Answer questions 1-4 in the word document. The excel sheet should be used as a tool in answering questions 3-4.
The actual Kassatly case is an attached PDF file needed but it doesn’t look like it will be.
Due in 24 hours.
No Plagiarism.
Calculations
| Kassatly Chtaura in 2 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CAPM estimate of the weighted-average cost of capital | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of Equity (KC has 7M cash savings onhand) | Amount of Equity | Beer | Saudi | Angola | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Riskfree rate | 2.85% | Value | 5000 | 7000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beer Beta | 1.50 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saudi Beta | 1.20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Angola Beta | 2.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Market return | 13.46% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lebanon Cost of Equity | 18.77% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saudi Cost of Equity | 15.58% | *Saudi project does not require debt because the company can invest cash and get 8M from Saudi investor | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Angola Cost of Equity | 24.07% | Amount of Debt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 10000 | 8000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of Debt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rate | 7.40% | Total Capital needed | 15000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxrate | 15% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 6.29% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Project | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 | 0.4 | 14.59% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes: | 1. Professor’s Beta estimates based on risk of investment (feel free to challenge this, or change it) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. risk free rate based on 2013 data from https://tradingeconomics.com/lebanon/risk-premium-on-lending-prime-rate-minus-treasury-bill-rate-percent-wb-data.html | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3. Since the relevant cost of equity in this situation seems to be the opportunity cost of equity reinvested into the business, Professor used annualized growth rate (2M to 25M over 20 years = 13.46%) Feel free to challenge this or change it if your team has a better estimate. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4. For cost of debt, Prof used the Lebanon bank lending rate from 2013 https://www.ceicdata.com/en/indicator/lebanon/bank-lending-rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5. Business tax rate in Lebanon was 15% in 2013, Individual rate 20% |
| Beer cash flows | Angola cash flows | Saudi Cash flows | ||||||
| Probability estimate | Probability Estimate | |||||||
| 0.3 | 0.5 | 0.2 | ||||||
| Pessimistic | Moderate | Optimistic | ||||||
| -2 | 500000 | -200000 | -1500000 | |||||
| – | 1000000 | |||||||
| -600000 | ||||||||
| 300000 | ||||||||
| 2500000 | 5000000 | |||||||
| 2000000 | 4000000 | 7000000 | ||||||
| 8000000 | ||||||||
| 6000000 | 9000000 | |||||||
| 6500000 | 10000000 | |||||||
| 11000000 |
Kassatly Chtaura Supplemental Data Analysis
Ghida and Reem were very interested in the possibility of opening up a plant in Angola, due to the good recent sales and positive growth rate of the market. Search online for data to examine this option. You can use the data available in Wikipedia because it is based on IMF data.
https://en.wikipedia.org/wiki/Economy_of_Angola
1. Produce a forecast of GDP growth rate data for 2014-2020 based only on what Ghida and Reem would have known up to, and including, 2013.
a. What does the forecast show? Are the forecasted results positive or negative? Describe the 95% confidence interval for these estimates.
b. How accurate were the forecasts in comparison to reality?
2. Repeat Q1 (a & b) focusing on the inflation rate.
3. Your professor has provided an excel worksheet with estimates you could use for estimating NPV of the 3 projects.
a. Check the Professor’s calculations of WACC to see if you think they are reasonable. Feel free to challenge or change these estimates in your work.
b. Your professor provided some estimates of cashflows and some probability estimates (assuming a 10yr life of the project). Use the WACC (discount rate) and cashflows to estimate the NPV of each of the 3 international expansion project options.
i. Feel free to change the probability estimates if you disagree
ii. Feel free to change cashflows if you disagree
iii. Create your own cash flow estimates for Angola and Saudi Arabia projects based on market knowledge available in 2013 (as much as possible, just do your best)
4. What does the valuation tell us about which project the company should pursue?
3.
9B15M104
KASSATLY CHTAURA: TIME TO EXPAND ABROAD?
Ramzi Fathallah wrote this case under the supervision of Professor Jean-Louis Schaan solely to provide material for class
discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may
have disguised certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.
32
08; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-12-01
On April 9, 2013, Nayef Kassatly got a phone call from his father to confirm their meeting the following
day with other family members to discuss the next strategic move of their company, Kassatly Chtaura,
which was headquartered in Beirut, Lebanon. The producer of both alcoholic and non-alcoholic beverages
was doing very well in terms of revenues and market share and had succeeded in building a strong cash
flow. However, last year’s figures showed little growth, and the family was concerned that sales had reached
a plateau. Building on the legacy of his father, Nayef1 wanted to expand the company and keep the family
business going for future generations. Was it time to invest in international markets, given the uncertain
political situation in Lebanon? Or should the company stay put and expand its operations in Lebanon?
LEBANON: ECONOMIC AND POLITICAL ENVIRONMENT2
Lebanon, a small country in the Middle East, experienced a civil war between 1975 and 1990, followed
by years of social and political instability. Its security institutions were inherently ineffective, being prone
to continuous conflict and constant interference from the neighbouring countries of Israel and Syria. Also,
there was an ongoing internal conflict triggered by different sectarian units that interfered in the
administrative institution of the state. The grouping of people by religion played a critical role in
Lebanon’s political and social life and had given rise to some bitter conflicts.
