Internationalization of Business Operations - Case Study Example

Foreign Market Screening for Nestle Perrier: Malaysia and Bosnia and Herzegovina Name Institution Course Date Foreign Market Screening for Nestle Perrier: Malaysia and Bosnia and Herzegovina Internationalization of business operations have become a trend globally. The globalization phenomenon coupled with increased integration of regional and international markets have created business opportunities for big companies in foreign markets (Ebner, 2014). Today, large multinational companies are looking for business opportunities in the emerging markets to allow them to have access to new markets that they cannot get domestically due to factors such as increased competition and domestic market saturation. Nestle is one of the companies that has taken advantage of globalization and increased development of free markets to grow its business beyond Switzerland to become a global brand. Nestle is a Swiss multinational nutrition, food and drink firm founded in 1905 and but is currently has its brands sold worldwide (Nestle Waters, 2016). The company manufactures and sells different products, including breakfast cereals, baby food, snacks, ice cream, confectionaries, dairy products, coffee, tea and baby foods and bottled water among others. Although the company’s products are performing well in the global market, its Perrier brand bottled water brand has been struggling in recent years and the company is considering possibility of divesting it or moving the brand overseas where the brand can register good performance (Nestle Waters, 2016). The objective of essay is to perform a micro and macroeconomic scan of Malaysia and Bosnia and Herzegovina (BiH) to identify the best foreign market to move the Perrier brand so as to ensure growth and profitability. Overview of Nestle Perrier Brand Perrier is a French bottled water brand acquired by Nestle in 1992 for $2.6 billion (Nestle Waters, 2016). Nestle acquired the brand a time Perrier was struggling not only in France but also in the foreign markets where the brand had reached. Nestle managed to transform the Perrier to a mineral-water brand with a huge market demand in the global market. The brand is manufactured from natural water obtained mainly from springs, which are them purified and carbonated before being packed in glass bottled of different sizes for distribution. Despite the good performance Perrier brand has posted in the past, this mineralized bottled water has been struggling in recent years, demonstrated by its falling sales and profitability (Nestle Waters, 2016). Therefore, as part of a strategy to save this brand, it becomes increasingly necessary for Nestle to identify an attractive foreign market to move this brand to ensure that it remains part of Nestlé’s brand portfolio. Macroeconomic Analysis Malaysia Malaysia is ranked one of the fastest emerging economies in the Southeast Asian region. The country’s capital is based in Kuala Lumpur and has a population of about 30.8 million people according to the latest population estimates. Malaysia was one of the poorest countries in the world in the 1960s and 1970s (The World Bank, 2017). However, through economic stimulus initiated by the Malaysian government, the country has transformed into a vibrant economy. In 2015, the Malaysia had a real GDP of US$296.2 billion, which makes it the third largest economy in Southeast Asian region. During the same year, the country had a per capita GDP of US$9,766.17. Malaysian economy has been experiencing a huge growth in the last decade and this has made it one of the most attractive investment destinations for multinational companies. From 2000 to 2012, Malaysia has recorded an average growth rate of 4.6%, which is one of the highest in the Southeast Asian region (The World Bank, 2017). Although Malaysia registered a negative growth in 2009 at the height of the global financial crisis, the economy of Malaysia picked immediately in 2010 recording growth rate of about 7.3%. In 2015, the country’s economy grew at 5% and analysts project the economy to remain stable in 2017 with a growth rate of 4% to 5% (Appaduray, 2017). In 2012, Malaysia was rated as Upper Middle income nation with a gross national income of US$8,770 per capita. By 2015, the country’s GNI per capita had increased to US$ 26,140. This is an indication that the number of people within the upper income class in Malaysia has been growing. As indicated in figure 1 below, the rising income among the Malaysian people has seen the consumption level of the population per GDP rise steadily. For instance, in 2009, the country’s consumption as a percentage of GDP stood at US$60,000 and this increased to US$66,000 in 2010, US$73,000 in 2011 and 78,000 in 2012 (The Star, 2017). The increased consumption is caused by the rising income level. Similar trend is seen with the household consumption pattern that has been rising steadily from 2009 to 2012 as indicated in