Newman Vintage - Possible Expansion into Canada - Case Study Example

Newman Vintage Feasibility report of possible expansion into Canada Table of Contents Abstract ………………………… 3 Introduction ………………….… 4 Company profile ………. 4 Country profile ………….. 5 Wine market …………………... 6 Pestle analysis ………………… 7 Political …………………. 7 Economic ………………. 9 Sociological ……………. . 9 Technological ……………11 Legal ……………………. 11 Environmental ……………12 Market entry strategy …………. 13 Competition …………………….. 15 Conclusions ……………………. 16 References ……………………… 17 Appendix …………………………19 Abstract This paper is a business report on the feasibility of Canada as new market for Newman Vintage as a wine making company based in Australia. Canada as a country fit for any business is reviewed and the prevailing business environment analyzed. The fundamental principles of the wine market are reviewed and placed in the context of the Canadian and Australian market into order to gain a comparative outlook. The report also analyses Canada’s wine market using PESTLE analysis tool. The report will also evaluate competition and highlight their strengths, weaknesses and tactics in the market and how Newman Vintage can handle that. Based on the finding of the above analysis, the report gives a suggestion on the best entry method into the market and makes conclusions on whether to go on with the venture or not. 1.0 Introduction 1.1 Company profile Newman Vintage is a fictitious wine making company based in Sydney Australia. The Company is involved in making and processing some of the best wines from a number of some of the richest and most fertile vineyards in the world. The company owns three wineries in the region which in total produce 13 different brands of wine. The company’s specialty is on red dietary wines with white wines considered as a minor project for the company. The company owns 17 vineyards spread across the country measuring a total of 1 100 acres. On average, the company produces 2 million liters of wine annually. However, with the planned expansion program, the company is planning on increasing its capacity to 5 million liters annually. In the domestic market, the company is represented well by our 13 brands whose performance in the short period of operations promises the company success in the new markets. The Australian wine industry has concentrated much on segmenting the market into two as the urban people and the country people. However, production of wine has not been limited to these markets as shown by the dominance of red and white wines varieties such as shiraz and chardonnay respectively. Newman Vintage has adopted a value oriented approach in production other than volume. The Australian wine market is highly competitive forcing industry players to seek alternative markets. In 2006–07, sales of Australian wine totaled approximately 1.23 billion liters: 449 million liters were sold domestically and 786 million liters were exported worth A$2.87 billion thus registering a 4.4 % year-on-year increase. The UK is Australia’s largest wine export market in 2006–07 trading year at 269 million liters, worth $977 million, closely followed by the United States (215 million liters, worth $856 million). Other leading emerging destinations are Canada, Germany and New Zealand. Newman Vintage has identified Canada as a potential candidate for their international expansion program. 1.2 Country profile Canada’s development is greatly linked to her close economic ties with the US and Mexico through the North Atlantic Organization (NATO) (The economist). As such, the current economic crisis affecting the US and the world at large is affecting Canada’s economy in two ways. 1) the global recession is being experienced in all countries with Canada being no exception 2) Canada relies heavily on bilateral trade with her southern neighbor the US whose economy is in a recession. As such the Canadian wine market is experiencing the slowdown in two ways through a fall in domestic demand and decrease in exports. Nevertheless, there are promising trends in the wine consumption industry with the growth of a wealthy wine-savvy middle class and a growing trend that is gaining favor in wine consumption across the classes. Therefore, the scenario offers an idea on the best policy by introducing a wide range of brands that would cater for the various income earners. 2.0 Wine market The success of Newman Vintage in Australia and the pending expansion into foreign market is powered by and good business and management practices, integration of wine into the Australian culture which is associated both in business and leisure (DFAT). Ramburuth et al (2005) says that proven marketing skills through experience is an asset to a marketer. He notes that a proven strategy allows a marketer to specialize and modify the strategy to suit changing market conditions. As such, Newman has the opportunity to increase wine consumption in Canada for the company’s benefit by aligning wine with the culture of the Canadian people whether for business and leisure. According to DAFT, Australia currently exports A$264 worth of alcoholic beverages to Canada annually, a yardstick that our company is using in assessing the size of the wine market in Canada. The wine market in Canada is also highly developed with the country’s wine exports for 2007 being in excess of US$25 million inclusive of other exports such as fermented beverages, cider, fruit wines, perry, mead and hard lemonades. The production and marketing of alcoholic beverages in Canada is under strict regulation by provincial and national regulatory bodies. As such, the laws tend to vary from one province to the other making it hard for players to adopt a nationwide strategy in marketing their products. However, the provincial jurisdictions are guided by a national body called the Vintners Quality Alliance (VQA) which acts as the wine regulator like is all the case with all European wine-growing countries. The national VQA acts as the fundamental law making body with the provincial VQA building on these laws for detailed specifications. One of the national VQA requires that wines must be local and that they are grown in their designated viticultural area. The body has also set a minimal sugar content for specified grape varieties (DFAT). Again, this regulatory body issues seals that have to appear on each bottle as a mark of quality verification. 