Lebanon had a population of around four million people and was characterized by a free market economy
and a laissez-faire commercial tradition. The Lebanese economy was service-oriented; the main growth
sectors included banking and tourism. The government did not restrict either domestic or foreign business
investments and was open to markets abroad with easy capital and labour mobility. The private sector
contributed around 75 per cent of aggregate demand. The business investment climate suffered from
corruption, arbitrary licensing decisions, archaic legislation and weak intellectual property rights.
The Lebanese economy enjoyed a relative attractiveness in 2009/2010 when it was considered a safe
haven for investments. However, after four years of 8 per cent average growth, the conflict in
neighbouring Syria had slowed the country’s economic growth to the 1 to 2 per cent range in 2011/2012.
Gross domestic product (GDP) per capita was estimated to be around $15,8003 in 2012. The Syrian Civil
War that erupted in 2011 had a strong spillover to Lebanon in 2013 as Lebanese political parties were
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divided between supporters and opponents of the Syrian government. This led to incidents of violence in
some parts of Lebanon.
LEBANON’S BEVERAGE MARKET
The dynamics of the beverage market in Lebanon was different from that of Western markets because
around half of the Lebanese population didn’t drink alcohol due to religious beliefs. Thus, growth was
mostly driven by non-alcoholic drinks such as the carbonated drinks, bottled water and fruit juice. The
market for soft drinks and juices was well-developed. PepsiCo had the largest market share in the
carbonated category; Coca Cola was trying to compete by investing in promotions and out-advertising its
rival. The soft drinks market was expected to continue growing by just over 27 per cent in sales value
from 2012 to 2017 to reach $675 million.4 Although the market in Lebanon was growing, it was still
considered small. For example, it was estimated that the soft drinks industry in Saudi Arabia was $5.2
billion in 2010.5
The leading fruit juice producers in Lebanon were Bonjus, PepsiCo (Tropicana brand) and LibanJus.
Another significant beverage category was bottled water, which witnessed an increase in the market due
to concerns over the safety of tap water.6 Tea and coffee markets were considered relatively mature sub-
sectors as the consumption of those drinks was part of local social traditions.
The alcoholic drinks sector was also witnessing one of the biggest growths in the region. Data from
International Wine and Spirits Research (IWSR) showed that alcohol consumption in Lebanon had
increased by 6.3 per cent from 2007 to 2012; almost one million litres of alcohol were consumed in 2012.
There were many distributors of foreign brands in Lebanon, but the market for alcoholic drinks was
sometimes affected by the country’s instability. When violence erupted, the number of tourists went down
and the local market tightened. The premium or mid-level range products were usually the most consumed.7
Nevertheless, by the end of July 2009, CNN reported that Beirut may be the “Best Party City in the
World.”8 Beirut had become a very important nightlife spot, despite its instability and the political
violence surrounding its borders. In 2012 and early 2013, the mushrooming of many bars in new districts
helped the alcoholic beverage industry to grow.
The country’s beverage exports grew by an average annual rate of 25 per cent during the years 2009 to
2011 due to the country’s growing wine industry.9 Over
30
new wineries had been launched since 2000,
compared to just three in 1990. Lebanon had a strong agricultural industry and a “terroir” (geography,
geology and climate) that was ideal for the industry. For instance, in 2011, Carlos Ghosn, the chief
executive officer of Nissan-Renault, teamed up with Lebanese wine distributors to start a new vineyard,
Ixsir, with an estimated investment outlay of $10 million.10
Many firms could leverage the extensive trade network of the many Lebanese who had immigrated to
countries around the world in the last decades.11 The three largest wine exporters in Lebanon were Ksara,
Kefraya and Chateau Musar. Many wineries exported more than they distributed locally.12 Although in
2012 there was a decline in wine exports, there was a rising export rate of other alcoholic beverages,
especially as Lebanon’s beverages production expanded.13
Arak, an anise infused drink made from distilled grapes, which turns white when water is added, was an
important part of Lebanon’s culinary heritage. However, there were many commercial and homemade
producers of this drink, so there were no official figures available for the annual production of arak.14
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Brasserie Almaza, owned by Heineken International, was the country’s leading brewer. It offered Almaza
and Amstel popular brands and Laziza, a non-alcoholic beer.
Whisky was the number one spirit in Lebanon, dominating more than 50 per cent of the market. Vodka
was the fastest growing spirit, but consumption was still lower than whisky. The popularity of vodka in
Lebanon was part of a global trend. In early 2013, a Lebanese start-up enterprise began producing J2
Vodka that was distilled in Poland; it was the first Polish vodka to use Lebanese mountain water.15
Johnnie Walker held
31
.6 per cent of the market share in whiskey consumption, and its parent company,
Diageo, a leading premium drinks business headquartered in London, United Kingdom, had a regional
office in Lebanon. Its corporate relations director described the country as “the showcase of the Middle
East and the leader of nightlife in the region.”16
KASSATLY CHTAURA: HISTORY
Akram Kassatly, Nayef’s father, founded the business in 1974. He studied winemaking in Dijon, France
and was very eager to start a winery in Lebanon. However, the civil war put his dream on hold as the
town where he wanted to establish his winery was controlled by militias whose religious values
prohibited alcohol. Therefore, he decided to start a bottling business for Jallab,17 a beloved non-alcoholic
Lebanese drink.
