Screening the Markets for Carlsberg in Russia and China - Case Study Example

A Report on Screening the Markets for Carlsberg in Russia and China Lecturer: The report looks at the prospect of introducing a Carlsberg brewery brand, to two economies, the high income economy of Russia and the middle income economy of China. The markets are studied extensively and market entry methodologies are proposed for the respective countries. General overview of the product Carlsberg is a world premium beer containing a smell of malt and hops and it also have a golden colour. It is generally a classic pilsner beer. Carlsberg is well proportioned and dry and also characterised by bitterness in its fine structure. This kind of beer is mostly used after a family meal or when friends meet for a party. There is a careful selection of the ingredients so as to allow the production of quality beer. The ingredient is mostly chosen from the female hop flowers that are unpollenated, Carlsberg famous yeast and malt from spring barley that are slightly roasted. Saccharomyces carlsbergenisis are finally brewed with water to produce the best taste of beer ever known all over the world. This beer contains the alcohol content of up to 5%. General overview of the Market share There has been a continuous adventure of market in Russia despite the poor performing economy in the recent past. There has also been kindness to foreign investors even though the government was cracking down alcoholism after it was found out that young people had indulged in drinking beer. Introduction of government regulations never stopped the growth of the market by almost 40% in 1990 where it became the market leader and their share prices tripled in 2004. In the recent times, the drinking habits of Most of the Russians have made the industry to be regulated by the government. Despite of these challenges, the market still has a lot of potentials. Many analysts have reckoned that Russia will be a world leader of beer and continuous increase in profits. Table of Contents Abstract 1 General overview of the product 3 General overview of the Market share 3 Table of Contents 4 Problem Statement 6 Cost of production of Carlsberg beer 6 Market Entry Modes for Carlsberg 6 Screening markets for iceberg beer 6 Market Entry Modes 8 Export 8 Licensing and Franchising 8 Joint Venture 9 Wholly Owned Subsidiary 9 Chinese Market 9 Discussion for China 12 Russian Market 13 Market Analysis for Russia and entire Europe 14 Conclusion 17 Reference list 21 Screening markets for iceberg beer Introduction The influence of multinational enterprises has been increasing a lot in our day to day lives. Many companies are trying to expand their presence by targeting more customers and to capture global markets for their companys products. The development of the markets leads to plenty of changes in the marketing strategy of these companies (Ball & McCulloch, 2004). There is a cut throat competition for these companies and hence more and more pressure is built in the company in order to remain in the market. The below thesis would throw light on the ways in which the multinational giants captures the international market. To analyze this scenario, take two markets namely China and Russia. Let us understand if the strategy to capture the emerging markets is in accordance with the OLI framework. We also would analyze any discrepancies between the FMCG industry and nature of the markets. The adaptation of strategy and its need to tailor few strategies seems to be important in case of emerging markets (Rugman & Collinson, 2006). There would be lots of obstacles that need to be handled with newer techniques. The markets would have lots of difficulties and these would mostly be due to the lesser spending power of the consumer. Moreover, people of lower strata would not be much concerned about the brand and they also would not be ready to shell out more money for the brand name. There would also be infrastructural related problems. Hence one must develop a proper strategy before they target developing markets. One may enter failures on the first few attempts to capture emerging markets. You could alter your strategy a bit in this case in order to capture such markets. In all the two above mentioned markets, let us assume a company situation in order to understand these strategies in a better way. Let us take the company Carlsberg for our study. Carlsberg would follow a different entry strategy in two different markets. The lessons learnt from the strategies of Carlsberg as well as the success and failure stories have been discussed in detail in our thesis. Problem Statement There are lots of strategies followed for different types of market and this thesis aims to provide with some important perception of various theories that are related to market entry (Ball & McCulloch, 2004). In case of emerging markets, we often restrict ourselves in analyzing single economy and hence the amount of literature is considerably lessened. The analysis is confined to the challenges of firms in dealing with emerging markets. Cost of production of Carlsberg beer The relative cost of