Managing International Trade of Roshen - Case Study Example

M018LON MANAGING INTERNATIONAL TRADE: BOARD PAPER Paper Reference: ID No. Paper: DD/MM/YYYY of Paper: Board Paper of ROSHEN onexpanding export strategy to UK For End of Module Assessment ************************************************************************************************ Brief Synopsis of the Issue The proposal to board of directors in ROSHEN is driven by the opportunity created in current UK confectionary market. In the first half of 2014, retail value sales were falling while the overall market was stagnant (Nieburg, 2014). On the behaviour of UK consumers, they tend to eat more quality chocolate as an indulgence in increasing concerns on health and wellness (Euromonitor International, 2014). At the same time, situation on national market drives UK consumers to lower priced products. On competitive confectionary landscape, circumstances of rising input costs on cocoa forced its main actors to increase their prices on chocolate (Nieburg, 2014). Due to the mentioned internal problems within UK market, the presented report provides recommendation for ROSHEN to expand current export of its chocolate confectionary products on European market by including UK in it. Recommendation(s) As the largest firm in confectionary industry in Ukraine (Ukrkondprom, 201-), ROSHEN faces the need to turn its high productivity into offers to foreign customers. In general, exports commonly evoke increasing returns in production (Ciuriak et al., 2014, p. 9). Thus, the expansion on UK market is the key recommendation in developing ROSHEN export strategy. In this case, it is reasonable to advice corporate board of directors using direct strategy, since the company has experience and production forces on European market as a multinational enterprise (MNE). In fact, the direct involvement of ROSHEN in delivery process by creating its own logistics centres in EU is the key element of creating competitive advantage of cheap and quality chocolate on European market. Background While accessing new markets, it is crucial to evaluate the impact of different factors: diversification of exported products, threat of entry from new competitors, and the perspectives on the new market (Ciuriak et al., 2014, p. 3). On exact actors facing difficulties of foreign market, “new new trade theory” considers trade through investigating country’s growth and prosperity. Although, the assessment of its impact depends on the links between trade, innovation, and productivity of separate firms (Ciuriak et al., 2014, p. 2). In Ukraine, confectionary industry is among the key spheres of national market, meeting the demand of both domestic and foreign customers with total production capacity of 1 million tons per year (Ukrkondprom, 201-, p. 2). At the same time, country faced plenty of complications in its recent history, especially Chornobyl ecological disaster in 1986 and current conflict with Russia. Although, Ukraine is the member of WTO, which helps its national companies to bypass trade barriers in interactions with EU and attract investment directly from developed countries. Moreover, the founder of ROSHEN (Piotr Poroshenko) won recent elections of Ukrainian President. This a significant advantage for this company on domestic market, because it enables favourable results in negotiations of international regulations on confectionary trade. In fact, Candy Industry Top acknowledged the productivity of ROSHEN on the 20th rank (Roshen, 2015). Even though UK companies do not demonstrate these high results, resource dependency theory evokes the need to investigate ROSHEN’s access to all the necessary resources (Hessels and Terjesen, 2010, p. 208) in creating sweets for UK consumers. Even though Ukrainian confectionary companies increased the amount of its exports from 281 thousand tons in 2006 to 423.2 thousand tons in 2013, European market hold only 5.6% percent of this amount (Ukrkondprom, 201-, p. 4).In this activity, ROSHEN is dependent upon other actors, meaning suppliers and distributors in European countries. Moreover, the type of product ROSHEN offers has specifics in marketing. In retail practice, impulse purchasing still determines the amount of sales in chocolate confectionary (Euromonitor International, 2014). Thus, successful chocolate sales need cooperation with retailers to ensure that the product has profitable position on the shelf of supermarket. Finally, “institutional context” (Hessels and Terjesen, 2010) of formal relations between Ukraine and United Kingdom creates the background of trade policies for exporting and importing actions. In particular, “trade policy includes both measures imposed at the border, such as import tariffs and import quotas, and regulatory policies, such as standards, competitions policy, innovation and investment policies, and intellectual property rights” (Ciuriak et al., 2014, p. 12). In practice, confectionary products entering UK should contain small amounts of products of animal origin (POAO), like eggs, milk and butter (Food Standards Agency, 2015b). In this part, Food Standards Agency (2015b) provides more strict rules for non-EU members. Thus, specifics of ROSHEN production causes severe difficulties on crossing UK border, since the major suppliers for the company are not from EU. Notwithstanding, ROSHEN has already entered European market and has Klaipeda Confectionary Factory in Lithuania and Bonbonetti Choco Kft in Hungary (Roshen, 2015). Hence, corporation already has experience in meeting EU standards and certainly has all the main certifications to operate in EU countries. Arguments against the Recommendation(s) The main risk of entering UK confectionary market is that ROSHEN will not deliver quality confectionary to UK customers. This can happen if not to meet custom requirement of small amount of POAO in confectionary products. In this context, cranberry and extra milk ROSHEN chocolates fall under the restriction of EU Regulation (EC) 733/2008 on fruit of the forest that are suspended on radiation resulting from Chernobyl incident (Food Standards Agency, 2015a). Nevertheless, production line of Bonbonetti as ROSHEN’s brand in Hungary already offers cranberry dark chocolate to European consumers (Roshen, 2015). Furthermore, certain product lines of ROSHEN (like frozen