At the time, street vendors who pushed their carts through the streets of Beirut prepared the unnamed
drink from dates and distilled rose water; to attract customers, they would call out, “Jallab!” Motivated by
entrepreneurial curiosity, Akram approached one of them and asked him to prepare the drink in front of
him to learn its recipe. He decided that it was a great business idea to manufacture and sell the syrup in
concentrated bottles for home preparation18; he named the product Jallab after the vendors’ cry. Since that
day, the beloved drink had become such a huge success in Lebanon and the Arabic region that Akram had
to expand his small factory to cater to local and international demand. He soon complemented Jallab with
a wide range of other concentrated syrups and flower extracts. The products became successful and
helped the family name prosper in the beverage market. As the factory was based in Chtaura, a town in
the fertile Beqaa valley, the homeland of the largest producers of fruits and vegetables in Lebanon, Akram
branded all his products with the name “Kassatly Chtaura.”
In the 1980s, the company expanded its successful syrup product range to include a wide variety of
liqueurs, as well as fruit jams and finally fruit juices and smoothies in the 1990s. In the early 1990s, the
company went more extensively into the food business, making pickles, jams and other canned food
items. However, in 1994 when Nayef, Akram’s only son, joined the company, he opposed the company’s
diversification strategy into this segment. He argued: “Kassatly Chtaura is a beverage business, and we
need to leverage our market advantage in this sector to be able to grow. We could definitely use our
bottling plant to make other drinks such as carbonated ones.”
Subsequently, the company focused more on beverages, developing different kinds of fruit juices, and
gradually stopped the production of all food items except small 30-gram packets of jam (strawberry and
apricot only). It decided to keep the jams as they helped to introduce its products to new places and
clients, such as airlines, hotels and restaurants. Nayef commented: “We don’t make money out of the jam
product, but it is an image focus product. . . . It is for marketing purposes.”
The company was always innovative in introducing new products and flavours. For example, it was the
first to produce mixed flavoured juices (tropical mix, banana strawberry and other mixes) when the local
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market offered only pineapple or orange juice. Also, it was actively involved in international exhibitions
to showcase its products, making its first contact with Saudi and Kuwaiti customers at the Gulf Food
show in Dubai during the early 1990s.
Kassatly Chtaura was known to focus a lot on its marketing strategy and to be a big spender on
advertising campaigns to promote its products. From the period of the civil war, it always had very
popular radio and TV commercials promoting Jallab, other syrups and liquors. Many of its ad jingles
were memorized by a large number of Lebanese.
Akram’s other children became part of the business gradually. After Nayef joined in 1994, Ghida
followed him to lead the marketing department. Upon her return from the United States in 2011, Reem
also joined to handle export markets. Nayef was promoted to the position of managing director, and the
father was happy to have his children in Lebanon working in the family business. The company was
owned 100 per cent by the family members, and they discouraged having any non-family owners.
Nevertheless, many non-family managers joined the company in the early 1990s, starting their careers in
entry-level positions, and contributed to the growth of the business. Some employees left to work for
multinational corporations in the Middle East, but they returned to Kassatly Chtaura with their newly
acquired experiences and visions.
The family also relied on foreign exports to help the company survive some of the seasonal political
turmoil that affected local consumption. However, they did not shy away from investing and growing the
business. The family always believed that the security situation in Lebanon was volatile — it could get
very bad in five minutes, but five minutes later, it would be better again — so it was important to persist.
Most of the management team had lived in Lebanon during past wars and turmoil, so they had the
experience and the acquired flexibility to navigate the challenging business environment.
During the six-week war in Lebanon in 2006, the factory shut down for one month; many surrounding
factories were destroyed by air strikes in the Beqaa, and roads leading to the factory were blocked. That
was a wake-up call for the family. They decided to buy annual political violence insurance to cover the
factory. In 2012, they paid $75,000 over a 12-month period for a full coverage including business
interruptions of $30 million.
KASSATLY CHTAURA: MAKING A BUZZ OUT OF READY-TO-DRINK PRODUCTS
When Nayef joined Kassatly Chtaura in 1994, the company had average yearly revenues of $3.5 million
(see Exhibit 1). He wanted to expand the business as he felt that it had a strong brand and know-how in
the beverage market that could be leveraged to explore many more growth opportunities.
During a personal trip to Switzerland, Nayef was amazed by the craze for vodka mix drinks in bars and
dance clubs where young men and woman in their early 20s partied. It was part of a global trend as vodka
mix drinks were practical and relatively cheaper than other alcoholic drinks. In 1999, Diageo, the
producer of Smirnoff Vodka, launched Smirnoff Ice, a new flavoured vodka mix. Upon his return to
Lebanon, Nayef asked his father: “Why don’t we produce a vodka mix drink in our facility in Chtaura? I
want to do the same new products as Smirnoff in Lebanon! We can expand the factory and buy some new
machines to enter the ready-to-drink [RTD19] market.” He already had a brand for this product in his
mind: “Buzz.”
Kassatly Chtaura invested $2 million in the bottling machinery needed to manufacture the new drink. (The
newly expanded plant could also be used to make other beverages.) In 2000, Buzz, an RTD beverage made
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with vodka and a variety of flavours, was introduced and became an instant success in Lebanon and other
export markets. The company recognized that it was hard to compete with the brand equity of the global
players, Smirnoff and Bacardi, but managed to compete on price to gain market share and build its brand.20
As Kassatly Chtaura exported lots of juices to Saudi Arabia, Nayef discussed with the company’s Saudi
agent the opportunity to make a product similar to Buzz but in a non-alcoholic format. The agent
suggested, “Buzz non-alcoholic” as a brand for the product. Nayef preferred to create a new brand,
“Freez,” so there would be no confusion, and it was launched within the year. This new non-alcoholic
carbonated fruit beverage set a new trend and was quite successful.
