The Migros Chain Investment Plan for International Expansion - Term Paper Example

 Investment Plan Executive Summary: MIGROS is the largest supermarket chain in Switzerland. This paper presents an investment plan for the Company to enter the Bulgarian market. Bulgaria has entered the EU only two years ago, but despite its still low per capita income compared to other EU countries, it has demonstrated steady economic growth and its transition from communism to a market economy provide excellent business opportunities for Migros. The Migros Company: The Migros Company is the largest supermarket chain in Switzerland and is derived from the words “mi” which means half way and “gros” which means wholesale; hence in effect the word Migros means halfway between retail and wholesale. The Company was founded in 1925 by Gottleib Duttweiler (www.foodinternational.net). The Company started off as five vending vans and a starting capital of 100,000 CHF and a year later, opened up its first store in Zurich. The first Migros co-op was founded in Ticino, the Italian speaking part of Switzerland, seven years later. Initially, Duttweiler’s objective was to retail only basic foodstuffs at highly competitive prices (www.finance.mapsofworld.com). After the founding of Ticino however, the store format changed to a cooperative. The Company has focused on selling basic foodstuffs such as sugar, rice, noodles, coconut oil and soaps, but in 1996, the Company started on a budget range of products known as M-products that were lower priced products targeted at budget conscious customers. This line of products has produced sustained profits for the Company, registering a fifteen fold increase from 1996 to 2006.(www.migros.ch:80). The Company has however, in recent years, moved into the marketing of other products such as milk chocolate, jeans, lighters and mountain bikes, among others. It recently introduced the MSC eco-label to foster sustainable fishing at its fresh fish counters at Switzerland (www.msc.org). All of these represent a significant competitive advantage for the Company in the global marketplace. The major competition that the Company faces from other cooperative supermarkets is the Coop store chain, which is currently the second largest retailer in Switzerland. The French global chain Carrefour also had a presence in the Switzerland market, but Bulgaria: Bulgaria is a country that has made the transition to democracy and a market economy after years of being a communist state. After considerable struggle, it has managed to achieve a control of inflation and unemployment has fallen from the previously high figures of 20%. (www.news.bbc.co.uk). The country has been characterized as an upper middle income country that has a gross national income per capita of $5490 in 2008. (www.worldbank.bg). PESTEL Analysis: PESTEL Analysis stands for Social, Political, economic and technological analysis. In the context of Bulgaria, it must be noted that the country has demonstrated a solid economic growth in recent years, which has considerably enhanced the potential for the retail industry. The sound macroeconomic policies implemented by the Government of Bulgaria have produced an average output growth rate from 2004 to 2008 of over six percent (www.worldbank.bg). The fiscal deficit in 1995 was 15% of the GDP, however this has been addressed through fiscal consolidation, which has led to a balanced budget in 2003 and has produced surpluses since that time. The structural reform program has also considerably reduced the levels of debt and growth in recent years has been largely driven by investment. It must be noted however that despite the improvement in its economic performance, Bulgaria’s per capita income is estimated to be only 40% of the EU average. From a political standpoint, Bulgaria’s objective to become a member of the European Union was resisted for a long time because of the concerns about corruption and crime that exist within its borders, but finally, in January 2007, Bulgaria, together with Romania, joined the European Union.(www.bbc.co.uk). In recent years, the country has demonstrated an impressive level of progress towards long term stability and economic growth, which are the result of deep structural reforms to address the concerns about corruption and crime, combined with sound macroeconomic policies. Bulgaria’s transition from Communism to a coalition Government that supports reform policies, including upholding the rights of the Turkish minorities, is an improvement to the business climate in the country and has opened up its markets (www.properties-guide.com). Strong labor unions are also a part of the Bulgarian economy, since it has made the transition from a Communist economy. This has been a problem for businesses in the region, who have to cope with these unions and their demands while simultaneously suffering from low productivity and environmental problems.