Franchising Co-Op in the EU, Middle East and South Asia - Research Paper Example

Report on Franchising Co-Op in the EU, Middle East and South Asia Submitted to This report details the possibility and process of the Co-Operative brand rolling out to the overseas. It designs the business opportunities potentially suitable for the three countries they have chosen for the initial expansion. It explains in a formal and informal language the exact setting of the proposed expansion. Abstract This paper is an intensive research on the expansion of Co-Operative groups. It goes in detail of the themes and theories of such an undertaking making a big phenomenal move which would create significant changes in the economical and social aspects of the countries to where the organization is going to move. The study considers the areas such as firm’s objectives for the expansion, the forms of business the firm will initiate in those countries along with the mode of financing and the amount of risk involved in such an investment. It would also analyze the details of the profit margin and transfer to UK. Tax concerns are evaluated and the work load of UK employees on such an overseas investment is assessed in the paper. Franchising Co-Op in the EU, Middle East and South Asia 1.1 Introduction The Co-Operative is United Kingdoms consumer co-operative which managed to take up the Summerfield supermarkets in March 2009. The organisation has around 4.5 million members and 123,000 thousand employees covering all the different fields of the business. With such investments and achievements the Co-Operative has become the largest business owned by consumer in the world. Since 1992 the Co-Op has been UK’s biggest supermarket supporter of fair-trade. They sell widest range of fair-trade products which benefits producers in some of the world’s poorest countries such as East African countries (The Co-Operative). Co-Op is a multifaceted organisation with vision and mission at hand make the world a better place to live in. ‘The Co-operative is amongst the world’s leading businesses when it comes to taking up the challenge of combating global climate change. During 2007, 99% of our electricity was sourced from good quality renewable (or green) sources, such as wind and water power. The Co-operative is committed to supporting the positive contribution that children and young people can make to their local communities. Thus, this year they are involving more than 100,000 of them with their community programmes. The co-op believes that when undertaken equitably, trade has an unparalleled capacity to lift people out of poverty and enhance the quality of lives across the world. However, business pressures and the demand for cheap goods can mean that workers in the developing world are often denied the basic living standards that most of the people in the UK take for granted. Co-Op recognises that our activities have an impact on international development, and the organisation believes that we can make this impact a positive one’ (The Co-Operative). 1.2 Expanding to the developing world Now, the world is faced with a financial uncertainty which drives the companies and business organisations to look forward to a definite strategy for a financial stability. This is where more and more firms find themselves in a need of taking their business to overseas. The firm then would be forced to draw up an international strategy. The reason why Co-Operative has looked for an expansion to the developing world has different reasons. 1.2.1 Success of Various Endeavours The Co-operative Group of businesses comprises: food, travel, banking, insurance, pharmacy, funeral, legal services, investments, online shop, electrical and beds. It has met with noteworthy success in the United Kingdom. Going global would allow the company to have different markets along with different base and dealings. The needs and demands can vary in a developing country. 1.2.2 Larger Profit from Different Economies Helen Deresky (2002) describes that the businesses often choose to go global in order to benefit from economies of scale. Increased competition can be termed as one of the benefits of globalisation. The Co–Op has decided to take advantage of the fact that a larger market will always provide a larger profit. 1.2.3 Resourcefulness and Cost Affordability ‘Another incentive driving businesses overseas is the availability of resources at lower costs than might be found domestically. For example, India has been known to offer information technology services and support for companies at a much lower rate than can be found in the United States. Both small and large businesses should take advantage of the lower cost of materials that can be found overseas’ (Jennifer Shook 2008). 