Another addition to the Buzz line in 2003, Buzz Extra Strong Plus, was a milestone in the growth of the
business. Nayef was inspired by the success of energy drinks such as Red Bull in European and North
American markets as well as the rising demand among clubbers in these markets for drinks that mixed
vodka and energy drinks. However, he was concerned with the side effects of these products on the health
of his consumers. So, Buzz Extra Strong Plus mixed vodka (10 per cent alcohol) with a special flavour
that did not contain any caffeine or taurine21 but tasted like an energy drink. In the second year of the
introduction of the “Plus” flavour, the volume of its sales doubled and grew, on average, 30 per cent
yearly since then.
Kassatly Chtaura’s RTD beverages had become very popular due to the company’s high quality products,
a range of flavours and alcohol content and strong communication strategy (see Exhibit 2). The company
made witty and funky advertising campaigns to target young consumers and kept changing its products’
flavours and packaging. The bottles had been redesigned four times so far because they were trendy
products in a category that was new and growing very rapidly. The alcoholic beverages’ share of Kassatly
Chtaura’s total sales grew from 20 per cent in 1999 to
38
per cent in 2003.
The campaign for these new products was ranked as one of the highest budgets spent in Lebanon for TV
and billboards ads — around $500,000 in 2005, mainly on billboards, advertising Buzz and Freez.22 The
company was making good margins on these products and spending money on development of the
brands. It allocated certain budget amounts per box and per range of product according to the previous
year’s sales to set spending on production of commercials and air time. It knew the market very well and
how to communicate with its customers.
Eighty per cent of the raw materials and ingredients of Kassatly Chtaura’s products were imported. For
example, the company had to start importing its glass bottles from Kuwait and Saudi Arabia after the
supplier in Beqaa was destroyed in the July 2006 war. Other materials, such as vodka, were imported from
European distillers; some flavours came from Switzerland. Seventy per cent of its imports came from
Arabic countries with an Arabic Union certificate that translated into an exemption from customs duties.
Kassatly Chtaura relied on its own in-house distribution team to cover the Lebanese market. The factory
in Chtaura covered the Mount Lebanon and Beqaa areas, and the office in Beirut covered regions in the
north, south and Beirut.
The company’s markets were both on-trade and off-trade. The on-trade market consisted of restaurants,
bars, clubs and beach resorts, where consumers bought the product and consumed it on the premises. The
off-trade market included food and beverage retailers, grocery stores and corner stores, where customers
bought the product but consumed it at home. The off-trade sector was the major market for Kassatly
Chtaura as people consumed more alcohol at home, mainly because the products were cheaper when
bought off-trade. However, the company had to be always present in the on-trade sector to build its brand
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image. Reaching the consumer was easier in the off-trade division because all the brand choices were
displayed right on the shelf, and some neighbourhood grocery stores extended credit to their customers,
who could then afford to buy more products. In a bar, the choice of products was influenced by exclusive
deals with distributors.23
EXPANDING THE BEVERAGE PORTFOLIO: GOING BACK TO WINE AND VENTURING INTO
ENERGY
Kassatly Chtaura had continuous average growth of 25 to 30 per cent annually since launching the RTD
products. This growth encouraged the family members to see the future of the firm on a bigger scale and
to appreciate the potential of many varieties of drinks.
In 2004, the family was ready again to pursue the dream of their father in winemaking. They bought a
vineyard in Baalbek, close to their factory in Chtaura, and built the winery in six months at a cost of $1.5
million. Its first wines were bottled in 2005 under the “Château Ka” brand. At first, it was a challenge to
compete with Lebanese winemaking giants such as Ksara and Kefraya. The wine business was growing,
but a company needed at least 15 years to build a strong market share. Château Ka produced between
100,000 and 150,000 bottles per year and was number three in 2013 in Lebanon per volume, but it was
still far from the market leaders.
Nevertheless, the success of the wine surpassed the family’s expectations as it met standards of excellence
in winemaking in many European countries and earned many awards. Its fine wine became appreciated in
Lebanon, the United States, Canada, France and the United Kingdom, where it was sold in high-end stores.
Although Buzz Extra Strong Plus accounted for more than 50 per cent of its Buzz products sales, Kassatly
Chtaura had to reconsider its strategy in 2008 when its previous agent in Iraq started to import a new
product from Germany, “XXL,” and sell it in Lebanon. The new competitor introduced XXL Vodka Mix
beverages, but its most successful product was XXL Energy that mixed vodka with caffeine and taurine.
Nayef commented: “My dad was very worried and was saying that XXL Energy is taking our market
share. We have to do the same product to compete. But, I said no, it is dangerous, we will not do it. . . .
XXL started to take a lot of our market share, and I was still stubborn.”
However, after losing a major share of the market, Nayef supported his family decision in 2009 to venture
into energy drinks by offering a vodka mix with caffeine or taurine added. Kassatly Chtaura’s RTD products
had been offered only in glass bottles, but the new product, Buzz Energy, was packaged in cans. As the
family was late in reacting to the competition, it had to invest a lot in communication but still had to be
patient before reaching 40 per cent of the market share in vodka energy drinks. Energy drink consumption in
2010 was around two litres per capita per year and the total market was around $20 million.