figure 1 below. Source: The Star (2017). Unemployment The macroeconomic performance of Malaysia is also indicated by the level of unemployment. Malaysia used to be one of the countries with the highest rates of unemployment in the world in the last decades. However, the government has managed to address the problem as Malaysia is now rated among the countries with the least rates of unemployment in the world today. In 2016, Malaysian unemployment rates stood at just 2.9% (Heritage, 2017a). The low rates of unemployment in the country mean that the majority of Malaysians are in employment, which means low poverty level in the country. Inflation Inflation is an important economic indicator of the performance of an economy. Although Malaysian inflation rates rose to a historic high of 4.5% in 2008 at the height of the global financial meltdown, the government has been able to contain inflation to one of the lowest in the world. According to the Heritage (2017a) economic report, Malaysian inflation rate stood at 2.1%. Low inflation rates means that prices of commodities are relatively stable in the country and this is good from consumer perspective. The low inflation rate experienced in Malaysia is caused by a combination of factors that include decline in domestic fuel prices, expanding economy, increase in good conditions for supply of commodities, increase in employee wages, strong domestic demand, price controls by government and government subsidy measures. Exchange Rates The performance of the Malaysian economy is also measured by the country’s currency performance. According to trend analysis, the Malaysian Ringgit has been strengthening against other major world currencies, such as the dollar, pound and Euros. In 1998, the value of Ringgit depreciated badly from 0.4US$/MYR to 0.21US$/MYR during the Asian financial meltdown (Appaduray, 2017). The depreciation is said to have been caused by selling of MYR on speculations. This prompted the Malaysian government to initiate monetary policy measures to contain the falling Ringgit value against major world currencies. The monetary policy measures taken by the government paid off as by 2005, the value of Ringgit had appreciated to 0.34US$/MYR from 0.26US$/MYR the previous years. Since then, the value of Malaysian Ringgit has been appreciating a trend driven by increased ease of doing business, as the country now ranked by the World Economic Forum (WEF) (2011) at position 7 in terms of ease of doing business. Ringgit has also been appreciating because of trade surplus that Malaysia has enjoyed in the last decade. Bosnia and Herzegovina (BiH) GDP Growth Bosnia and Herzegovina (BiH) is a Southeast European nation that borders Serbia, Croatia, Montenegro and Adriatic Sea (The World Bank, 2016). The highly mountainous country with a population of barely 4 million people has emerged as one of the emerging economies in Southeast Asian region. The economy of BiH was adversely affected by the Yugoslavian War of 1992-1995. However, the economy has bounced back and has been recording remarkable growth in recent years. In 2015, the per capita GDP of the country was $10,492. In the same year, the economy of BiH grew by 2.8% though this marked a slight drop compared to 2015 where the GDP growth rate stood at 3% (Goldstein et al., 2015). Despite the slight decline in 2016, the economy is projected to grow at the rate of 3.2% in 2017. The growth that BiH has recorded in the last decade has transformed the country from being a low-income nation to an upper middle-income economy. Unemployment Unemployment is one of the major economic issues affecting BiH. According to the Heritage (2017b) report, unemployment in BiH stands at about 30.2%. According to Goldstein et al. (2015), more than two-thirds of youths in BiH are jobless. The high number of jobless people in the country means that the country is affected by high poverty levels. Despite this being the case, the government of BiH is implementing a number of economic stimulus that is expected to create more jobs for the population and to help tackle poverty in the country. Inflation Inflation is less of an issue in BiH. Analysis indicates that BiH has one of the least inflation rates as the country has been able to contain inflation rate to below 1% for quite some time. According to Heritage (2017b) report, BiH’s inflation for the year 2016 stood at -1%. This implies that the country did not record any increase in the prices of commodities. In fact, the negative inflation rate indicates that there was a general fall in the prices of commodities in the country, which is a good thing from the consumer perspective. Exchange Rate BiH uses Convertible Marka as its currency (The World Bank, 2016). The high investment flow into the country has seen the value of the Marka strengthen against world major currencies in the last decades. However, a slowdown in economic growth coupled with declining exports has seen the value of the country’s Marker