Turkish Wine Industry Competitive Advantages - Report Example

Word Count: 3,592

Introduction

Turkey is a secular democracy in Europe featuring a majorly Muslim population. In 2014, its annual gross domestic product (GDP) was $800 billion and GDP per capital was $10,542 (UK Foreign & Commonwealth Office, 2016). Following the economic crisis in 2001, it embarked on key structural changes especially in the finance sector and, coupled with a stable political environment, realised a 5% average growth between 2002 and 2014. As reported by the UK Foreign & Commonwealth Office (2016), the Turkish economy grew by 4% in 2015. Using Porter’s National Diamond (PND) and the Adaptive Change Theory framework, this report will evaluate the attractiveness of the Turkish wine industry and the viability of Kraft Foods Group venturing into business in the industry as a foreign company. Essentially, the wine business is part of the larger food retail industry that, in part, entails the sales of alcoholic and non-alcoholic beverages. According to reports by Forbes, the global vineyard area in 2015 stood at 18.5 million acres while wine production and consumption stood at 274 million and 240 million hectolitres respectively (Karlsson & Karlsson, 2016). Further, the same report indicated the global wine market grew by 3.2% between 2011 and 2015 to reach the $258 billion value. It was also noted that an average of 43% of the total wine consumed in any country is produced elsewhere, essentially implying that 43% of the wines consumed locally are imports. Out of the 240 million hectolitres of wine consumed globally in 2015, Turkey accounted for 14.1 million hectolitres (or 0.06%) of the global consumption (The Wine Institute, 2015).

PART 1

1.0 Porter’s National Diamond Analysis

Corporate strategies are increasingly globalising, effectively increasing the need to be perceived in a global context (Buckley, 2011). Even if a business entity does not intend to export or import directly, the management must assess the international business and market environments. That will facilitate the understanding of how the domestic market is influenced by the actions of sellers, buyers, competitors and new entrants offering substitutes (Wild, Wild & Han, 2014). This report acknowledges that not only are some countries more competitive than others, but more importantly, that some industries within countries are also more competitive compared to others. Hence, the extended version of the PND will be applied to the Turkish wine industry to determine the viability of a new foreign entrant.

1.1The Extended Version of Porter’s National Diamond Analysis

1.1.1Factor Conditions

1.1.1aOpportunities

The Turkish retail market officially opened in 2003 to the sales of imported wines following the Tobacco Products and Alcoholic Beverages Market Regulatory Authority (TAPDK) Directive on Domestic and Foreign Trade of Alcohol and Alcoholic Beverages (Azabagaoglu, Aykol & Ozay, 2006). Further, the European Union (EU) accession talks have largely driven the modernisation of the business environment and the economy in Turkey. The cultivation of grapes in Turkey dates back to the pre-civilisation eras supported by its favourable territorial and climatic conditions. It is one of the world’s most suitably located countries geographically for wine grape vineyards, which makes it the fourth largest grower of grapes globally (Deloitte, 2010). Specifically, Deloitte (2010) pointed out that the production of wine grape is concentrated in the provinces of Ankara, Diyarbakir, Manisa, Elazig, Nevsehir, Denzili, Gaziantep, Canakkale, Kirsehir, Izmir and Tekirdag. With such large-scale growing of grapes, there is a viable opportunity to increase the 3% of the produce that usually goes to wine production. Demographically, the country not only features Europe’s youngest but also fastest growing population that releases over 700,000 graduates into the labor market annually (UK Foreign & Commonwealth Office, 2016). According to The Wine Institute (2015), the young population is interested and open to trying the new products and brands offered by the wine industry.

1.1.1bThreats

The growing opportunities in the wine industry have drawn a large number of wine producers and importers from different countries that offer both low priced and high quality wines (Köprülü, 2014). However, the unsound regulatory environment in the agricultural industry, on which the beverage and specifically wine industry relies, can potentially result in negativities such as unfair competition. Further, in the context of producing wine in Turkey rather than importing, raw materials (grapes) and energy costs are prohibitively high and can potentially negate the reliable availability of high quality grapes locally (Gumus & Gumus, 2008). To overcome this threat, it is critical that a foreign entrant balances both local production and importing in order to realise profitable operations (Dicken, 2011).