producing the Carlsberg to the consumer is 70 % packaging, marketing and taxes. Marketing and packaging costs has been a challenge to most manufacturers of beer. Another cost of producing Carlsberg is cost of raw materials. Labour costs are extra costs that are incurred during the production of Carlsberg. Market Entry Modes for Carlsberg According to a study by Buckley & Casson (1998), there are around 15 to 20 modes to enter the market. These are further classified into five main classes and these are in conformance with the control of entrant and this has been increasing with increasing commitment and investment. Screening markets for iceberg beer Population Population has a role in the demand of goods and services. Supply of beer has undergone several changes in the recent with increase in production that tries to meet the demand of the growing population. Brewing companies are targeting countries with large population as this will increase the potential consumers of the products of the company. As for the iceberg company, the countries has large population is seen as source of potential market for its products. According to the market screening, countries like Palau, Nauru, Anguilla, Aland Island and Norfolk Island are not viable to be ventured into since it has the lowest population. Infrastructure Having realised that infrastructure has the greatest role to play in the international trade; countries with best infrastructure attract foreign traders to trade in their countries. It involves the intervention of the government through reforms and regulation especially telecommunication. From the screening of the markets, infrastructural barriers outweighs tariff barriers therefore countries with poor infrastructure attracts few investors into their countries with best infrastructure include; Switzerland, Hong Kong, Australia and Finland can attract most of the investors in their respective countries. Countries like Angola, Tanzania and Burundi have poor infrastructure therefore can attract few investors. Beer consumption per capital In the case of beer consumption per capita, any business venture that intends to open a new product line for its goods especially in a beer industry has to screen the market to get the best countries with the highest consumption. In this case, countries like Yemen, Afghanistan, Libya and guinea has the lowest consumption while countries like Russia, Moldova, Hungary and China are among the leading countries in beer consumption. Income effect Income of an individual nation or an individual affects the way one consumes as a result of purchasing power. When the income of a country increases, it also affects the currency and prices of goods. Therefore when income increases, consumption of normal goods also increases. In this case the company targets countries that have high income level that can increase the purchase power. Competition A competitive environment is found in the brewing industry where there is greater efficiency, asset utilization and flexibility critical to competitive advantage and sustaining margins. Given the wider variety of alcoholic beverages, consumers are least apt to stick to a single type or brand of beverage. The global production is slowly nearing 1.5 billion hectolitres per year especially in Africa, Eastern Europe, Asia, Middle East and Russia. They encompass the new growth markets. The United States has been overtaken by China to become the global leader in beer market. Taxes and custom duty According to foreign investors, consistency and credibility of the government’s are crucial just like statutory tax rates. Attracting new offshore investors happens through cutting of nominal corporate income tax rates. There is a continuous global shift towards indirect taxation where businesses encounters increasing challenges in attaining holistic compliance and greater pressure on cash flow and resources, thus improving businesses and reducing cost. Market Entry Modes Export There are two types of markets involved with it. A company would simply send its products from domestic market to a foreign market. A dealer in foreign market would sell these exported goods in their local market. A country would encourage exports as it is a good source of revenue for a company (Buckley & Casson, 1998). The system seems to be very simple and this does not require any kind of investment. This type of market is also known for its flexibility. The exporting company does not have much involvement in the marketing and the distribution of their products in their target market. Licensing and Franchising The technology is shared to the franchisee by the target company and they use the same techniques in the production. The foreign company gets paid by the franchisee for this knowledge and brand name sharing (Buckley & Casson, 1998). In such type of marketing, the franchisee is required to put in a good amount of investment in order to share the brand tag with a big company. Strategic Alliance Agreements are made between them in order to reach specific goals. There would be a combined effort between both the parties in knowledge and technology transfer (Buckley & Casson, 1998). The expenses and also the risk factor are also to be shared by both the parties. This type of marketing technique would involve a lesser upfront investment. Joint Venture This type of collaboration generally takes place by owning a subsidiary equally. This type of marketing would involve more contribution from the foreign company rather than from the local firm (Buckley & Casson, 1998). This would greatly benefit both the parties. Wholly Owned Subsidiary This can also be considered as a green field venture in which responsibility is taken from building production to distribution by the venture itself. A large amount of investment is expected from the entrant, since everything needs to be built from scratch (Buckley & Casson, 1998). In this type of marketing, the foreign company would have full control on the venture. Since it is a green field investment, it is also not fair to expect full knowledge of foreign market from the incumbent. Hence the company should take their own initiative without depending much on the incumbent’s knowledge of foreign market. Chinese Market China has 1.3 billion populations which are spread out across 3.7 million sq-mi (square miles). To add to that, China is abode to around 650 cities (Jiang, 2003). Around half of these cities or marginally less have a population which exceeds 1 million people. The 3rd party model applies to both sales and distribution and this is adopted as the China has a very much diverse and limitless territory (Jiang, 2003). All these models share some set of characteristics as follows: With leveraging tough wholesaler systems in China, companies look for avoiding the expenses and intricacies of distributing and selling products unswervingly to many minute and medium-sized channels and outlets. The centre of attention is on pushing goods through these outlets. In the background of the “third-party go-to-market (GTM) model”, volume is indeed the king (Carlsberg Group, 2006). The solution is to put up for sale as much as possible to mediators and intermediaries. Merchandising, SKU penetration, service levels and price control are less important. Volume discount is critical to trade of quota. Front-line resources of sales are weighed up by their dexterity in “pushing” goods or taking instructions or orders, instead of their awareness of the preferences and need of retail clientele or consumers (Carlsberg Group, 2006). If given the stress on taking orders, use of Sales-capability and account supervision tool is limited. 1. South China: Economically urbanized and very much developed. To add to the list of such mega cities such as Shenzhen and Guangzhou, there are a lot of small yet well-developed 2nd Tier cities like Shantou and Dongguan (CIA, 2009). 2. West China: The slightest urbanized area with the leading rural population, least income level, and most undersized and underdeveloped transport infrastructure. Though the analysis is precious as a preliminary point for an intellectual GTM strategy, (like clientele or customers in different region have different budgets and tastes) it is significant not to be extremely rigid about the conclusions (CIA, 2009). Each of the mentioned regions is considerably fragmented. However, these aren’t monoliths. To add to this, their configuration isn’t static. To exemplify, as government hastens its investment in rail system, distinctions between tiers and/or megacities will budge even more quickly. This stratagem should include the plan of offering right product variety, providing differentiated execution in-store, negotiating profit margins as well as commercial terms. It should also include designing apt service and logistics plan of action. In developing most favourable value proposition, FMCG companies have to; for example, differentiate between the wants of traditional buy and sell (mom & pop) store in a 3rd Tier city and a 1st Tier city (Carlsberg Group, 2006). In 3rd Tier, where customers are lesser flush as compared to the greater urban area, the store might favour a narrower manufactured goods line with cheaper and smaller packages which are pre-sorted and could be “dropped” on to shelves with ease. The same kind of store if situated next to Internet bar present in a 1st Tier city would be more likely supporting a wide range of manufactured goods SKUs with greatly larger package size. This tool engages 2 sets of calculation: First, cost required to serve This comprises for each of the channel, variables like direct cost and external cost where the direct cost is the cost of supply from the plant to the wholesaler or vice-versa budget and the external cost includes discounts and promotions (Carlsberg Group, 2006). Second, sales uplift This encompasses taking estimate of the potential income and gains / losses of dissimilar distribution scenarios, focusing specially on impact of diverse ‘point-of-sale’ approach, augmented number of the SKUs, and also out-of-stock reduction (Carlsberg Group, 2006). In the ‘profit-to-serve model’, sales uplift minus serving cost is a clearer indicator of the GTM model’s charm (Jiang, 2003). First create a montage of