Coffee & Bytes in India - Case Study Example

 Coffee & Bytes in India To study the decision of Coffee & Bytes (a US-based international coffee chain) to enter India, a developing economy, a study of the international business environment was undertaken. The study was conducted through available literature from reliable sources. The study found that there are several international players in the food chain industry having a string presence in India. Nevertheless, there is ample scope for new entrants as the growth potential is high. FDI in this sector is limited by the Reserve Bank of India rules. In any case, joint venture is advised as the mode of entry because this mode ensures local assistance and knowledge. Corruption follows FDI but these are issues that have to be taken in the stride. Labour laws too are stringent in India although reforms could make the work environment more congenial. India offers absolute and comparative advantage in this sector and the risks are low. Cultural differences do exist between the two nations but since most international chains in India are US-based and have achieved success, there is likelihood of Coffee & Bytes also succeeding in its venture. 1. Introduction A multinational Corporation based in the US – (Coffee & Bytes) – is looking for overseas expansion. It has presence in a few developing nations such as the UK and Italy and is now seeking to open up in India. C&B specializes in different varieties of aromatic coffee and has budget snacks to go with it. It is based on the fast food concept like Café Coffee Day chains but operations are on a much lower scale. However their interest in India has arisen because of the growing consumerism in the country in the past decade. Global retailers are interested in India because of its geographic advantages, its versatile demographics and a growing economy with a stable government (Article Base, 2009). The prospects for food chains in India is high because unlike the developed countries where fast food is seen as functional, in India, the idea of eating out is still aspirational (Mitra, 2009). Eating out in India is still a family activity and family entertainment. The demand for fast food in India is growing as more nuclear families have come up and look for fast readymade food (Kulkarni & Lassar, 2009). However, the local government has been trying to promote healthy eating and hence the multinational chains have been alerted. In view of the prospects and the challenges in the food chains in India, C&B needs to study the international business environment which is influenced by the micro and macro policies of the nation. Even though internationalization has become a regular practice there are still significant economic, legal and cultural barriers to trade and capital flows. 2. National Business Systems 2.1 India – country background India is a rapidly emerging global economic power with a population of 1.03 billion (Pick & Dayaram, 2006). It is creating its own version of globalization and they are becoming more influential on the world stage. As its economy evolves, the political and economic situation would impact how foreign firms enter and operate in India. 2.2 Economy The economy of India is the fourth largest in the world with a Gross Domestic Product (GDP) of US $ 3.63 trillion (Nation Master, 2005). At the end of the first quarter of 2005-2006, India was the second fastest growing economy in the world with the GDP growth rate of 8.1 percent. The country’s economy is diverse and services are the major source of economic growth in India. Today India is a mixed economy combining features of capitalist market economies and the socialist command economies. Thus it has a regulated private sector and the public sector controlled by the government. The economic reforms in India has taken place at a fast pace because the growing middle class favour liberalization and tightening of fiscal deficit (Mohan, 2006). This strengthens the economy because as deficits fall, the private savings can be chanelized into the private sector. 2.3 Political It is generally believed that democracy does not survive in poor countries but India is an exception to that (Rachman, 2009). The US is building a new relation with India, to some extent to counter balance authoritarian China. Thus the US-India trade relations have an advantage, and in fact they are even developing common values. Nevertheless, India is a major power with its own interest. While democracy has given India a deep and unshakable stability, India still faces threats to its internal stability. India demonstrates culture power and growing wealth but at the same time the threat of terrorism is also severe. However, the political stability of the Indian government is evident from the relative strength of the economic which did not crumble during the recent global financial crisis (Anonymous, 2009). Liquidity in the country has improved and there is improved funding for trade. 2.4 Labour laws The labour laws in India are stringent and it has been found that if reforms in labour laws could increase the employment level. Flexible labour laws can help improve the work environment in the food chains that operate in India. All the labour laws are contained in the Shops and Establishments Act (SEA), which is a state legislation and provides all information the hours of employment, the leave, working condition and the pay scales (Amin, 2008). 