Costa Coffee Entry to Azerbaijan: A Strategic Look - Assignment Example

Bala Ahmad Gileyer Terry Johnson International and Strategic Marketing December Strategic Analysis of a Foreign Market Entry Executive summary This paper is an analysis of decisive issues needed by Costa Coffee in its entry to Azerbaijan. Ownership structures as a marketing function in an international business environment are discussed and strategies in entry are described. Important current issues such as a description of Azerbaijan’s demography, regulatory and economy are presented to find possible weakness in its practices or economy. Study found barriers that will impede on the entry of Costa coffee. However its growing economy, low inflation, growth of population and low unemployment rate are strengths that is encouraging signals for a market entry and considered as strength. Threats are competitions who are strongly positioned while opportunity is the growing interest of coffee drinkers for a sophisticated taste of coffee. As a formulation of an international marketing strategy, recommendation is for entry of Costa Coffee using a differentiated business approach. Strategic Analysis of a Market Entry I. Introduction. The purpose of this report is to analyze the critical factors required in entering a foreign market. The chosen country is Azerbaijan which is located in Southwestern Asia, bordering the Caspian Sea, between Iran and Russia, with a small European portion north of the Caucasus range. (CIA 2012). Costa Coffee needs to decide on the four types of entries to this market, namely: exporting, licensing, joint venture, and direct investment (Washington Secretary of State. Corporations Division). Costa Coffee has also need to plan the appropriate strategy in its entry. The market strategies established are the technological innovation, (the superiority of the product); product adaptation (modifications in the existing product); Availability (low price strategy); or total adaptation (conformity strategy). II. An overview of Azerbaijan. l. Demographics. Azerbajan has a total population of 9,643,000 as of 2011 (CIA). It is composed of 3,436,459 females and 3,307,88l males in the bracket of ages 15-64 and a male population of 227,172 and 367,675 bracket of 65 years and above. Population is composed of Azeri 90.6%, Dagestani 2.2%, Russian 1.8%, Armenian 1.5%, other 3.9% (1999 census). Population growth rate is 1.017% with a rank of 114 in world comparison. Baku, its capital holds 1.9 million people. 2. Economy. Its high economic growth is attributable to a large and growing oil exports, construction, banking, and real estate. Obstacles to its progress is said to be the public and private sector corruption and infrastructure inefficiencies. The country also needs a stepped up foreign investment in the non-energy sector. It imports machinery and equipment, oil products, foodstuffs, chemicals, and metals from Russia, Turkey, China, Germany, UK, Ukraine and Italy. Important statistical data gathered from CIA GDP Per capita is $10,200 which is ranked as 109th place in world comparison. Low unemployment rate of 1%. As of 2011, its bank prime lending rate is 19 % ranking the country as 19th place in world comparison 3. Business Environment. Business Environment Snapshots done by the World Bank (2011) shows Azerbaijan ranking as 66th out of 183 in Doing Business in 2012. However, the three listed obstacles in Doing Business here are Access to Finance, Tax Rates, and Corruption. According to the information, “52.2% of the firms report being expected to give gifts to public officials ‘to get things done’, compared to 24.9 % regional average.” As to “economic freedom” Azerbaijan scores 58.9% making it as 91st freest economy in the world index in 2012. This low score, according to the report is a reflection of its worsened performance in business freedom. 3.1 Competition. Tea and coffee remain to be the favorite hot drinks in Azerbaijin. Euromonitor (2012) reports tea is consumed by almost 100% of its citizens, while coffee remains to be one of the stable areas in hot drinks, Multinationals strongly positioned here are Nestle, Unilever, and Ahmad due to popularity of their brands. Brand loyalty is very strong in coffee. Their business structures are general partnership agreement with an LLC for Nestle, a trading company for Unilever, and corporation for Ahmad coffee. 3.2. Distribution. Hot tea and coffee products are sold in supermarkets and independent stores. This type of distribution channel according to Euromonitor is a growing trend of sales model because of more shelf spaces, convenience, and the free ride in advertising and promos of the store. 3.3 Market forecasts. Euromonitor forecasts a growing trend of the sophisticated tastes of coffee. Accordingly, it forecasts a positive growth for coffee and a decline in tea consumption due to maturity and the increasing demand for sophisticated blends. II. Strategies to entry. Strategies to entry will depend on the business model of Costa Coffee. Advantages and disadvantages of each business strategy are presented. 