models/channels. Once the analysis is complete, what do the FMCG companies do with obtained results? Being precise, the task is to make a montage of channels and models suitable for company’s manufactured goods line and profit wants across China (Jiang, 2003). Mosaic must deal with such dimensions such as the type of sale, the distribution model (like pre-sales, telephone oriented sales, route sales), the sales call substance and its implication for the profit and role of sales force (like account openers, in-store merchandisers, business advisors) and also if FMCG company would own the partner or channel with a 3rd party in order to serve it. Obviously a ‘one-size-fits-all model’ is no longer most favourable. Business Intelligence and Customer Insight In developing best value propositions, the FMCG companies have to; for instance, contrast in between the needs of conventional trade (mom & pop) stores in 3rd Tier city and 1st Tier city (Carlsberg Group, 2006). In 3rd Tier, where customers are lesser flush as compared to the greater urban area, the store might favour a narrower manufactured goods line with cheaper and smaller packages which are pre-sorted and could be “dropped” on to shelves with ease (Jiang, 2003). The same kind of store if situated next to Internet bar present in a 1st Tier city would be more likely supporting a wide range of manufactured goods. Discussion for China A more substantial entry of Carlsberg into the Chinese market was marked by the closing down of this brewery and its movement to the Guangdong province of mainland china, where the economic boom was at its peak due to its proximity to the SEZ (Jiang, 2003). Eventually, the company acquired a major equity stake in the brewery, and since then, it has followed a standard pattern of selling Carlsberg by gradually increasing the level of commitment in their markets to a complete, or close possible ownership of interests. By 2006, the Huizhou brewery attained a prominent place in the eastern Chinese markets along with being the main distributor of the brand products of Carlsberg in China (Carlsberg Group, 2006). The conduct of the company in entering the Chinese markets, by following the overall strategy of acquisition of its Chinese partners combined with Carlsberg’s multi-tier strategy, seems quite conducive to gaining a strong foothold in the chosen markets (Jiang, 2003). This is because they can sell their own international brands by capitalizing on both local distribution networks as well as local brands. The strong market position of Carlsberg is again accentuated by the fact that they can compete in the whole of beer industry by selling both international as well as local brands. This case of Carlsberg’s entry into the Chinese markets is a perfect example of the importance of being flexible when entering foreign markets. The fact that a company must have a flexible strategy in order to be competitive is exhibited by the route followed by Carlsberg wherein it entered the market using one strategy and later changed this strategy completely in order to mark its foray into the western markets (Carlsberg Group, 2006). This is because it wanted to avoid competition in unfavourable conditions, as far as the eastern markets were concerned. Entering a market by choosing the right kind of strategy is advantageous to gain access to local brands and distribution networks in the beer industry. This is of significant importance as far as the development and sustainability of the enterprise in a completely new market is concerned. Russian Market The Russian economy moved from an annual GDP growth rate of 6% (for the last 10 years) until 2008 to 7% in 2009, thus making Russian economy one of the fastest growing in the world ((CIA, 2009). However, the recent economic slowdown, that affected the entire world, proved extremely fatal for the Russian economy resulting in a budget deficit of 5% along with no discernible GDP growth in a span of 5 years (US Commercial Service, 2009). Since, foreign direct investment and availability of cheap loans have always acted as the driving forces of the Russian economy; the current economic scenario does not offer any immediate prospects of Russia resuming its growth trends. Like most of the world’s developed countries, the corporate system of Russia cannot expect any immediate credit availability as well as cheap loans which were easy to attain before the downturn. Also, there is an ever increasing demand for the payment of outstanding loans, as the creditors are trying to avoid defaulters and salvage their own situation. Finally, fall in the commodity prices has brought down the overall earnings of the Russian economy, mainly because of Russia’s dependency on the sales of abundant natural resources to drive its economy. This is particularly true because the concerns and problems faced by the Russian economy largely resemble those of other emerging economies and the world as a whole. One of the major issues concerning any entry into the Russian market as well as its development is the huge geographical area that the country covers. Around 17 million square miles of area and 11 different