3. International Food chain industry in India Multinational companies have entered the food value chain in India. International restaurant chains such as McDonalds, Pizza Hut, Dominos, Coffee day, and Qwiky’s are growing rapidly but the pace in food retail is much slower compared to the IT and the Pharma sector. There are no billion dollar players in the food industry in India compared to China and Philippines. However, as affordability has increased, the fascination for fast food in India has also increased. As of 2008, India had more than 900 fast food restaurants and coffee joints (Mukherjee, 2008). Café Coffee Day has nearly 440 stores and plans to increase it to 700 while Pizza Hut would another 40 units to their existing 135 outlets. Popular Italian brand for ice creams and desserts have also entered the Indian market (BS Reporter, 2008). Within two years they have plans to have presence in about 25 cities. All the food chains are present in different formats such as kiosks at malls, airports, standalone stores/restaurants and large format stores. McDonald's revolutionized the food retaining and introduced India to service standards. The menu has to be localized to suit the Indian taste and culture and dietary laws (Kulkarni & Lassar, 2009). Plenty of local food retailers in India dominate the market and hence competition is intense. Since pricing is an issue in India, the target market has to be identified in advance. Growing fascination with fast food in India is evident from the growing sales that international chains such as McDonald's, KFC, Pizza Hut and Domino’s Pizza have experienced (Mitra, 2009). Food courts are packed to capacity at the shopping malls even if the retail stores are not. Despite this it is considered that the concept of fast food is still new to India, suggesting potential for new entrants in the market. KFC claims that average spending by customers has been steadily increasing. A large segment does not want to visit expensive restaurants which give an edge to the fast food chain sector. McDonald's plans to invest in about 140 new outlets in India, as the consumption has been growing, and the company sees huge potential in investment (PTI, 2009). The International business environment has changed according to Bhattacharya and Michael (2003) of Harvard Business Review. Entrepreneurship in emerging economies has exploded because of internal reforms. Capital has become cheaper and the government support is forthcoming. Hence the multinationals can no longer stick to the strategy they followed decades ago. Products and services have to be customized for the locals in India. Factors that have driven retail growth in India include rising incomes, urbanization, brand consciousness, shopping malls and the excessive use of plastic money or credit cards (UKIBC, 2009). However, there are certain challenges that the sector faces. These include multiple licenses required to set up a retail food chain. Real estate costs have gone up especially in the major metros in India and the food chains have to first establish in the metros before venturing into the tier-two cities. The labour laws in India are stringent and the working hours are constrained. India’s cultural diversity requires that the foreign investor must be aware of the local habits and preferences which imply that customization is essential to succeed in India. Competition from local food chains is intense. They are familiar with the local market and the local tastes which gives them an edge over the international food chains (Kulkarni & Lassar, 2009). The mass market in India is governed by their own set of preferences. Any new entrant in this sector has to understand the consumer market. The investor has to understand the consumer needs, the ability of the people to buy, the buying motives and the purchase process. Home delivery service concept is also picking up in India. 4. Factors influencing International business 4.1 Mode of entry The international food chain sector in India is a mature sector with too many players but there is still room for new entrants. Nearly all the international food companies have entered India through joint venture due to government restrictions on FDI in this sector. Besides, joint venture gives the investor access to local knowledge and work practices. Dunning’s eclectic paradigm – the OLI – ownership, location and internalization paradigm guides the investor in the entry mode (Habib & Zurawicki, 2002). The O and I advantages are based on the firm-specific resources and capabilities and the reduction in transaction costs. The location of the FDI is driven by certain factors such as the markets, resources, efficiency, and strategic assets. Hence the variables have to be identified before investment in a particular market. The variables that need to be considered for selecting the location has to be more than just the transaction cost explanations. The cultural context and the institutional context variables have also to be considered as transaction cost variables (Brouthers, 2002). The institutional context is important because it refers to conditions that undermine property rights and increase risks in exchange. The cultural content is important because they influence the managerial costs and the uncertainty evaluation in target markets. According to the transaction cost theory the cost of finding, negotiating and monitoring the actions of the potential partners influences the entry mode decision. When these costs are low firms are keener on the location. Hence firms that consider the transaction costs, the institutional and cultural contexts perform better. Infra-structure for storage and transportation is lacking in India and hence the supply chain would have to be efficiently managed (Kulkarni, 2009). Both the upstream and the down stream supply chain would have to be covered efficiently. Local sourcing from farmers and suppliers would have to be adhered to as per Indian government’s rules, regulations on food, health and hygiene. 