Final Strategic Recommendation - Grupo Damm

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George Simmons
Friday, May 4, 2012
International Studies Program – Barcelona
Professor Fischer

Grupo Damm Final Strategic Recommendation

Introduction and Summary of Recommendation
Grupo Damm, one of the largest beer brewers in Spain, is a strong company in a weak home market. Although many opportunities exist for expansion, the strongest plan for the company to embark on is an aggressive expansion of its business in the United States. This project will give Damm access to a large consumer base with minimal risk due to previous conservative investments in the region. Situation Analysis

Grupo Damm’s current situation is the third largest beer company in Spain. It is a large player in a market dominated by two other beer producers: Grupo Mahou, and Heineken (Appendix 3). Grupo Damm is extremely concentrated in the Catalonia region and, more specifically, Barcelona. The company commands 70% of the market share in and around Barcelona, but it claims only about 30% of the beer market nation-wide (Company presentation). Grupo Damm’s main strength lies in its quality portfolio of beers, which commands an extremely loyal following in its home region of Catalonia. Also, valuable resources the company controls, like a high tech factory with excess production capacity, add to their overall strengths.

One weakness with Grupo Damm’s current market concentration is the risk of this small market weakening and hurting the company’s overall sales dramatically. Companies without diversified revenue streams, whether it is through product line diversification or geographic diversification, are more risky than diversified companies. Grupo Damm’s main competitors are larger and more diversified than itself, and this produces a competitive disadvantage from a risk-adjusted return standpoint. One way to mitigate this weakness is to expand Grupo Damm’s geographic distribution, potentially outside of Spain.

Although the Spanish market is project to contract severely over the next several years, other global beer markets are projected to flourish (Roman). One huge opportunity Grupo Damm has is the ability to be the first internationally recognized Spanish beer; something Corona has done with Mexican beer, Fosters has done with Australian beer, and Guinness has done with Irish beer. These are not countries renowned for their beer making, like Germany or Belgium, but these brands have captured an association with their home countries that makes them ubiquitous throughout the world.

A major threat to Grupo Damm – as well as all Spanish firms – is the potential collapse of the Spanish economy. This scenario is not far-fetched – Spain’s credit rating has recently been cut to BBB+ and the country has recently entered into yet another recession (Roman). This means many Spanish workers will have to be laid-off (despite the extremely stringent labor laws) as firms look for ways to cut costs. As the recession continues, discretionary consumer items, like beer, are the first things to be cut back on – especially at the high-margin, on-trade retail segment (Appendix 3). This is not a risk Grupo Damm can diversify away, as even if it gains a foothold in international markets it could still be wiped out by a depression in Spain.

Lastly, Damm is fairly well positioned financially. The company does have some leverage, with a debt to equity ratio of about 50% (Bloomberg). However, when one examines the company’s quick ratio, (how much cash, short term investments and accounts receivable can cover short term liabilities) it is very healthy at 1.35x (Bloomberg). The most important metric I would look at is the EBITDA to interest ratio, which measures how many times a company’s cash flow can cover its debt payments. This ratio is over 19x, which means Grupo Damm could service it’s current levels of debt for 19 years, purely with the money it made in 2011 (not including current cash reserves). The company has enough financial resources to take on a...
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