Changes in Government Laws and Regulations
In June 2012, the Lebanese government issued a new law allowing only energy drinks with maximum
alcohol of 10.2 per cent and caffeine concentration of 0.01 per cent to be produced and sold. There was
some expectation that the government would soon prohibit the sale, production and import of any product
that mixed alcohol and energy substances, as new studies had shown that these drinks were dangerous.24
Nayef expressed his opinion: “Personally, I didn’t like Buzz Energy from its early introduction and was
not convinced that Kassatly Chtaura should produce it because the product has side effects, and I don’t
want to link my brand with risks to consumers’ health.”
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Although the family wanted to discontinue this product, it was not an easy task. As a large manufacturer,
Kassatly Chtaura had ordered millions of printed cans in advance for bottling Buzz Energy. It had to incur
extra costs to wrap the cans with new labels to use them for the Buzz beverages that had no caffeine or
taurine added.
KASSATLY CHTAURA IN 2013
Since the entry of XXL into the Lebanese market, a media war between Buzz and XXL products helped
to expand the new market segment of RTD beverages in Lebanon. By 2012, the market represented
35
million cans, or around 170,000 hectolitres.
Although the spillover from the Syrian crisis was escalating in Lebanon, the family believed that the
beverage sector had the potential to stay healthy and even grow. Nayef remembered well the period of
civil violence and war in his country. People played cards and drank alcohol while they were in
underground shelters hiding and waiting for the bombs to stop so they could go to work. He commented:
“Even when there is war, people don’t stop drinking. When you are happy, you drink; and when you are
sad, you drink.” Moreover, there were fewer imports reaching the Syrian market due to economic
embargos from different nations, which created an opportunity for the company to continue selling in
Syria through the open border. The location of the factory in Beqaa was strategic as it was halfway
between Beirut and Damascus.
By 2013, Freez represented some 50 per cent and Buzz some 30 per cent of Kassatly Chtaura’s sales.
Freez was very successful in the Gulf countries — around 70 per cent of Freez products were exported to
the Gulf Cooperation Council (GCC)25 market, while 35 per cent of Buzz production went to export
markets, mainly to Syria, Iraq and some African countries. Jallab and liquors represented only 10 per cent
of the company’s turnover.
By April 2013, Kassatly Chtaura had become a leading drinks manufacturer, having grown from a $2
million business to almost $25 million in 20 years and from 20 employees in 2002 to 170 full-time and,
during peak seasons, 300 employees. The new management team was relatively young and motivated to
expand the business, but the company still depended on family members.
Kassatly Chtaura did not have any production or distribution facility outside Lebanon. It exported many
of its products to markets in the Middle East and some other markets in Europe, Africa and North
America (see Exhibit 3). Saudi Arabia was the major export market with total sales of $3.07 million in
2012. Kassatly Chtaura also exported to Kuwait and the United Arab of Emirates. In 2012, the company
sold around $2.12 million in Kuwait and $1.88 million in the United Arab of Emirates. Angola was the
largest market in Africa with $1.65 million. Although Syria was an important market for Kassatly
Chtaura’s products, the management team considered the Syrian market as an extension of the domestic
Lebanese market because many products were smuggled across the borders.
Many of Kassatly Chtaura’s products relied on raw materials and ingredients from suppliers in
international markets, but everything the company sold was produced locally.
GROWTH OPPORTUNITIES
The company had been growing more than 25 per cent annually, but the sales figures were slowing. Its
financial statements remained very healthy and showed a strong cash flow. Following its philosophy to
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always expand into new beverage production, the family wanted to expand the business, but they had
different opinions regarding how to do so.
1. Freez Production Plant In Saudi Arabia
Nayef, who was interested in taking the business international, believed that Kassatly Chtaura should
venture into Saudi Arabia by building a manufacturing plant there to produce and bottle Freez products.
This was not the first time that the family had considered venturing into the Saudi market. In 2006, the
six-week war in Lebanon affected many industrialists as many ports were closed, including the airport,
restricting imports and exports. Nayef commented: “We thought of a plan B during the war, and it was
about a new plant in Saudi Arabia, but family restrictions and emotions played a role and the situation got
better, so we decided to stay.” He continued:
Today we should consider opening a bottling plant for Freez as it is very successful in the
countries of the GCC, and our biggest export market for Freez is Saudi Arabia. Freez is 50 per
cent of the turnover of all our business today; 90 per cent of its market is GCC, and 45 per cent of
its market is for Saudi Arabia. So it is worth it, and if we go there, there is also potential to get
bigger because we can start also distributing our own products.
Saudi Arabia, the largest economy in the Arab World, is a monarchy governed along Islamic lines. Nayef
was very familiar with the new government’s economic reforms that promoted foreign investment in the
kingdom by establishing six “economic cities” in different regions of the country.26 Growth in the
beverage industry was attributed to a large and growing younger population and to the aggressive
marketing activities of manufacturers, such as new product development and innovative marketing
campaigns aimed to appeal to the personalities and lifestyles of this young population.27
Kassatly Chtaura was a top Arab brand — number 25 according to Forbes Arabia — and it already had an
official Freez Arabia page on Facebook that had many followers and loyal customers.