(Whitford, 1998). Bulgaria has become a member of the European Union in 2007, however this is subject to reformation in areas such as agriculture and security, as well as strong efforts to fight corruption.(www.news.bbc.co.uk). Bulgaria has been criticized for failing to adopt a new anti corruption penal code and its inadequate efforts to combat crime. There is also a lack of press freedom in the country and some of the repression and lack of openness that characterized the earlier Communist regimes still exists. Bulgaria has however, been evolving in terms of technological development, and information and communications technology. In the year 2004, the T-Centers project was initiated, and the main objective of this program is to set up a network of electronic centers across the country where people from remote locations in the country can also access the Internet and related services.(www.socialniprava.info). According to Gabriel Accasia, who performed a mid-term evaluation of the T-Centers project: “let’s look at the two components here: One is ICT for the “internal use” or development of services at the national level. I think here I have seen the beginning of a very large opportunity. The T-centers network, which UNDP is supporting, is critical because it opens the door to services that are offered through ICT and which eventually will become transparent to the users. The T-centers should make available to citizens a wide range of government related services, or social services (education, health related), and others that have to do with business opportunities, for instance SME support, facilitation in obtaining services, licensees...... “ (www.socialniprava.info). Hence, there is an ever expanding development in technology, which provides good opportunities for businesses. For instance, MIGROS could operate a website and carry on e-commerce in order to increase its sales. The developments in technology would also be useful to the Company in improving its communicative abilities to streamline its supply chain and reach out to its suppliers and customers alike. Existing Competition for MIGROS in Bulgaria: In Switzerland itself, the stiffest competition for MIGROS has been the Coop supermarket chain, which has also consolidated its market position in Switzerland, after the French Company Carrefour sold out its stake in Switzerland to the Coop company (www.swissinfo.ch). However, MIGROS itself bought out the Swiss discount chain Denner in January of 2007, which has helped it to further consolidate its position among low income buyers. Currently, the leading retailers in Bulgaria are Billa Bulgaria, Bolyari and CBA Bulgaria, which are registering lower levels of sales as compared to a durable goods retailer like K&K Electronics in terms of sales, while others like Videolux and Germanos are also moving closer to sales levels of these grocery retailers (Euromonitor, 2007). This demonstrates the existing trend in Bulgaria of a receptive market for non grocery chains that have better marketing strategies to target consumers and ensure they use their disposable income on buying these durable goods. Retailing in Bulgaria is however, expected to grow very quickly, with store sales projected to grow by 40% in constant value terms, to reach Lev21 billion in 2012, with major activity contributed by international retail chains such as MIGROS (Euromonitor, 2007). There is thus great potential for the sale of grocery products in Bulgaria, especially MIGROS products such as coffee. For example, an analysis of the coffee industry in Bulgaria has revealed that the most popular hot beverage in the country is coffee, accounting for 90% of sales and Euromonitor’s Reports reveal that there is a growing demand for specialist coffee shops in eastern Europe (Merrett,2006). According to the Euromonitor report, the reasons for the growing demand for coffee in Bulgaria have been summarized as follows: “The reason for the increase in the number of specialist coffee shops outlets was that these places became more popular as meeting places for young people and because the sub-sector was previously under-developed.” (Merrett, 2006). However, despite evidence of the growing popularity of coffee shop outlets, the number of such specialist chain coffee outlets stands at only 1.3% of the market, while independent stores dominate the sector (Merrett, 2006). Seven brands existed in 2005, therefore this is still a relatively undeveloped market as far as coffee chain outlets are considered, unlike the other European countries like Sweden, which are veteran coffee drinking nations. MIGROS could therefore capitalize on this trend and reach out to the Bulgarian population by offering such coffee products in its stores and providing conversational areas within the stores where customers, especially young people, can sip a cup of coffee and enjoy meeting others. To add to the competition MIGROS might face in this market however, the British coffee chain, Costa Coffee entered the Bulgarian market at the end of 2006, in the country’s capital of Sofia, and plans to move further into the country in 2007.