1. Exporting . This is the long-established method of entry to a foreign market. It does not require the goods to be manufactured in Azerbaijan. There will be no investments in production facilities. The only costs involved are the marketing expenses. The advantages to this set up are the trade barriers and tariff costs, and transport costs. Disadvantages are Trade barriers are the high tax rates and high incidence of corruption. Weighted tariff rate is 3.9%. The country is working its accession to the World Trade Organization. Foreign investment is allowed in most sectors, but lack of transparency and bureaucratic control holds back progress. 1.1. Regulatory . The Heritage Foundation’s 2012 Index of Economic Freedom places its business freedom at 68.6%, Labor Freedom – 81.6%, and Monetary Freedom – 74.5%. According to the information, the business start-up process takes twice the world’s average of 15 procedures in 200 days. Price controls are set in energy products, and inflation has come down to 6%, down from 20% in 2008.(The Heritage Foundation. In partnership with Wall Street Journal. 2012). 2. Licensing – is a kind of agreement wherein the company signs an agreement with another company to use its intellectual property in exchange for a specific amount of money. 3. Franchising is almost similar to licensing but the difference lies in the company’s granting of rights to use company’s trade mark or name. In such agreement, franchisee pays a fee for the rights of using its name. A certain fee is set at the outset of the agreement , that means Costa Coffee can collect fees regardless on whether the franchisee makes any money in the agreement. 4. Foreign direct investment. FDI means company will have to purchase assets in the target country. Setting up its own subsidiary has advantages of control its production, distribution and activities related to its business. III. Findings and discussions 1. Azerbaijan is a relatively peaceful country. No turmoil has been seen in the literature review, and one that is showing economic growth. It has a growing economy that encourages foreign investments. But investors have to wrestle on corruptions and high tax rate and high bank lending rate. 2. The country has good rate of economic freedom, labor freedom, and business freedom. Labor freedom becomes significant because it means being free from labor union problems and disposable income to spend on little luxuries of food. Business freedom means foreign investors are free to compete with the domestic market since government has no restrictions. 3. It has a large market considering that almost 100% of the population is hot drinkers of either tea or coffee. People are brand conscious, so it will take a lot of effort in promoting a new brand of drink in the market. 4. Competition is strong and is strongly positioned due to popularity of its brands. Costa coffee will have to do a lot of marketing activities to penetrate the new market. 5. SWOT analysis. Strength of doing business in Azerbaijan is its growing economy, 100% drinkers in the population, a large number of working population that could be a target marke.t,. Weaknesses are trade barriers traced to public and private corruption of officials, high bank lending rate and high taxes; Opportunity is the growing trend for sophisticated tastes of coffee; and threat is the highly positioned multinationals in the market. Added to that is brand loyalty the have already achieved. 5. It has a low percentage of inflation rate. Recommendations. The entry of Costa Coffee to Azerbaijan is recommended based on the following strategies: To adopt a business model of franchising and a business model similar to Starbucks. The concept of a coffee plaza is something new to Azerbaijan who would be looking for a friendly atmosphere to unwind after work, and a sophisticated blend of coffee. Since their taste for coffee is experimenting, Costa Coffee will see this as a business opportunity to meet demands of coffee drinkers. Jut because it is new concept, company can introduce a new price that factors in the cost of the coffee plaza, cost of new ingredients to the coffee, and the corruption costs. References CIA World Fact Book. (Uptd. November 20, 2012) People and society [online] Available at https://www.cia.gov/library/publications/the-world-factbook/geos/aj.html[05 December 2012] ----- Economy. [online] Available at https://www.cia.gov/library/publications/the-world- factbook/geos/aj.html[05 December 2012] Business Environment Snapshots 2011. Country snapshots: Azerbaijan [online] Available at http://rru.worldbank.org/BESnapshots/Azerbaijan/default.aspx [05 December 2012] Euromonitor International.2012. Hot drinks in Azerbaijan. [online] Available at http://www.euromonitor.com/hot-drinks-in-azerbaijan/report[05 December 2012] The Heritage Foundation [2012] In partnership with Wall Street Journal. 2012 Index of Economic Freedom). [Online] Available at http://www.heritage.org/index/country/Azerbaijan[5 December 2012] Ownership Structure Types (n.d.) . Washington Secretary of State. Corporations and Charities Division.[Online] Available at http://www.sos.wa.gov/corps/registration_structures.aspx [05 December 2012] Ease of Doing Business in Azerbaijan.(2012) Doing Business. Measuring Business Regulation The World Bank.[online] Available at http://www.doingbusiness.org/data/exploreeconomies/azerbaijan[05 December 2012] Read More