time zones act as a significant obstacle as far as the overall market analysis is concerned, because the differences between different areas can be vast (AB InBev, 2009). As compared to more developed economies of the world, this undeveloped infrastructure will act as a constraint for an outside company who wants to compete in Russia, or even its own established companies (US Commercial Service, 2009). Despite suffering from huge distances, underdevelopment along with rough environment in some places, Russia still enjoys a substantial advantage over many of the resource rich and emerging economies of the world (CIA, 2009). In part, this can be explained by the existing tradition of science and industry and education in Russia along with its determination to exploit its natural advantages in terms of easy market access for its resources and products as well as its favourable location. Market Analysis for Russia and entire Europe Threat of New Entrants: If Carlsberg Brewery Company wants to compete effectively, the economies of scale play a significant role (Rugman & Collinson, 2006). In case of Russia, the fact that the market is still in its growing phase, it is bound to be considered by the companies trying to enter the Russian market. This suggests that within Carlsberg brewery, each segment will have only a handful of companies which will be able to operate successfully in the Russian market (US Commercial Service, 2009). As mentioned earlier, foreign direct investment has always been an important factor, affecting the growth of Russian economy in a positive manner; hence, Russia welcomes all foreign investors (Beverage Daily, 2004). This can be observed by the fact that Russia extends huge tax concessions to all its investors, in several regions. Rivalry among Existing Competitors: Russia does not have any publicly available or easily accessible register or source that the companies can refer to, in order to see information about their immediate competitors. At the same time, the sources that exist are incomplete, out-dated or extremely formalized so as to be rendered almost useless. Due to this reason, any company would find it difficult to obtain any significant information about its potential competitors or the Russian market, in general. As mentioned earlier in the section of entry barriers, for a production company to operate successfully, it needs to realize economies of scale (Beverage Daily, 2004). Bargaining Power of Suppliers: When it comes to the imports of goods and services, Russia does not exhibit any overwhelming differences in comparison to most of the other countries (US Commercial Service, 2009). Greater the openness of the market to competition, harder it will be for the suppliers to influence price and gain power through the formation of collusions or cartels (Rugman & Collinson, 2006). Since, Russia does not have a very strong judiciary and legal system as compared to other, more developed economies, there is every possibility of controlling the prices and market by forming cartels and price agreements between different suppliers (Beverage Daily, 2004). However, the existence of high possibility of imports so as to avoid dependency upon domestic suppliers alone along with the varied nature of the desired materials, this possibility looks like a remote threat. Hence, the suppliers in Russia will have a relatively low bargaining power. The Russian Beer Market The table below summarises the market held by Carlsberg breweries in most of European countries In recent years, Russia has experienced a spurt in its economic growth, measured by rising living standards as well as majority of the population enjoying higher incomes (AB InBev, 2009). These factors have largely contributed towards the rapid expansion of the Russian beer market. This is partly due to an increased realization by the consumers that now they can afford to make purchases in a more selective manner. In addition to this, the Russian culture has always been quite conducive to the consumption of alcohol in general (AB InBev, 2009), although vodka still enjoys a higher demand as compared to beer. However, there has been a fast and steady rise in the Russian consumption of beer, from 33.5 litres per capita in the year 2000 to around 60 litres per capita in the year 2005. This figure is expected to rise further to 85 litres per capita in the year 2010 (AB InBev, 2009). With an increased growth in the retail sector of the FMCG industry, it has now become possibly easier for the major breweries to reach remote customers and markets. Conclusion The size of a company plays a crucial role for the company in being competitive primarily because of the lesser developed markets and cheap factor costs prevailing in these markets (Ball & McCulloch, 2004). Factors like scale of production facilities for a competitive stand are greatly influenced by the market, different regions in the market, present market conditions, and the competition available in the market. It is demonstrated by the case of Carlsberg in the Chinese market that large competitors is capable of forcing closing of a large operation in the