Nayef believed that Saudi Arabia would be the largest market for the company’s beverages, especially
since the market was based on local Saudis and not expatriates, but the United Arab Emirates (UAE) and
Qatar were also forecasted to show rapid growth over the next five years. He argued:
There are many advantages to investing in Saudi Arabia: energy cost is very low, transportation cost
is very affordable and we can cover all the GCC countries from Saudi Arabia. Labour cost of
foreign workers is very low, but we will need to recruit some Saudis to work for us following the
Saudization law . . . but this should not be a problem. There are almost no taxes, and the country is
relatively more politically stable than Lebanon. The state is more solid and there are stronger
institutions of inspections and rules and regulations. . . . Raw materials are cheaper and widely
available, so we will not need to depend on importing our materials from foreign suppliers and
incur high costs. For example, Saudi Arabia has glass factories and sugar refineries. . . . We don’t
have direct competitors in Saudi Arabia; Pepsi and its line of juices could be the only competition.
Nayef said that the family would need an investment of $15 million to open the plant; the bulk of this
amount would be spent on the purchase of the machinery from European suppliers. It would require a
partnership with a local player who could provide a portion of the capital and access to more local
financing and local market knowledge. The family would inject $7 million for this project, an amount that
was equal to their savings to date.
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2. Buzz And Freez Production Plant In Angola
Ghida and Reem were also interested in expanding into international markets; however, they believed
Angola in Africa was the best destination for a new production plant. Africa was ranked among the top
destinations of Lebanon’s total agricultural food exports including beverages, and Angola was the top
destination in Africa.28
Angola’s economy had on average grown at a double-digit pace in recent years. Ghida said:
In Angola, we have a good market for both alcoholic and non-alcoholic beverages. We are also
selling our Buzz Energy drinks there as they are in high demand and not illegal. There is a lot of
potential in this market. Angola’s government wants businesses to come and invest in the country
and have new companies that open factories and recruit labour. . . . All our agents in African
markets were encouraging us to come to the market and open a factory. They told us just to visit
Angola and consider this option seriously and they would help us all along this process.
Diageo already sold spirits and beer in Africa, which accounted for almost 14 per cent of its revenues last
year. Its African sales were growing very quickly to a level almost equal to its Asia-Pacific region sales,
while revenues were falling in other markets.29 Angolan consumers were now richer than their regional
counterparts and were able to spend more freely on alcohol. Recently, Diageo announced a new beer deal
with a Portuguese brewer in Angola.30 Ghida estimated an initial total cost of $15 million to build and
operate the new manufacturing plant in Angola. The biggest cost would be buying and installing the
machinery, and the total investment would require a local partnership.
Reem concurred that Angola could be a good option, especially since Africa was a new, relatively virgin
market that was growing fast, but she also highlighted the challenges of operating in Angola:
Much of the country’s infrastructure was still damaged or undeveloped from the long civil war,
and corruption is a major challenge. We might be facing logistical hurdles and challenges to
locally source our raw materials. Moreover, our numbers do not show consistency in the market.
Our sales figures of the products we export to Angola keep on going up and down. One year the
government increases duties on imports so sales go down, then another year they are better, and
then again a new law comes up and they go down.
Moreover, Reem was concerned about the lifestyle in Angola and whether any family member would be
willing to relocate and live there to oversee the new operation.
3. Beer Production Plant In Lebanon
Akram, the founder and current CEO of the company, had a different vision for the company’s future. He
wanted Kassatly Chtaura to venture into a new product — beer, which would complement the company’s
portfolio of beverages. He argued: “We always had one warhorse on which we built our categories of
products. For example, we had Jallab, and we built all the syrups around it. Then, we had Buzz, and we
built all the vodka mix products and Freez around it. Today, it should be beer. Beer would be the future of
Kassatly Chtaura.”
Lebanon’s consumption of beer was 5.5 litres per capita (11 litres per capita when adjusted for the
population that drinks alcohol), compared to 80 litres per capita in the United States and 75 litres in
Europe. 31 The market in Lebanon was estimated now to be around 200,000 hectolitres. Brasserie Almaza,
35
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now owned by the Heineken group, had had a monopolistic grip on the beer market since 1933 and was the
only large-scale brewer in the country. The Almaza local brand had 74 per cent of the market and the
imported Heineken brand another 6 per cent, totaling 80 per cent for Brasserie Almaza. Five per cent of the
market was held by 961 Beer of Gravity Brewing, a relatively new microbrewery that started in 2006 with a
small plant that employed traditional brewing methods. The remaining 15 per cent of the market was made
up of imports (Efes, the Turkish brand, was dominant in this category).32 Brasserie Almaza exported 10 per
cent of its production mainly to Syria, the United States, Turkey and the UAE, while Gravity Brewing
exported to the United States, Europe and Hong Kong and had plans to expand into Australia.
Akram thought that Kassatly Chtaura would have to expand the market of beer in Lebanon rather than
compete with existing producers to grab a share of the current market. There was a low beer culture in
Lebanon where around 70 per cent of people drank beer only in the summer. Akram commented:
We can create a new market and change the habits of the Lebanese consumers. We can also
invest in aggressive communication and marketing campaigns, so we will be able to double
Lebanese consumption of beer, hopefully, in five years. Also, the export markets would be in
mind. Our Syrian agent is very excited about the idea of importing beer from us if we decide to
go with this investment.