depreciate slightly in recent years and is currently exchanging at 0.56 per the U.S dollar (Heritage, 2017b). Microeconomic Analysis of Bottled Water Bosnia and Herzegovina (BiH) Market Structure In economics, a market structure denotes the characteristics of a market, in terms of the number of sellers, buyer strengths and the degree of conspiracy among the existing sellers, forms of competition, ease of entry into and exit from a particular market (Myers & Tauber, 2011). There are different types of market structures, which include perfect competition, oligopoly, monopoly and monopsony (Myers & Tauber, 2011). Analysis of BiH’s bottled water market indicates that the market is perfectly competitive market. A perfectly competitive market structure is a market characterizes by many buyers and sellers (Myers & Tauber, 2011). There is a fierce rivalry among existing firms in BiH’s bottled water market because of the existence of many companies that compete for the limited market share. The major players in the country’s bottled water market include Sarajevski Kiseljak, which controls about 50% of total market share, Vitinka (17%) and Jamnica (13%), Ilidzanski Dijamant, Oaza, Planinski Biser and Leda (Euromonitor International, 2017). Competition among the existing firms in the industry is based mainly on quality as all charge relatively same prices. The threat of new entrants into BiH’s bottled water industry is low because the existing large firms have created a string barrier because of their economies of scale and the fact that the existing players have already established a strong brand name with strong customer loyalty because of first mover advantage (Myers & Tauber, 2011). Buyer power in BiH’s bottled water is weak. Although the country experiencing an increasing number of drinkers of bottled water, individual customers exert little pressure on companies (Foreign Investment Promotion Agency, 2011). However, the existing firms face significant pressure for large wholesalers, and retailers who buy bottled water in bulk. Supplier strength in BiH’s bottled water industry is low. Supplier strength is weak due to the fact that raw materials (spring water, sulphur and salt) use in the manufacture of mineral water is available in abundance and can be obtained from many suppliers in BiH (Myers & Tauber, 2011). This implies that bottled water manufacturers in the country have stronger bargaining powers for prices. The market, however, characterized by a lot of substitute products that consumers might take instead of bottled water (Foreign Investment Promotion Agency, 2011). Main substitutes include tap water, water from bore holes and streams, boiled and treated water, while some people use water dispensers instead of bottled water. Malaysian Bottled Water Market Structure Malaysian bottled water market is a perfectly competitive market. The market has many buyers and sellers. Competition for customers in the industry is strong although Spritzer Bhd has the lions share as it controls about 48% of total market share (Euromonitor, 2017a). Other major competitors in the market include Coca Cola (Dasani), Clean & Clear Water System SDN Bhd, Delcol Water Solution Sdn Bhd, MP Mineral Water Manufacturing SDN Bhd, and Ocean Mineral Water (M) Bhd among others (Euromonitor, 2017a). The threat of new entry into the Malaysian bottled water industry is low. The existing firms, such as Spritzer Bhd have created a strong entry barrier through long-established brand with strong brand presence. Additionally, the existing firms enjoy first mover advantage and economies of scale that enables them to produce at low cost, thus able to sell at relatively cheaper prices, which keeps new entrants at bay. Buyer power in the industry is weak, for individual buyers. Malaysia being an upper middle-income economy has many buyers of mineralized water because of their ability to pay. In 2016, Malaysian bottled water industry generated MYR543 million in sales and is projected to grow by 7% in 2017 (Euromonitor, 2017a). This indicates a huge demand for bottled water in Malaysia. However, individual consumers have less bargaining power over prices. Nonetheless, players in the industry face significant barraging power from large buyers, such as wholesalers and retailers, as well as corporate customers. Supplier strength in Malaysian bottled water industry is low. Supplier strength is weak due to the fact that raw materials (spring water, sulphur and salt) use in the manufacture of mineral water is available in abundance and can be obtained from many suppliers in BiH. This implies that bottled water manufacturers in the country have stronger bargaining powers for prices. Malaysian bottled water market is characterized by a lot of substitute products that consumers might take instead of bottled water (Euromonitor, 2017a). Main substitutes include tap water, water from boreholes and streams, boiled and treated water, while some people use water dispensers