1.2Demand Conditions

1.2.1Market Demand

Market demand in Turkey is relatively low when viewed from the perspective of other countries traditionally known to be wine producers and consumers despite having the proper climate for viticulture (Azabagaoglu, Aykol & Ozay, 2006). As studies by Azabagaoglu, Aykol and Ozay (2006) suggest, the reason is that Turkey is not traditionally considered as a “wine country” on the international arena despite being one of the world’s oldest Old Wine producer. Effectively, domestic demands as well as international exports are relatively limited. However, since the production and consumption of alcoholic beverages in the country has gradually evolved from total prohibition to one of tolerance and finally acceptance, demand has improved albeit minimally in the 21st century (Köprülü, 2014). Further, demand for wine in Turkey is also largely culture-dependent, with the non-Muslim population being the largest consumers. The growth is also aided by the relatively large population of 75 million and the large number of new-generation young adults with spending power released into the labour market annually by institutes of higher education (UK Foreign & Commonwealth Office, 2016). With strategic marketing and advertising, an investor can profitably tap into the growing demands that are characteristic of such markets (Taylor & Taylor, 2004).

1.2.3Socio-Cultural Diversity

While there is a myriad of substances traditionally used by diverse cultures to achieve special sensations worldwide, alcohol is by far the most popular and important. In the case of Turkey, is typically dominated by the Islamic religion and the associated culture. However, by virtue of being a member of the EU, it also features a secular and diverse culture that resulted in the relaxed attitude towards drinking (Karlsson & Karlsson, 2016). On one hand, Islamic religious tenets as provided by Sharia laws ban alcohol consumption and the direct consequence was very low wine consumption in the Ottoman Empire. However, it is also imperative to note that historically, Anatolian production and consumption of wine did not necessarily assume a regular pattern owing to the ban. Rather, production and consumption has continued under the patronage of the Jews and Christians who form the religious minorities in the jurisdiction until the TAPDK freed the market in 2003 (Azabagaoglu, Aykol & Ozay, 2006). Ideally, the socio-cultural diversity is potentially beneficial for the growing wine consumption in Turkey in spite of the strict Sharia laws.

1.3Firm Strategy, Structure and Rivalry

1.3.1Firm Strategy and Structure

The World Bank ranks Turkey at position 55 out of 189 in its Doing Business 2016 Report (UK Foreign & Commonwealth Office, 2016). Further, the 2012 New Turkish Commercial Code has adequately addressed the need for higher degrees of transparency by reducing Bureaucracy in businesses in Turkey and enhancing directorship flexibility. Consequently, businesses in Turkey are characterised by strong governance as well as corporate social responsibility (CSR) structures (Puffer & McCarthy, 2008). Following the enactment of the 2012 New Turkish Commercial Code, businesses in Turkey are subjected to the specifically designed for Corporate Governance Compliance legislation. According to the UK Foreign & Commonwealth Office (2016), the implication is that, in due course, they will be required to conform to international financial reporting standards (IFRS) and increase global confidence in the market.

1.3.2Rivalry

The Turkish wine industry may still be developing but rivalry among competing entities is fierce. Gumus and Gumus (2008) infer that as the wine market develops steadily albeit gradually, foreign wines will enjoy a growth in share, effectively forcing the withdrawal from the market of entities that produce lower-quality wines. Additionally, rivalry has increased with the increase of modern production facilities established recently to distribute high quality but affordable wine. With regards to operational efficiency, (Azabagaoglu, Aykol & Ozay, 2006) found that larger producers recorded a mean value of 6.53 compare to 5.80 by smaller ones. The reason was that larger companies are inherently better structured and have the capacity to seek improvement. In contrast, smaller companies focus on product price, hence, table wine usually at the expense of quality products, promotion and distribution. Larger companies on the other hand focus on the improvement of market positioning, brand name, quality and new markets as well as customer loyalty (Azabagaoglu, Aykol & Ozay, 2006). It follows, therefore, that a new entrant must consider its entry strategy; whether as a small-scale or large-scale player which, in turn, will determine its competing strategies (Rugman & Collinson, 2012).

However, Turkey is party to numerous international treaties, agreements and conventions (Cavusgil, Knight & Riesenberger, 2014). Therefore, even the smaller producers and especially those of low quality products are covered by intellectual property (IP) rights that protect confidential information, trademarks, patents and both unregistered and registered designs. License agreements, trademarks and patents are registered by the Turkish Patent Institute upon registration, which means protection is effected as soon as the application is lodged. As The Wine Institute (2015) recommends, it is prudent for new entrants to develop their own market segment as opposed to engaging in unhealthy rivalry over existing consumers. However, that is not to mean that competing for favourable positioning should not be part of the strategic plan of new entrants.