Moreover, Akram was familiar with the new incentives that the Lebanese government was offering to
Lebanese enterprises. Banque du Liban33 was offering business loans supported by the United States and
European Union to encourage Lebanese entrepreneurs and businesses to stay and invest in Lebanon.
Akram continued:
Half of the brewery is already available (bottling, packaging and pasteurizing) in our factory in
Chtaura. When we bought our machines during the last 10 years or so, we had in mind to expand
our bottling line to produce different kinds of beverages including beer. We would need an
extension for brewing and fermentation. It would be an investment of $15 million ($10 million to
buy the machinery, $1.5 million for construction of the extension factory, $1.5 million for utilities
and installations and the remaining for other raw materials and diverse costs). We could apply for
a $10 million loan backed up by the Banque du Liban, and we would need only to inject $5
million as self-investment.
Akram’s children were very concerned about the political instability in Lebanon and the region, but
Akram reacted: “Kassatly Chtaura was born, developed and expanded during the war and during the
persistent political instability, and it never stopped — why should we stop now? When we decide to do a
project, we do it . . . no matter what!”
THE NEXT STEP
On April 9, 2013, Nayef had a very busy day at the factory in Chtaura. He also had to think about what he
was going to tell his father and siblings tomorrow morning when they would meet to decide on the next
strategic move of the company. Should the family venture away from Lebanon and grow in Saudi Arabia
and develop the markets in the GCC? Or should the family invest their capital in the emerging markets of
Africa and build a factory in Angola? These were promising markets, but they were in distant locations
with different cultures. The political situation in Lebanon was unstable, but it had always been like that.
Adding beer as a new product line to Kassatly Chtaura’s successful portfolio would complement its
business strengths in Lebanon and accomplish a family dream.
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EXHIBIT 1: KASSATLY CHTAURA SALES
Year Sales US$
millions
% of sales
Alcoholic
% of sales
Non-Alcoholic
%
Local sales
%
International
Sales
1999 3.3 20 80 87 13
2003 3.2 38 62 50.5 49.5
2007 8.2 36 64 52 48
2008 10.6
37
63 51 49
2009 14.2
39
61 48 52
2010 17.9 35 65 46 54
2011 22.4 28 72 42.6 57.4
2012 23.6 37 63 45 55
Source: Company information.
EXHIBIT 2: KASSATLY CHTAURA’S PRODUCT CATEGORY SALES SHARES
Source: Company information.
EXHIBIT 3: KASSATLY CHTAURA’S EXPORTS BY PRODUCT CATEGORY
Source: Company information.
Percentage of Total
Revenues
1999 2003 2011 2012
Liquors 20 20 4 2
Buzz N/A 18 19 30
Freez N/A 30 54 49
Château Ka N/A N/A 5 5
Fruit juices 15 10 3.5 2.5
Rose water; Flower
water
15 4 1 1
Syrup, including Jallab 45 12 11 8.5
Jam 5 6 2.5 2
Percentage Exported of
Company’s Total Sales Value
1999 2003 2011 2012
Liquors 0 0 0 0
Buzz N/A 3 4.2 7.5
Freez N/A 40 45 41.4
Château Ka N/A 0 1.3 0.6
Fruit juices 1 0.3 0.3 0.2
Rose water; Flower water 3 0.25 0.33 0.2
Syrup, including Jallab 7 6 6.2 5
Jam 2 0 0.1 0.1
37
Page 12 9B15M104
NOTES
1 The first names of the protagonists were used in this case as they are all from the same family.
2 This section is based on information from “Lebanon,” CIA World Factbook, www.cia.gov/library/publications/the-world-
factbook/geos/le.html, accessed December 22, 2014; “The Economy,” The Embassy of Lebanon in the U.S.,
www.lebanonembassyus.org/the-economy.html, accessed April 2, 2015; D. Jamali and B. Neville, “Convergence Versus
Divergence of CSR in Developing Countries: An Embedded Multi-layered Institutional Lens,” Journal of Business Ethics,
2011, 102(4), pp. 599–621; N.M. Ezrow and E. Frantz, Failed States and Institutional Decay: Understanding Instability and
Poverty in the Developing World, A&C Black, London, 2013.
3 All currency in U.S. dollars unless otherwise indicated. The U.S. currency is commonly used in Lebanon for large and small
transactions. Since 1999, the rate of the Lebanese pound has been fixed around £1.507.5 = US$1.
4 Business Monitor International, “Lebanon: Food and Drink Report 2013,” Western Libraries,
www.lib.uwo.ca/business/DatabasesBusNetworked.html, accessed April 2, 2015.
5 Business Monitor International, “Saudi Arabia: Food and Drink Report: Q3 2012,” Western Libraries,
www.lib.uwo.ca/business/DatabasesBusNetworked.html, accessed April 2, 2015.
6 BLOM Invest Bank, “The F&B Industry in the MENA Region 2011,”
www.ifpinfo.com/getpdf.php?pdf=Food%20and%20beverage%20industry%20in%20MENA , accessed April 2, 2015.
7 Nabila Rahhal, “Out of Spirits,” December 16, 2013, Executive Magazine, www.executive-magazine.com/society/beirut-
alcohol-lebanon, accessed December 18, 2014.
8 Gabriela Greess, “Beirut: Best Party City of the World,” Cigar Journal, Issue 2/2012, www.cigarjournal.co/index.php/us/back-
issues/1064-ausgabe-22012-beirut-best-party-city-of-the-world; also www.youtube.com/watch?v=3_NxbnOz8uI, accessed
September 8, 2015.