instead of bottled water. Determinants of Demand and Supply for Bottled Water in Malaysia and BiH The demand for bottled water both in Malaysia and BiH has been growing. There are a variety of factors that affects the demand for bottled water. The first major factor is health. Reports from Malaysia and BiH indicate that a large number of people are turning to the use of bottled water for health reasons. Many people are avoiding drinking raw water from tap for fear of contracting waterborne diseases, such as diarrhea, dysentery and typhoid (Johnstone & Serret, 2012). Income is another factor that determines the demand for bottled water both in Malaysia and BiH. In this respect, Doria (2006) observed that the majority of those who buy bottled water are the middle and high income earners with enough disposable income. Just a few of the low-income earners buy bottled water because of lack of enough disposable income to spend on bottled water. Class is other factor that affects the demand for bottled water in Malaysia and BiH. Bottled water is particularly associated with high class, luxury and wealth. For this reason, some people buy bottled water as a show of class (Ferrier, 2001). Additionally, price is a factor that affects demand for bottled water. The higher the price, the lower the demand for bottled water, though this applies for price sensitive customers. Other determinants of demand for bottled water include consumer tastes and preferences, education, age, and occupation (Doria, 2006). The supply of bottled water in Malaysia and BiH are affected by a number of factors. The most dominant determinant of supply of bottled water in both countries is the number of suppliers (Doria, 2006). As indicated previously, both Malaysia and BiH has many bottled water companies competing for the existing customers and this has created a huge supply of this commodity in both countries. Market of Choice The macroeconomic and microeconomic analysis above indicates that both Malaysia and BiH have attractive economic environment for bottled water. The economies of the two countries are growing as both now belong to the upper middle-income category. However, Malaysia presents the best choice for Nestle Perrier bottled water brand because the country has a higher demand for bottled water than BiH due to the high number of middle and high-income earners. Besides, Malaysia has very fewer jobless people than BiH which also makes Malaysia more favorable for Perrier brand than BiH because joblessness determine income of individuals which is a major determinant of demand for bottled water. Conclusion The macroeconomic analysis indicates that both Malaysian and BiH’s economies have been recording remarkable growth in recent years. Both countries are currently rated as upper income countries because of the strong growth of the two economies coupled with the rising number of middle and upper income earners. However, whereas BiH continues to struggle with high unemployment rates, Malaysia has very low rates of unemployment. Microeconomic analysis indicates that the Malaysian and BiH’s have similar market structures as both have perfectly competitive bottled water markets with many players, low buyer and supplier strengths, low new entry threat but with many substitutes. Nonetheless, Malaysia has a more favorable market for bottled water than BiH because of high economic growth, high number of high and middle-income earners and experiences a growing demand for bottled water. References Appaduray, A. (2017). Malaysian economy to register steady growth in 2017. Retrieved from http://www.theedgemarkets.com/article/malaysian-economy-register-steady-growth-2017 Doria, M. D. (2006). Bottled water versus tap water: understanding consumers' preferences. Journal of Water and Health, 271-276. Ebner, H. (2014). Reasons for the internationalisation process of companies. Berlin: GRIN Verlag. Euromonitor. (2017a). Bottled water in Malaysia. Retrieved from http://www.euromonitor.com/bottled-water-in-malaysia/report Euromonitor International. (2017b). Bottled water in Bosnia-Herzegovina. Retrieved 2 from http://www.euromonitor.com/bottled-water-in-bosnia-herzegovina/report Ferrier, C. (2001). Bottled water: Understanding a social phenomenon. Ambio, 30(2), 118-119 Foreign Investment Promotion Agency. (2011). Bosnia and Herzegovina beverage industry. Retrieved 2 from http://www.ekonomi.gov.tr/portal/content/conn/UCM/uuid/dDocName:EK-210020 Goldstein, E., Davies, S., & Fengler, W. (2015). Three reasons why the economy of Bosnia and Herzegovina is off balance. Retrieved from https://www.brookings.edu/blog/future-development/2015/11/05/three-reasons-why-the-economy-of-bosnia-and-herzegovina-is-off-balance/ Heritage. (2017a). Malaysia economy. Retrieved from http://www.heritage.org/index/country/malaysia Heritage (2017b). Bosnia and Herzegovina economy. 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Global competitiveness report 2011–2012. Geneva: WEF. Read More