1.4Related and Supporting Industries

1.4.1Availability of Related and Supporting Industries

The larger food and beverage industry in Turkey was ranked 5th globally by the Business Monitor International (BMI) in 2010 (Deloitte, 2010) as contributed by the long-term economic structure and lack of market saturation or maturity. Turkey is also a key agricultural producer that consistently reports positive balances in the food and beverage trade. Owing to the considerably developed transport and communication infrastructure that the agricultural industry relies on, the wine industry is privileged with easy access to raw materials. However, the food and beverage industry in Turkey recorded 1.3% decline between 2008 and 2009 owing to the global economic crisis (The Wine Institute, 2015). Notably, the decline was not as severe in other industries. However, as recovery got underway, the food sector became more advanced as retailers demanded higher standards from not only manufactures but also investors to facilitate development in the wine industry. Effectively, the modern concept of Mass Grocery Retail outlets alongside the growth in consumption patterns occasioned by the increase of disposable income increased the demand for processed and packaged food. Wine, being an accompaniment in food consumption, also experienced growth in consumption. Equally importantly, the report by BMI projected a 16.4% growth between 2009 and 2014 in terms of compound annual growth rate (CAGR) specifically because of the expanding sales in soft drinks (Deloitte, 2010). In that sense, the soft drinks subsector has significantly boosted business for nonalcoholic wines. By virtue of being an EU member state, the toning down of cultural disparities has also promoted the collaboration of supporting industries such as logistics providers and packaging companies. Effectively, such supporting industries help in developing networks that link the manufacturers, distributors, retailers and customers in the wine market (Grant, 2005).

1.5The Role of Government

1.5.1Government-Related Political Risk

After coming into power in 2015, the present government set out prescribed multi-sectoral reforms with the promise to rapidly implement and progress them. Further, there was also a promise to develop a new Constitution for the country designed to comprehensively address the market environment. Through the economic and trade relations the country has created, it targets to be among the world’s top 10 largest economies by 2023 from its current position 16. On one hand, in the context of ease of doing business, the Customs Union, which is a pre-condition for accession to the EU, provides that EU companies are not faced with similar difficulties they would face in other high-growth markets (Buckley, 2011). On the other hand, however, sudden regulatory and legislative changes, regulatory hurdles and decision-making paralysis by the Turkish government often reach frustrating levels. Further, there are additional levies applicable to EU companies that, even though domiciled in Turkey, manufacture their products outside the EU (Köprülü, 2014).

1.5.2Corruption

The National Integrity System by Transparency International Turkey in 2015 reported that the executive influences the judiciary and legislative arms of government a well as institutions such as the media and ombudsman in a way that undermines democratic practices and rule of law. In recent years, most notably after the 2008 financial crisis, the reform process intended to end corruption has been declining. The UK Foreign & Commonwealth Office (2016) explained that the NIS was weakened rather than strengthened by legal system frameworks amendments. It is, therefore, imperative for new entrants to be wary of the possibility involvement in bribery, which effectively promotes corruption. Such tendencies should be avoided by sound corporate governance founded on an ethical culture (Cavusgil, Knight & Riesenberger, 2014).

1.6The Role of Chance

1.6.1Natural Disasters

First and foremost, it is imperative to acknowledge that the wine industry not only in Turkey but any other jurisdiction is heavily dependent on agriculture (Deloitte, 2010). Thus, it is also critical for prospective wine producers in Turkey to recognize that agriculture is also a high-risk business that can adversely be affected by uncontrollable phenomena such as prolonged, unfavourable climatic conditions and natural calamities. More importantly, the sheer size of the Turkish agricultural industry can possibly translate into multiple losses in the event of a natural calamity (Azabagaoglu, Aykol & Ozay, 2006).

1.6.2Political Unrest

In 2015 the illegal terrorist organization, Kurdistan Worker’s Party (PKK), violated its two-year ceasefire, resulting in conflict with the Turkish security forces. There are also claims, albeit allegations, by the international community that Turkey is acting not only as a source but also destination and conduit for organised immigration crime as well as illegal drugs (UK Foreign & Commonwealth Office, 2016). The most immediate danger of such claims is a clash between human rights bodies and the Turkish government, which can potentially result in political unrest.

The two concepts of natural disasters and political unrest may largely occur by chance or, in the case of the later, as a function of corruption (UK Foreign & Commonwealth Office, 2016). However, the implication in the business context is that they are largely uncontrollable from the internal business environment. It is, therefore, imperative that the business getting into Turkey adopts new methods to counter the effects of adverse weather conditions (Azabagaoglu, Aykol & Ozay, 2006). For instance, they may secure alternative supplier of raw material outside of Turkey. However, it is equally important to source for alternatives within the EU to avoid additional duties levied on importing raw materials. For political unrest, the most effective solution would be seeking appropriate insurance cover.

PART 2

2.0Market Entry Strategy

This section will discuss the advantages, appropriateness and limitations of the use of foreign direct investment (FDI) as an entry strategy into the Turkish market with specific focus on increasing sales, spreading risks and improving the corporate image. It will also provide FDI recommendations for a new entrant into the Turkish wine market. Basing on the definition of FDI by the United Nations Conference on Trade and Development (UNCTAD), a foreign entrant into the Turkish market will be investing with the objective of acquiring sustainable interests outside their domestic economy. In the modern market environment, businesses can get into the Turkish foreign market via hierarchical modes, intermediate modes and export modes.