(Merrett, 2006). The company plans to enter the market through a franchisee, Coffee Lite. The leader in the Bulgarian market is however Kraft Foods International, which strengthened its market position in Bulgaria in 2001 by purchasing Bulgaria’s leading coffee supplier company (www.foodnavigator.com). Kraft foods also deals in different grocery items and since it has already established itself in the Bulgarian market, is likely to enjoy the advantages of a prior hold on the market and will pose stiff competition to the Migros Company. Investment Plan: As mentioned earlier, the disposable income of consumers in Bulgaria is increasing, hence Migros may enjoy a good market opportunity. The Company is likely to need a substantial initial investment in order to set up its stores in the capital city of Sofia. However, transportation costs and ensuring a strong supply chain will be facilitated by the proximity in distances between Switzerland and Bulgaria and the free movement of goods that is now allowed with the formulation of the European Union. The belief in the beneficial effects of free trade that exists today is largely a function of the theory of comparative advantage that underlies the Ricardian model of international trade (Henderson, 1993:827). Comparative advantage is the ability possessed by a particular organization to produce and provide a particular good or service at a lower cost relative to competing goods. Therefore, comparative advantage possessed by a particular country in one area of production indicates that the country has some favorable factors working on its behalf or has perfected specialized techniques in the production of that good, so that it is able to produce it more efficiently (Mankiw, 2007: 52). In the case of Migros, its focus on the budget segment and specific retail items has improved its production capacities and the quality of its products. According to Porter (1996:64), “Competitive strategy is about being different.” Porter also states that “Strategy is the creation of a unique and valuable position, involving a different set of activities……different from rivals.” (Porter 1996: 68). Since other retail outlets such as Kraft Foods, Billa Bulgaria, Costa Coffee and others, Migros could potentially gain a competitive advantage by actively promoting its M products, because it would then be able to seize a niche in the market, i.e., the low budget consumers. In a recent Euromonitor report on the retail market in Bulgaria, there was a slowdown in retail growth which was registered in 2007 because consumers started restructuring and limiting their expenses. From the PESTEL analyses provided above, it may be noted that Bulgaria’s improvement in economic growth has produced greater levels of disposable income among consumers; however since the per capita income is still relatively low as compared to other countries in the EU, MIGROS is likely to achieve greater success if it focuses on its budget range of products, aimed at those with low incomes and large families. This is especially relevant in the context of the current financial climate of recession prevailing across many countries.(Euromonitor, 2007). Migros also has another significant advantage in its new MSC-eco labels, because such products are likely to enjoy increased popularity and be patronized by customers in the current eco-conscious atmosphere. Consumers are increasingly looking for products that are eco-friendly, with more consumers focusing on ethical shopping and being willing to pay higher prices to ensure that poor farmers receive better returns, this has put pressure on multinational corporations to ensure a measure of corporate social responsibility in their operations. Where the coffee industry is concerned for example, Nestle has introduced a fair trade instant coffee and claims that it is a commitment to help poor farmers, however organizations such as the World Development Movement have characterized it merely as a move to cash in on a growing market (BBC News Report, 2005). Consumers and world regulatory bodies are no longer content with superficial claims, such claims need to be backed up by Corporations with sustainable practices. Efforts to promote sustainability have also been advocated by the Kraft Company which now pays a premium of 8 to 12 cents per pound of coffee that is grown in accordance with standards of sustainability set out by the Rainforest Alliance.