1.3.1 The expected out Come and the Objectives of the Expansion The expansion will remain as on of the major steps to differentiate itself from others by concentrating more on the ethical side of the business. The organisation looks beyond the maximum profit in its urge to expand and grow. The firm in itself want be recognised as the world largest consumer owned firm and make the spirit of community investment in the developing societies and emerging economies of the world. The expansion will also pave way to promote the fare trade policies the firm has so predominantly brought up. The firm has sought and found on which decided to grow business out side the United Kingdom because there is where the opportunity is and there is where the growth. The confidence of being the ethical brand gives them the sense of a faster growth internationally. Innovation has become the order of the day in the European Union (Anna Piesiak 2006). It was just in the spirit of this innovative strategy that Co-Operative has decided to expand to countries like Poland, Qatar and India that is to Eastern Europe, Middle East and South Asia. 2.1 General and Economic Information of Qatar Qatar is a peninsula with a number of Islands in the west coast of Arabian Gulf. The total land area of Qatar is a little more than 11,000 square kilometres. According to the 2004 population census, Qatar had a population of 743000. Qatar provides massive aids to investment prospect due to the prosperity of the natural resources and the diversifying economy. ‘The Qatari government adopts a policy aiming at diversifying income resources and developing economic infrastructure. Specifically, the government expanded the exploration projects in oil and gas sectors and offered numerous incentives to attract foreign investors to carry out similar projects. The Qatari economy is one of the most rapidly growing economies in the world offering the international community a variety of world-class and cutting-edge products and services’ (Qatar Economic Review). With its strong and open economy, the government of Qatar is committed to international standards and practices. The country is concentrating on establishing business presence in the world community in order to leverage on globalization basis. Continuous improvements have seen as central to the country’s growth and advancement as summarized below: a) Qatar is a stable and pro-business country with clear vision and direct focus. b) Qatar has the highest GDP per capita income in the world estimated at US $68,467 in 2008. c) Qatar’s nominal GDP growth continues to reach record levels, averaging 25% over the past five years. d) Qatar has a strong trade surplus over the years with revenues mainly driven from oil and gas exports. e) Qatar is a country of creative energy, a leader in Liquefied Natural Gas (LNG) sector and one of the desirable investment destinations of the world. f) Qatar welcomes foreign participation in joint venture to invest in all the various sectors of national economy with 51% Qatari participation g) Qatar is rated with AA-long term and A1 short term on foreign and local currency sovereign credit by Standards and Poor’s, Aa2 with stable long-term outlook by Moody’s and A+ by Capital Intelligence in 2007. h) Qatar’s Equity Markets has been among the most exuberant in the Gulf Cooperation Council (GCC), accumulating significant gains since 2003. i) Positive growth rate in DSM is largely backed by strong Macro-Economic fundamentals and sound financial performance of corporate sector. 2.2 General and Economic Information of Poland Poland is situated east of Germany and borders to 6 other countries. In the north it has a coastline of almost 500 km., along the Baltic Sea. The biggest part of Poland is flat, only in the south there are hilly and mountainous areas (Next Destination). The population census on July 2000 reported that Poland has a population of 38.6 million people. The outside usually think of Poland as big but economically not so well to do country. “It was the only country in the European Union to register economic growth last year, at 1.2%. As Jacek Rostowski, Poland’s finance minister, likes to point out, GDP per head rose from 50% to 56% of the EU average in 2009—a record jump. Poland now has Europe’s sixth-biggest economy. Poland’s stodgy banks came late to the wild foreign-currency lending that proved so disastrous in such countries as Latvia and Hungary. Poland’s big internal market has cushioned demand. Stimulus measures in Germany have spilled across the border. But the country has also benefited from some canny political leadership. Poland has something rare in the EU and all but unique in its ex-communist east: a sensible centre-right government with a majority in parliament” (The Economist). However it sounds like Poland stands low on the friendliness f business. A recent study by the World Bank put the Polish tax system at 151st out of the 183 countries it surveyed. Poland manages friendly relations with all the neighbouring countries. ‘Poland has enacted economic policies that are encouraged the rapid privatization of state-owned enterprises and the dismantling of price and currency controls. Polands current growth is also fueled by an influx of foreign investment. To encourage such inflows, Rostowski has laid out a specific plan to adopt the euro as the countrys currency by 2015. While I have never been crazy about the euro concept, as opposed to a gold standard, the effort indicates to foreign investors a desire to control inflation. Assuming the block is able to stick together, the European Central Bank is considered a reliable enforcer of strict monetary policy. Polands zloty rapidly devalued after it was allowed to float, and though the rate of inflation is declining, it remains high. Eurozone membership will impose external discipline on the Polish government, even if Civic Platform loses power’ (Peter Schiff 2010). 