Figure 1: Foreign market entry modes

Source: Deloitte (2010)

2.1Advantages

On one hand, Turkey is strategically located geographically. On the other hand, the unique Customs Union it has with the EU as well as its expanding market potential are key factors that present market opportunities for foreign direct investment. Therefore, in the context of location-specific advantages, its geographic location, economic climate, business climate, market potential and cost of labour positively contribute towards FDI (UK Foreign & Commonwealth Office, 2016). With particular regards to ownership-specific advantages, international experience and investment in research and development (R&D) are more relevant investment decisions compared to the size of the business. Hence, regardless of its size, a new entrant into the Turkish market can benefit from adequate investment in R&D directed towards tapping into the advantages availed by the EU Customs Union. For Kraft Foods Group, venturing into FDI in Turkey will also be advantageous in the cultural context given that it is a European firm, hence, the cultural distance will significantly be reduced despite the dominant Islamic culture (Ployhart, 2006)

2.2Appropriateness

If a business is privileged with ownership advantages, it can appropriately engage in international operations in Turkey. However, it is imperative for the management to critically evaluate, qualify and quantify the benefits it stands to gain by locating the ownership advantages in a foreign country (Le, Li & Yukhanaev, 2014). In the case of the Turkish wine market, the business will benefit from internalising its ownership advantages as opposed to leasing or selling them to foreign operators. As illustrated in the foreign market entry modes in figure 1 above, the hierarchical mode is the most appropriate to enter into the Turkish wine market. As earlier noted, the Wine Institute (2015) recommends that new entrants develop their own market segment. Therefore, via the hierarchical mode, a new entrant should establish regional centers, production/sales subsidiaries as well as institute locally based sales representatives. This move is appropriate because the Turkish market features a large population and also a large potential market segment in the form of the 700,000 graduates annually that are open to trying new lifestyles (UK Foreign & Commonwealth Office, 2016).

2.3Limitations

The wine industry has been shown to be heavily reliant on the agricultural industry. In itself, that presents a key limitation because the agricultural industry has also been shown to be high-risk and also dependent on largely uncontrollable factors. It is also noted that inasmuch as the Turkish transport and communication infrastructure is developed, it is comparatively below the standards of many other EU member states. Effectively, that will have slightly negative impacts on FDI decisions. Further, corporate taxes in Turkey are prohibitively unfavourable and can have negative influences on FDI decisions. It is also noted that political instability as well as inflation and considerable exchange rate fluctuations have negatively impacted on FDI. However, an analysis of the situation indicates the recent stabilization in the political environment and inflation and exchange rate fluctuations predict positive future investment conditions (Peng, 2014).

2.4Recommendations

Basing on the opinion by Dicken (2011), it is recommended that a new entrant balances both local production and importing in order to realise profitable operations. It is also recommended that the business significantly invests in R&D as well as marketing and advertising so as to tap into the growing demand of the Turkish market. Further, rather than engaging in the already fierce competition, the business should focus on creating its own market segment and target the large young population.

PART 3

3.0Contemporary Management Issues

Given the number of university graduates released into the labour market annually, this study shows that the Turkish labor market features significantly skilled personnel. However, the large population mainly composed of youths also indicates that there is also a large proportion of young and unskilled labour. Therefore, the first management issue that a new entrant should take into account is how to deal with the potential of the targeted human resources starting from the recruitment and hiring processes (Whetzel & McDaniel, 2009). The human resource management (HRM) team should make resolving work-life conflicts one of its key objectives. Although it is acknowledged that the underlying goal of FDI is to realise sustainable interests outside an organisation’s domestic economy, the internal environment of the destination jurisdiction is an equally important factor to consider. Therefore, in a bid to avoid work-life conflicts in a new jurisdiction, the HRM team must ensure that work demands and family demands of the targeted labour force are mutually compatible (Wei, Yili & Tian, 2013). Ideally, the implication is that the demands of one domain do not make it impossible to meet the demands of the other.

Venturing into international business in Turkey essentially implies starting operations in a new jurisdiction with its own unique culture (Lievens, Peeters & Schollaert, 2008). It is thus imperative for a new entrant into the Turkish market to consider local staffing, employee/labour relations and human resource development. Therefore, the second management issue is also in the form of the labour force and specifically in the context of cultural diversity. As a foreign entity, the company will essentially be working with a diverse workforce that may be defined through aspects including religion, gender, social class, ethnicity and, equally importantly, disability (Wei, Yili & Tian, 2013). Therefore, as a potential employer, the new entrant must strive to represent the qualities of a diversely talented and skilled. Suitably qualified and diverse recruits must be considered for roles in leadership, which means the new entrant must implement strategies to neutralise biases in recruitment processes.