4.2 National cultures and sub-cultures Geert Hofstede has studied how culture affects relationships and work place practices. The four dimensions of culture have managerial implications and also influence the relations between the host country and the investor country in international business. The US is a country with high individualism (Itim, 2009) where individual efforts have to be rewarded and the individuals must also be able to contribute to setting and achieving the organizational goals. India on the other hand, scores low on individual and hence they prefer to receive instructions. The right leadership is needed to guide the people through. India scores high on uncertainty avoidance which means that the management systems have to reduce the risks by systematic planning whereas in the US with low uncertainty avoidance, planning and sharing is more informal as the anxiety among the workers is less. High power distance in India indicates inequality of power and this is accepted as a cultural norm. In the US there is greater equality between societal levels including between the government and the organizations. When the power distance is low the management systems can be decentralized. As far as the masculinity is concerned both countries have gender differentiation of roles. Nationality of a company predicts its financial leverage. National cultures affect capital corporate structures. Countries with higher scores on the cultural dimensions of ‘conservatism’ have lower corporate debt ratios. The effects remain strong even when the differences in the economic performance, legal system and financial institutions are taken into account. Culture according to Hofstede and Bond has been defined as the “the collective programming of the mind that distinguishes the members of one category of people from those of another. Culture is composed of certain values, which shape behavior as well as one’s perception of the world” (Chui, Lloyd & Kwok, 2002). Culture influences the values which in turn affects the attitudes and the behaviour. Culture differences in joint ventures can influence the outcome of the joint venture (Pothukuchi, Damanpour, Choi, Chen & Park, 2002). Organizations from different nations differ in fundamental values but organizations within the nation only differ in organizational practices. The organizational culture and management practices should be nested in the national culture in joint ventures for high performance. 4.3 Work place practices India’s cultural values differ from other countries. Within the country there are several sub-cultures but these only cause differences in organizational practices. The four dimensions of culture as her Hofstede also affect the work place performance. As values and institutions have evolved, the corporate governance of firms has also changed. Foreign firms have done better than local firms because of access to capital, technology and marketing support and because they carry a global brand name (Gollakota & Gupta, 2006). Globalization is the major driving force in the changing face of India. This has led to disembeding of culture and the society which are being replaced by heterodoxical contingencies (Pick & Dayaram, 2006). The Indian society is attempting to adapt the western-style structures and technologies into their traditional lifestyle thereby creating risks. Consumerism and materialism is the outcome which is creating a deeper divide between the elite and the masses. Culture and religion play a very important role in international business and especially in food sector. Burger King had used the image of Goddess Lakshmi, the deity of wealth in India, seated atop a meat sandwich, in one its advertising campaigns (Jha, 2009). This demonstrates lack of cultural religious sensitivity and the company had to tender an apology. 4.4 FDI in Retail sector FDI in the retail sector has been allowed only since 2006 up to 51 percent with prior government approval but FDI restrictions have not deterred the international players from entering the Indian market (Article Base, 2009). Franchising is the easiest route to enter India as it allows the firm to expand without investing its own capital. This enables firms to curb local opposition and benefit from local expertise. Most fast food chains such as McDonald’s and Pizza Hut have entered India through this channel. RBI imposes conditions that the franchisor has to either make direct investment or provide technical assistance to the franchisee. Pizza Hut has mage significant investment in India. McDonald’s entered India in 1996 under joint venture with 50-50 partnership with two Indian businessmen (Kulkarni & Lassar, 2009). The international food chains are forced by Government regulations to operate as monitory partners in Indian companies and policy change is not envisaged in the next two years (Anonymous, 2008). India’s fast food segment is worth more than $225 million according to India’s Ministry of Food Processing Industries. It is difficult to match the popularity of Indian food chains such as Nirula’s. India remains predominantly a vegetarian community even with westernized culture pervading the lifestyles. One-thirds of the Indians are largely vegetarian and 97% of Indians like to eat in groups. The government controls have relaxed and the food chains stand to gain as incentives have been granted to cold storage and refrigeration companies (Sindhu, 2009). These incentives such as tax reduction in investment in such facilities would encourage the food chains to offer better services and augment FDI in India. Since the logistics and the transportation costs would reduce, it will reflect in the overall consumer prices. 