2.3 General and Economic Information of India ‘India is located in south Asia and is often called a subcontinent. The Himalayan ranges crown the northern boundary of India. India is bounded on the north by Afghanistan, China, Nepal, and Bhutan; on the east by Bangladesh, Myanmar (formerly known as Burma), and the Bay of Bengal; on the south by the Palk Strait and the Gulf of Mannar (which separates it from Sri Lanka) and the Indian Ocean; and on the west by the Arabian Sea and Pakistan. India is divided into 28 states (three of which are recently formed) and 7 Union Territories. New Delhi is the capital of India and one of its largest cities. India is the largest democracy in the world, the seventh largest country and the second most populous. India is a picture of diversity seen in her people, culture, colourful festivals, dress and costumes, religions, flora and fauna and varying landscapes. Indias history dates back to the Indus Valley civilization of about 2500-1700 BC’ (Trinetra Tours). “India’s economy has been one of the stars of global economics in recent years, growing 9.2% in 2007 and 9.6% in 2006. Growth had been supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real estate boom, and a flourishing capital market. Like most of the world, however, India is facing testing economic times in 2008. The Reserve Bank of India had set an inflation target of 4%, but by the middle of the year it was running at 11%, the highest level seen for a decade. The rising costs of oil, food and the resources needed for India’s construction boom are all playing a part” (Economy Watch). There has been a increase of 7$ plus in India’s financial system for last decade. Even then scarcity lessening is a major dispute in India as the 1.1 billion population of India is a society based on the farming and natural elements are very often. “Structural transformation that has been adopted by the national administration in recent times has reduced growth constraints and contributed greatly to the overall growth and prosperity of the country. However there are still major problems around federal vs state bureaucracy, bribery and duty that require addressing. India’s public debt is 58% of GDP according to the CIA World Fact book, and this corresponds to another challenge. During this period of stable growth, the performance of the Indian service sector has been particularly significant. The growth rate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the same period and is now 29% of GDP. Agriculture is 17% of the Indian economy. Growth in the manufacturing sector has also complemented the country’s excellent growth momentum. The growth rate of the manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The storage and communication sector also registered a significant growth rate of 16.64% in the same year. Additional factors that have contributed to this robust environment are sustained in investment and high savings rates. As far as the percentage of gross capital formation in GDP is concerned, there has been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross rate of savings as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same period” (Economy Watch). 3.1 Doing Business in the Proposed Countries When entrepreneurs draw up a business plan and try to get under way, the first hurdles they face are the procedures required to incorporate and register the new firm before they can legally operate. Economies differ greatly in how they regulate the entry of new businesses. In some the process is straightforward and affordable. In others the procedures are so burdensome that entrepreneurs may have to bribe officials to speed up the process or may decide to run their business informally (IFC). The IFC report points out that it takes only six days to start a business in Qatar. Qatar also ranks well in the indicators for dealing with construction permits (27th) and closing a business (31st). Globally, the country was placed second for its taxation regime, but finishes in the bottom half of the rankings for obtaining business credits and contract enforcement (Press release on IFC report). IFC reports shows Qatar ranked at 39 on the ease of doing business while India stays way down at 133 and Poland at 72. In the same way Qatar seems to be the easiest place to start a business ranked at 68 by the IFC, while Poland looks to be easier than India at 117, when India stays at 169. From our choice of three countries Qatar sounded as a country which easily welcomes the entrepreneur as it only gives a hard time in providing a credit for which Qatar stands at 135th out of the 183 countries the IFC has reported. Where as, India seems to have been a hard work for entrepreneurs, in spite of all the promotions the government has been doing to attract the overseas investments. Poland is much easier on providing a credit to the investor than India who stands at 30th against Poland who remains very viable at 15th position. 3.2 Taxes and Interests India has a prevailing corporate tax rate of 40% while Poland and Qatar have 19 and 10 per cent respectively. Qatar and India have the lowest income tax rates of 10 per cent with the highest being 30% and 35% respectively. At the same time Poland has imposes an income tax of 18% and 32%. Qatar does not charge any VAT while India collects 12.5% of VAT on non-essentials against the 22% VAT charged in Poland. Poland has the lowest interest rates of 3.5, where as India is a little higher on interest rates with 4.75% while Qatar has highest annual interest among the three nations with 5.5%. The inflation rates are 15.10%, 13.51% and 3.30 percent respectively in Qatar, India and Poland. The exchange rates against British Pound are usually between 65-75 Indian Rupees, 5.94 Qatar riyals and 4.49 polish zloty. Indicator Poland India Qatar Payments (Number of years) 40 8 1 Time (Hours Per) Year 395 17 36 Profit Tax (%) 173 945 0 Labour Tax and Contributions 21.9 9 11.3 Other Taxes 3.3 20 0 Total Tax Rate (%Profit) 42.5 960 11.3 As mentioned earlier, India does not impose