple of years to prepare to face much harder competition on domestic market, as well as to look beyond national boarders for expansion. Breweries owned by world leading beer players will face that challenge more easily than other Croatian breweries.
2. Methodological remarks
Getting approval for conducting a case study was main problem, combined with a long negotiating process. Maybe not so paradoxical, longest negotiations were with the brewery that eventually turned us down. From the business point of view reluctance to disclose internal processes and dynamic to the eye of public is understandable. Nevertheless that had unfavorable repercussions for our case study. First, we were forced to change planed design of the study – instead one case we have two. Second, instead planed 15 interviews we made additional two – total of 17. Developments in the negotiations to get approval for participation in the research directed us to include in the research respondents from two suppliers companies. So, in one brewery we made 8 interviews, in other 7, plus 2 interviews with the suppliers.
Modified design of case study has both advantages and liabilities. With reduced number of participants we were not able to get such deep and detailed insight in the case as we wanted. Second, we did not choose our respondents – we were offered to interview mainly their senior managers and couple middle level managers. That gave us insight in a view from the top of organizational pyramid and left us without the view from the bottom of organizational hierarchy. We expect that ‘rank and file’ employees and their immediate supervisors have a little bit different perspective on cultural encounters, especially in the light of the group layoffs. Fluctuation of workforce happened also at managerial level, so we talked with (satisfied) survivors or with the newcomers. In interviews with managers who joined company in a recent past we had to skip the question about original expectation after take-over. Instead we asked them about positive or negative surprise after they joined the company. Third, in Carlsberg Croatia all interviews had to be made in a presence of the Public Relations manager and in agreed time of 30 minutes. We are certain that it posed additional impulse for self-control and certain auto-censure at the side of managers participating in the research. That also caused difference in quantity of gathered interview material and put Karlovacka pivovara in focus of this case study. On the other hand, experience in two companies taken-over by leading players in the world beer market allow us to better understand the world of big corporations and to make certain comparison between these two cases. In a way corporate cultures and practices are quite similar.
The Croatian beer market leader Zagrebacka pivovara, owned by Inbew, turned us down after a month and half time of intensive business correspondence. Karlovacka pivovara was chosen also because during an ACCESS project in 2003 we already made two interviews with leading managers and we got certain insight in the company. In April/May 2005, through business correspondence and personal contact with one of the directors, researchers explained the scope and methodology of the project. We came to agreement with Mr. Schoevers, the President of the Management Board of Karlovačka pivovara that we can make 10 interviews. In May, we had scheduled interviews with four members of the senior management, starting with the President of the Management Board. Before we started interview Mr. Schoevers informed us that he changed his mind and that we have the permission for only four interviews. Explanation was that four interviews are quit enough to get insight in the company. It took over 3 weeks of “lobbing” to get the permission for additional 4 interviews – total of 8 interviews. Some managers from the list were on the vacation and than too busy – beer production/consumption is highest during hot summer. We also took break for a summer vacation, so the last interview was made in September.