confectionary and bakery) require extra costs on logistics (Pozar, 2001, p. 412). Thus, cross-border collaboration between Ukraine and its closest Western neighbours from EU facilitates further activity and certificating of the company on European market. However, this works only for chocolate confectionary that is not temperature sensitive and perishable. Furthermore, before entering UK market it is necessary to analyse the situation within the key confectionary competitors. Among the main risks of competition, Ciuriak et al. (2014) mention “extensive margins” responses as the necessity to adjust to current circumstances on market in terms of “the type and number of firms, products, and markets” (pp. 7-8). In UK confectionary market, powerful actors are Mondelez International, Mars, and Nestle which have shares of retail value 29%, 21%, and 15%, respectively (Euromonitor International, 2014). However, the overall situation on market and the necessity to increase prices on chocolate (Niebung, 2014; Euromonitor International, 2014) makes it possible for ROSHEN to enter UK confectionary market. Finally, there is a risk of increased distribution costs due to the long distance of exports to UK that are not common for ROSHEN’s European expansion. However, the reality of direct export strategy reduces the risks of unexpected costs on cooperation with foreign partners. Moreover, even the scenario of indirect export strategy may bring profits to ROSHEN. In Ukraine, milk chocolate costs less than 1 EUR (precisely, its price online is 16.5 UAH) (Roshen, 2015). The company packs milk chocolate in box containing 40 tablets. Thus, the price of one box that creates profits for the company is 660 UAH, or 27.5 EUR. If company decides to use DHL delivery of 200 tablets within Europe (from Hungarian or Lithuanian factory), it will sign an indirect ECCO Offset that will cost company around 125 EUR. In sum, chocolate tablet will cause profit if to put price 1.3 EUR on it. On average, British chocolate costs around 1.5 EUR, which makes ROSHEN able to enter the market as the cheap and quality confectionary competitor, while establishment of partnership with UK delivery companies will enable company to return the investments within direct export strategy. Arguments in support of the Recommendation(s) As the research conducted by Ciuriak et al. (2014) shows, firms using exports are greater in size, more productive, more skilled-labour-intensive and are able to pay more money for their employees (p. 7). In other words, enlarging current exporting for ROSHEN facilitates development of this company. In addition, recent situation for ROSHEN provides export expansion opportunities because of hard times on UK market and preferable situation on domestic Ukrainian market. On the one hand, ROSHEN as MNE obtains information on distribution costs, transport infrastructure, marketing investments, and behaviour of other MNE competitors (like Mondelez and Nestle) (Greenway et al., 2004, p. 1029). In addition, the type of unified standards ROSHEN creates in its logistics centers (Roshen, 2015) helps it support its ambition on selling quality products in its ethical decision-making. By caring about quality, ROSHEN also participates in charity activities (Roshen, 2015), which puts it on equal position in competition with other MNE competitors on UK market. On the issue of governmental impact, the fact that current President of Ukraine is ROSHEN’s founder eliminates obstacles of governmental indifference and facilitates corporate export strategy. It is preferable for the company, because Poroshenko cares of it by encouraging Ukraine to enter the EU. Thus, interests of this firm correspond with the overall foreign policy of Ukrainian government. Therefore, current situation in global politics includes the probability to develop cross-border collaboration between Ukraine and UK in a favourable for ROSHEN state. Implementation of Recommendations On the first stage of recommendation implementation, ROSHEN needs to sign contract with any delivery company (like DHL) on corporate partnership. The cheapest option is highly preferable, since the delivery is the most costly part of export. By that time, ROSHEN needs to negotiate with UK retailers on guaranteeing an equal place on supermarket shelves among the other competitors, because its confectionary has cheaper price. Then, returning of investments will depend on the ability of ROSHEN to base its own logistics centre and reduce the delivery price and custom barriers to minimum. On the latter factor, euro-integrating activity of current Ukrainian President is an advantage for the company not only on domestic but also on European market in general and UK market in particular. Signature and Date: Your full name and date of board paper (DD/MM/YYYY) List of References 1. Ciuriak, D., Lapham, B., and Wolfe R. (2014), Firms in International Trade: Trade Policy Implications of the New New Trade Theory [Online] available at: [23 June 2015]. 2. Euromonitor International (2014), Chocolate Confectionary in the United Kingdom [Online] available at [23 June 2015]. 3. Food Standards Agency (2015a). Foodstuffs with current European Union (EU) restrictions [Online] available at [24 June 2015]. 4. Food Standards Agency (2015b). Trade Information Sheet No 3: Confectionary products [Online] available at [24 July 2015] 5. Greenway, D., Sousa, N., and Wakelin, K. (2004) Do Domestic Firms Learn to Export from Multinationals? European Journal of Political Economy, 20(4), pp. 1027-1043. 6. Hessels, J. and Terjesen, S. (2008). Resource dependency and institutional theory perspectives on direct and indirect export choices. Small Business Economics, 34(2), pp. 203-220. 7. Markussen, J. and Venables, A. (1998), Multinational firms and the new trade theory. Journal of International Economics, 46, pp. 183-203. 8. Nieburg, O. (2014), UK chocolate sales rocked as consumers balk at price hikes [Online] Confectionerynews.com. Available at [24 June 2015]. 9. Pozar, J. (2001). Perishable Foodstuffs Within the System of Supply Logistics. Traffic Engineering, 13 (6), pp. 405-414. 10. Roshen (2015). About Us [Online] available at < http://www.roshen.com/en/> [25 July 2015]. 11. Ukrkondprom Association (201-), Confectionary Industry of Ukraine [Online] available at [23 June 2015]. Read More