4.5 Corruption Corruption in the host countries has become common when FDI inflow starts and the contact between the less corrupt and the more corrupt countries start (Habib & Zurawicki, 2002). Corruption does not deter FDI as the emerging nations continue to attract FDI. Corruption in FDI creates bottlenecks, gives rise to uncertainties and raises costs. Corruption extends to the extent of providing some companies with preferential access to profitable markets. When the level of corruption in two countries differ, it becomes difficult for them to deal with the situation mutually. 4.6 Controls and procedures Group affiliation is better in emerging markets such as India. The transaction costs theory posits that the optimal structure of a firm depends on its institutional context. In the US the institutional context is characterized by well-functioning capital, labour and product markets whereas in emerging markets like India the characteristics of the financial markets range from inadequate disclosure and weak corporate governance and control (Khanna & Palepu, 2000). Securities regulations are weak and their monitoring inefficient. Market imperfections make it costly to establish a quality brand image. Thus, firms entering India would stand to benefit if they have a joint venture with established business groups because this would give them access to internal institutions and thereby mitigate external failures. Group structure reduces the cost of diversification. However, in ventures with business groups, conflicts between controlling family shareholders and minority shareholders are probable. Besides, the SMEs in India do not have the management skills, the internal process, and the political affiliations to generate benefits. 4.7 Absolute and comparative advantage Comparative advantage depends upon the relative differences in labour productivity resulting from differences in technology among nations (Fazeli, 2008). Some economists take the resource endowments as the basis for comparative cost differences among nations. Absolute advantage not only regulates domestic transactions but also rules international trade. India produces several varieties of coffee including organic coffee. The industry is characterized by small holdings situated in the southern part of the country. The organic coffee sector is not well, organized and the small holders do not possess the marketing skills (India Coffee, 2009). Thus, if C&B enters India with its coffee chain, it would have to bring about changes in the supply chain of coffee beans production and the logistics. 4.8 Exchange rates risks Rupee is the only legal tender accepted in India which is divided into 100 paise and the highest currency note is the 1000 Rupee note. India follows the floating exchange rate since 1976 when the value of the rupee was pegged to a basket of currencies fully controlled by the Reserve Bank of India (Nation Master, 2005). Since liberalization the rupee has become fully convertible on trade and current account. Restrictions on foreign exchange for foreign business transactions, travel and education has been removed. In recent years its value has depreciated with respect to most currencies with the exception of the US dollar. Thus, in conversion the foreign franchisor runs the risks of losing if the rupee becomes stronger. 4.9 CSR & Ethics Along with the coffee, C&B would have to serve some snacks which have to be a mix of vegetarian and non-vegetarian items. While serving or even while purchasing the non-vegetarian fillings, certain ethical and sensitive issues would have to be looked into. Animal welfare is a much talked about issue in India and the food chain industry has to be cautious of animal slaughter. Multinationals have to be environmentally friendly when operating in other nations and must contribute to the society and the environment in some way. They also have to ensure that their waste management system does not add to the environmental degradation such as global warming, ozone destruction, depletion of mineral resources and the natural habitats (Kulkarni & Lassar, 2009). Fast food chains have been accused of contributing to the destruction of ecological balance. Thus C&B would have to come with some strategy to combat such issues and contribute towards greener environment. Nutrition and health food habits have to be maintained. Gradually as consumerism has taken over India, healthy and nutritious food is being replaced by mass-produced, processed food (Kulkarni & Lassar, 2009). This has given rise to the concept of quick meals and in the process serious debates on health food has ensued. These macro factors are likely to affect the C&B entry into India. Food that is high in fat, sugar and salt has to be controlled. 5. Conclusion The food chain segment in India is mature and hence the entry of C&B in India could be smooth. However, the US chain has to take into consideration certain issues. The mode of entry that is advised is through joint ventures which ensure local knowledge and assistance. Initially, C&B should enter the metro cities or bring the service to the urban population as the mass market in the rural areas is not yet ready for this concept. FDI inflow in the retail sector is still limited. Corruption following FDI would have to be contained. National culture is India differs widely from the culture of the US and hence it is advisable to have the local people at the outlets. Technological assistance has to be provided from the US principals. Transaction costs in entering India would be minimal but C&B would have to comply with the local regulations on the health and nutrition. C&B should try to gain competitive advantage through discharging their CSR responsibilities towards the society and the environment. The growth prospects are phenomenal in this industry as most international food chains have massive expansion plans for the next 5 years. References Amin, A. (2008). Labor regulation and employment in India’s retail stores. Journal of Comparative Economics. 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