a VAT on essential commodities. While petroleum product, Tobacco, liquor …etc. attracts an increased VAT rates depending on the states, 1% of VAT is charged on bullions and precious stones and 4% on industrial inputs, capital goods and items of mass consumption. A 12.50% of VAT is imposed on all the other commodities. All these three nations have the potential to hold retail out puts for the Co-Operative with a centralised administrative process back in UK. These countries encourage fringe investments with more than 50% shares kept in the country itself. The investment would be faced with little risk in Poland as the country gives a 100per cent welcome support to the couture of the company. The labour cost can be highest here among the three countries but they would all be natives. As far as Qatar is concerned the labour force will be mostly of foreign nationals for retail out let, at the same time the legal status of the work force would easily and timely processed. Political uncertainties, cultural disputes and lagging of legal procedures would be the hurdles to foresee in India. Evading such issues will depend on choosing the right partner and location for the launching. INR is the currency to be used in India, while Qatar Riyals and polish Zloty are the currency to be used in Qatar and Poland respectively. All three countries transfers money with limited restrictions. 3.3 Employment India has one of the most formidable work forces in the world. The work force of India is growing at the rate of 2.5 per cent annually. Where as the employment rate is only growing at 2.3 per cent. Economic reforms have given a boost to the productivity and encouraged foreign investments to the country, but such movements yet create jobs in India. India’s Unemployment rate still continues to be 7.32%. Poland has an unemployment rate of 12.5 while Qatar has the least unemployment rate of 0.4%. 4.1 Conclusion Ethical values: ‘the Co-Operative is campaigning to free political prisoners in Burma’ ‘The Co-operative has joined the Votes at 16 Coalition to campaign for the voting age to be lowered to help boost democratic and parliamentary renewal in the UK and energise young people to better engage in society’. ‘Co-Operative’s campaign to stop Toxic Fuels expansion aims to raise awareness of an emerging global trend to extract oil from unconventional fuels, such as tar sands and shale oil. Such exploitation threatens global efforts to avoid dangerous levels of climate change and risks local ecological disaster’. ‘With once common fish species such as common skate and Atlantic halibut now listed as critically endangered, our seas are in urgent need of protection. Co-Operative has been campaigning in partnership with the Marine Conservation Society for a strong Marine Act, including a duty to introduce a network of marine reserves. On Thursday 12th November this Act became law. Now were asking you to vote for where you want reserves to be sited’ (The Co-Operative). The above statements are only examples to prove that the Co-Operatives observe and they are flexible in their ethical values respecting the society at large and the culture of the community where they belong to. Closely analysing the economies of the three countries, the first inclination is that the economic situation seems to be stable. These countries have in fact risen according to the circumstances as far as the economy is concerned to innovate and involve so they must be a place were the investors would prosper with limited risk. Black Hutcheson (2008) suggest that when the city can demonstrate the will and ability to solve its own financial problems and gets its fiscal house in order the greater the support, understanding, and encouragement it will receive from its taxpaying citizens, and the greater the potential for strategic cooperation with other levels of government. It would also lead to the fact that the city is achieving a financial stability. These countries also have demonstrated the stability in their economic ventures. Rest of the factors seems conducive for investment References Anna Piesiak (2006). Meeting the Innovation Challenge in the European Union: Recommendation for the new member states; Demos Europa; Centre For European Strategy. Black Hutcheson (2008). For Fiscal Stability and Economic Prosperity – A Call to Action. Final Report, City of Toronto, Ontario. Economy Watch (nd) Indian Economy Overview; Stanley St Labs http://www.economywatch.com/indianeconomy/indian-economy-overview.html Helen Deresky (2002). Global Management Strategic and Interpersonal: Prentice Hall Publications IFC (2009) Doing business in Qatar 2010. The international Bank of Reconstruction and Development: The world Bank Jennifer Shook (2008) Global Business Expansion: International Trade http://globalization.suite101.com/article.cfm/going_global Next Destination (2010) Travel through Europe and Africa with Elisabeth and Teije http://www.havetravelfun.com/poland/poland-information.htm Peter Schiff (2010) Poland’s Economy is No Joke; ETF Daily January 17, 2010. Qatar Economic Review (2010) Qatar Exchange: World Economic Outlook, IMF, EIU http://www2.dsm.com.qa/pps/dsm/portal/Pages/DSM_About_QatarEconomy The Co-Operative (nd). We are UK’s Most Ethical Brand: Co-Operative group limited. http://www.co-operative.coop/mostethicalbrand/ The Economist (2010) Poland’s Strong Economy: Horse Power to Horsepower The Economist Print Edition; January 28, 2010. Trinetra Tours (nd). Destinations India: A journey Through the Minds Eyes http://destinationsindia.com/india/index.html Read More