(Wunderlich 2006:11). Kraft is a significant competitor for Migros in Bulgaria, hence the Company will have to ensure that it uses eco-friendly methods in preparation of its products and take pains to promote itself as such. A recent market report in Bulgaria showed that non store retailing was just marginal, accounting for 1% of the market in Bulgaria (Euromonitor, 2007). Most consumers tended to shop at stores rather than using e-commerce and this could partly be explained by the fact that the electronic medium of commerce is not yet fully developed in Bulgaria but is still in its initial stages. As a result, it would appear that MIGROS would not be very successful if it utilized an online marketing strategy; rather the Company needs to set up its stores in the country and it could be useful for the Company to enter the market by setting up its stores in the capital city of Sofia. There are also problems with corruption in Bulgaria and the lack of a free press, but the popularity of products from capitalist markets and the capitalist image among young people could prove to be a big draw. Bulgaria, being a member of the European Union, is benefitting from free trade and European markets. The entry of retail superstores such as Migros could be viewed by young Bulgarians as the entry of western style stores and products into the former eastern bloc and the attendant ethos of Western culture, which could be a source of attraction for Bulgarian consumers. The most important factor that is in favor of the Bulgarian market is the fact that it is relatively untapped because it was a Communist controlled market for a long time, but this market now shows significant growth potential from a long term point of view. For the same reasons, Bulgaria offers economies of cost as compared to other European countries like Spain or Italy for example and the move to establish in Bulgaria is likely to be much less expensive than a move into the latter countries. Moreover, since the market itself is relatively new and not yet clearly defined, consumers would not have fallen into firm product purchase patterns and the existing brands in Bulgaria are still not firmly established. This leaves Migros with enormous scope for brand building in the Bulgarian market, especially for its M products and eco-label products, since it is like virgin territory that the Company can enter and build itself up. Some of the advantages inherent in being the first mover in a business opportunity are (a) technological leadership (b) pre-emption of assets and (c) buyer switching costs. However, there are also disadvantages associated with being the first mover, notably market uncertainty and shifts, as well as incumbent inertia and free rider effects. Migros is fortunate in some aspects that it is not the very first entrant, because it has not been subjected to the levels of market uncertainty that other companies could have been subjected to during Bulgaria’s transition from a Communist economy. The best entry strategy in Bulgaria would therefore be as a wholly owned subsidiary, in order to derive the maximum benefits. Bulgaria could be Migros’ pilot project in East Europe and can form a base from which it can expand into other east European countries that are likely to benefit economically in the neat future from becoming members of the European Union. In this way, Migros can avail of the full benefits in the long term potential that exists in this market. It will be able to achieve and maintain a degree of control over its operations that will not be possible in a joint venture, where there could be too much scope for stealing of technology, corruption and inability to realize location. It may be necessary for Migros to work in association with local firms in Bulgaria who have some clout with the Government and will be able to secure licenses, etc, however, it is recommended that Migros select a good distribution and marketing firm for this purpose. In this way, they will also be able to gain information on the internal problems that may be peculiar to the Bulgarian economy and way of doing business. However, by starting its own subsidiary, Migros can still retain full control over business operations and profits. Bibliography BBC News report, 2005. “Nestle launches fair trade coffee” [online] available at: http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/1/hi/business/4318 Country Profile: Bulgaria: [online] available at: http://news.bbc.co.uk/1/hi/world/europe/country_profiles/1059735.stm Euromonitor report “Retailing in Bulgaria”, http://www.euromonitor.com/Retailing_in_Bulgaria; Henderson, David R, 1993. David Ricardo. The Fortune Encyclopedia of Economics. Information and Communications technology in Bulgaria according to a foreign expert”, http://www.socialniprava.info/article1862.html; Mankiw, N. Gregory, 2007. “Comparative Advantage: The Driving Force of Specialization.” Principles of Economics. (4th ed) Thomson learning Merrett, Neil, 2006. “Costa Coffee to enter Bulgaria.” Beverage daily.com [online] available at: http://www.beveragedaily.com/news/ng.asp?n=71470-whitbread-costa-coffee-bulgaria-coffee “Migros”, http://finance.mapsofworld.com/company/m/migros.html; “Migros sets ambitious goal: 100% increase of sales with MSC-labelled”, http://www.msc.org/newsroom/msc-news/archive-2009/migros-sets-ambitious-goal-100-increase-of-sales; “Political and economic environment” http://www.properties-guide.com/guide/business-bulgaria/political-economic-environment; Porter, M.E. (1996), What is Strategy? 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