east region, whereas smaller production facilities may continue their operation in the less developed inland regions with a different set of conditions both in terms of competition and consumers. One of the most important factors responsible in this case includes the overall strength of the local brands and sickly developed infrastructure. A multi-tiered strategy is followed by Carlsberg in the two markets and their main intention is to have their presence in every segment of the beer market (Carlsberg Group, 2006). In general, it is achieved with the availability of local brands in the lower segment and licensed local premium brands which are targeted towards the premium segment of the market. According to Carlsberg, they obtain their goal of being the leader in the market with focus towards different segments and it further requires plenty of resources and commitment from the company as compared to their single-tired competitors. According to the analysis of three different markets in this thesis, the entrance of MNEs in any emerging market is highly influenced by current market developments, openness in the foreign investment, and the infrastructure. In accordance with the Carlsberg’s way of entering an emerging market, both the characteristics of individual markets and the predetermined plan for entering the market seems to be highly determining factors in the process. As explained in our case, this factor is very important for both Indian and Chinese markets. It is evident that entry strategies developed with partners are advantageous in case of individual markets, but somehow they also diminish the ability for technology and knowledge transfer for the MNEs (Ball & McCulloch, 2004). The same principle is applicable to the Carlsberg to some degree. It is because Carlsberg tend to obtain complete control of the foreign subsidiaries and there are negligible chances of losing company specific advantages in the process. The main outcomes is that strategies developed for entering emerging markets depends upon different factors which are specific to the individual markets, despite of the fact that a single entry mode is recommended in literature and theories. When it comes to entering an emerging market, the unique design and adaptation level of the strategy is much more important than are predetermined design or strategy. In case of Carlsberg entering three different emerging markets, the expected entry strategy diverged according to the market-specific factors and conditions of the individual markets. With the findings of predetermined strategies not being used in the emerging markets, another important finding of the thesis is the point that the election paradigms like Buckley & Casson”s Framework are focussed towards different factors and are sufficient in describing the best entry strategies for Carlsberg brewery while entering emerging markets (US Commercial Service, 2009). With the large number of questions raised in the paper, they can further be used for analysis and research in this domain. After considering the data and different sources used with respect to the Carlsberg and two markets, a detailed study including greater number of markets and companies would be really helpful in understanding the best strategies and entry modes for entering into emerging markets. Some important challenges are highlighted in this study for both beer industry as well as the conditions in the targeted markets. There is no doubt about the relevance of justifications and reasons provided for the chosen markets, further study of challenges in other markets will be different than these points, and they can offer additional insights against the challenges and problems faced by MNEs and their respective strategies. Reference list AB InBev (2009) Abinbev in Russia Key Facts & Figures, Available at: http://www.abinbev.com/pdf/factsheets/Russia2009.pdf. [Accessed Jan 26, 2013] Ball D & McCulloch W (2004). International Business, New York: McGraw Hill. Buckley, P. J., & Casson, M. C. (1998) Analyzing Foreign Market Entry Strategies; Extending the Internalization Approach. Journal of International Business Studies, 29 (3), 539–562. Beverage Daily (2004). Russian Beer Market Turns To Premium Brands. Available at: http://www.beveragedaily.com/Industry-Markets/Russian-beer-market-turns-topremium-brands. 26th July 2009. [Accessed Jan 26, 2013] CIA (2009). World Fact Book, Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html [Accessed Jan 26, 2013 Carlsberg Group (2006). Carlsberg in China, Presentation. Available at:http://www.carlsberggroup.com/Investor/DownloadCentre/Documents/Other%20Presentations/27.11.06%20Carlsberg%20in%20China%20.pdf [Accessed Jan 28, 2013] Jiang, F. (2003) Factors Affecting the Effectiveness of FDI Venture Operations in China: A Comparison between Early-entrants and Late-entrants Available at: http://www.hicbusiness.org/biz2003proceedings/Fuming%20Jiang%202.pdf. [Accessed Jan 29, 2013] Rugman A M & Collinson S (2006) International Business, 4th Edition, New York: Prentice Hall US Commercial Service (2009) Doing Business in Russia, p12, U.S. Department of State Read More