9 “Analysis of Lebanon’s Food Market (2009-2013),” November 2014, Bank Med Report,
www.bankmed.com.lb/LinkClick.aspx?fileticket=nFxuBuTBs4g%3D&portalid=0, accessed April 2, 2015.
10 BLOM Invest Bank, “Exploring the Lebanese Wine Industry,” The Lebanon Brief, July 2013,
www.databank.com.lb/docs/Wine%20-%20blominvest%20july%202013 , accessed April 2, 2015.
11 BLOM Invest Bank, “Overview of Business Monitor’s ‘Lebanon, Food and Drink Report,’” The Lebanon Brief, December
2011, 753, www.databank.com.lb/docs/Food%20and%20Drinks%20-%20blominvest-7%20Jan,%202012 , accessed
April 2, 2015.
12 Nabila Rahhal, “It’s All in the Grape,” October 14, 2014, Executive Magazine, www.executive-magazine.com/business-
finance/business/wine-its-all-in-the-grape, accessed December 18, 2014.
13 “Analysis of Lebanon’s Food Market (2009-2013),” op. cit.
14 Nabila Rahhal, “In Flavor of Arak,” October 16, 2014, Executive Magazine, www.executive-magazine.com/business-
finance/business/flavor-arak, accessed December 18, 2014.
15 Nabila Rahhal, “Vodka — Lebanese Style,” November 12, 2013, Executive Magazine, www.executive-
magazine.com/society/j2-vodka-lebanon, accessed December 18, 2014.
16 Nabila Rahhal, “Raise Your Spirits,” February 19, 2015, Executive Magazine, www.executive-magazine.com/business-
finance/business/raise-spirits, accessed April 2, 2015.
17 Jallab is an Arabic slang word that means something that attracts or brings people to it.
18 The drink would be obtained by diluting the syrup with water in a glass, then adding crushed ice and a handful of raisins and
pine nuts.
19 “RTDs are pre-mixed or prepared beverages, in which beverage alcohol is combined with fruit juice or other liquids to create
the equivalent of what a bartender may be asked to prepare from scratch. The percentage of alcohol by volume in an RTD
usually mirrors that which the bartender would use. RTDs typically contain between 5 per cent and 8 per cent alcohol by
volume. Most RTDs have a white spirit base, though other spirits and even wine and malt are sometimes used.” Kirkwood
Diamond Canada, “Ready to Drink,” www.kirkwooddiamond.com/en-ca/suppliers/readytodrink.aspx, accessed December 15,
2014.
20 “Small Wins in Industry,” March 1, 2004, Executive Magazine, www.executive-magazine.com/business-
finance/business/small-wins-in-industry, accessed December 19, 2014.
21 Taurine is an amino acid that supports neurological development, it is regularly used as an ingredient in energy drinks as
it is suggested that taurine supplementation may improve athletic performance.
22 Michael Karam, “Coming In from the Freez,” June 1, 2006, Executive Magazine, www.executive-magazine.com/business-
finance/business/coming-in-from-the-freez, accessed December 19, 2014.
23 Rahhal, “Out of Spirits,” op. cit.
24 S.E. Ferreira, M. Tulio de Mello, S. Pompeia and M.L. de Souza-Formigoni, “Effects of Energy Drink Ingestion on Alcohol
Intoxication,” Alcoholism: Clinical and Experimental Research, 2006, 30(4), pp. 598–605.
25 GCC Countries include Saudi Arabia, the United Arab Emirates, Oman, Bahrain, Qatar and Kuwait.
26 “Saudi Arabia,” CIA World Factbook, www.cia.gov/library/publications/the-world-factbook/geos/sa.html, accessed
December 23, 2014.
27 “Country Report: Soft Drinks in Saudi Arabia, 2014,” February 2015, Euromonitor International,
www.euromonitor.com/soft-drinks-in-saudi-arabia/report, accessed April 2, 2015.
38
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28 Investment Development Authority of Lebanon (IDAL), Agrofood Fact book
www.investinlebanon.gov.lb/Content/uploads/Publication/140604064750179~Agro%20Food%20Fact%20Book%202014 ,
accessed April 2, 2015.
29 Clementine Fletcher, “Snapp If You Don’t Want a Beer,” June 21, 2012, Bloomberg Businessweek,
www.businessweek.com/articles/2012-06-21/snapp-if-you-dont-want-a-beer, accessed December 23, 2014.
30 Sasha Planting, “New War in Angola,” January 19, 2010, Bizcommunity.com,
www.bizcommunity.com/Article/7/87/43781.html, accessed December 23, 2014.
31 Approximately half of the population does not drink alcohol due to religious beliefs. BLOM Invest Bank, “Lebanese Beer
Market Yet to Brew,” The Lebanon Brief, Issue 833, Week of 19–24 August, 2013, pp. 12-14,
http://images.mofcom.gov.cn/lb/201308/20130829164039489 , accessed September 8, 2015.
32 Paul Cochrane, “Multiple Shades of Amber: A World of Opportunity Is Opening Up for Lebanese Beer Lovers,” October
15, 2014, Executive Magazine, www.executive-magazine.com/business-finance/business/beer-multiple-shades-of-amber,
accessed September 8, 2015.
33 Banque du Liban is the Lebanese Central Bank.
39
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