3.0 PESTLE analysis 3.1 The political factors Sales tax in the country is charged by the federal government at 5 % currently but was 6% before 2008. This levy adopts different names from one province to the other. The main ones are Harmonized Sales Tax (HST) and Goods and Services Tax (GST). All provinces also charge an additional levy separately on top of the federal one except for Alberta province which does not. Nova, Scotia, New Brunswick and Newfound Land and Labrador have harmonized and combined their sales tax with the federal one so as the sales tax in these provinces is one but higher. All wines are legible to HST/GST taxation but an additional taxation on alcohol is imposed. Unlike in Australia where taxation is not hinged to the alcohol content of wine (basic requirement for taxation is over 1.15% ethyl alcohol content), Canada imposes taxes on wines according to the alcohol content. In Australia, all wines are taxed at 10 per cent by the Goods and Services Tax (GST) and all are liable for 29% of Wine Equalization Tax (WET) (Taxation of wine). Again the Municipal governments charge property tax to entities within their jurisdiction. The charges vary from one municipal to the other. All export and import businesses or those that are eligible to pay GST/HST in Canada have to be registered with Canada Revenue Agency and issued with a Business Number (BN) (Government of Canada). The registration process is divided into four programs; Corporation Income Tax, Goods and Services/Harmonized Sales Tax, Payroll Deductions, and Import-Export accounts (CRA). This process however can be done online. Excise tax is charged on luxury goods otherwise considered as demand inelastic goods such as alcohol, and cigarettes. In the case of alcoholic beverages, a seemingly different approach is used. Tax rates are set according to alcoholic content. As such, taxation is higher on low alcohol content than the stronger ones hence the relationship is somehow inverse. This has caused underdevelopment of the low alcohol drinks market in the country. (Stockwell et al 2006) According to the Australian treasury department, wine taxation in Canada is as follows. A rate of C$0.5122 per liter is charged to wines with more than 7 % absolute ethyl alcohol content by volume. A rate of C$0.2459 per liter applies to wines with 1.2 -7 per cent absolute ethyl alcohol by volume. For wines with less than 1.2 per cent volume or less the rate is lower at C$0.0205 per liter. The bilateral trade relation between Canada and Australia are termed as “mature, highly productive and broad based” by DFAT. Trade between these two countries totaled A$3811 million Canada is a member of NATO, Asia-Pacific Economic Cooperation (APEC), Organization for Economic Cooperation and Development (OECD) and North Atlantic Free Trade Agreement (NAFTA) among others. 3.2 Economic factors The country has a low population with a high living standard. The economy is highly reliant on services industry accounting for 70% of the GDP (DFAT) employing 75% the labor force. The country has very close economic ties with the US where 79% of her imports are to the US while Canada sourced her 65% of her imports from the US as of 2006 (DFAT). Therefore, the fall of the US economy in recent times has seen a fall in the Canadian Economy which contracted by 3.4% in the 4th quarter of 2008. However, the Bank of Canada is expecting a recovery in 2009 with a projected 3.8% GDP growth in 2010 though empirical evidence shows otherwise (DFAT). Per capita income in the country is higher at US$39,300 as compared to Australia’s of US$38,100 according to 2008 estimates (CIA). 3.3 Sociological factors The “sophisticated wine drinkers” of Canada have moved towards integrating wine consumption into their life. This has resulted into increased average consumption. A research by Centre for Addiction and Mental Health in Ontario labeled alcohol "our favorite drug which we take for granted which in general is responsible for putting people's health and safety at some degree of risk." (Mann, 2008) Wine and alcohol consumption is accused of causing many traffic accidents and deaths in Canada thereby campaigning against wine consumption. Mann (2008) further reports that alcohol is the largest cause of criminal deaths in Canada. He further reports that alcohol consumption impairs reasoning and driving ability even with the smallest level of blood alcohol content. He says that a research in Ontario showed that “an increase of 1 liter in per capita, or average, consumption of alcohol would result in an increase of between 8 and 14% in drunk driver deaths.” This has in effect the potential to lower wine consumption on drivers. On the other hand these observations have seen civil groups call for the lowering of the blood alcohol content limit for driving at 50mg% from the standing 100mg%. This again has the potential to shrink the wine market (Mann, 2008). The population composition according to the Canadian government lists Islam as a minor religion in the country. Islam prohibits wine consumption while Christianity in some manner encourages wine consumption. In Canada, Christianity is the main religion thus a plus point for the wine industry. Contrary to the situation in Australia, wine consumption in Canada is not regular: It is only consumed during special occasions. This presents both an opportunity to Newman Vintage and a challenge too. 3.4 Technologic factors Levitte and Rugman (2003) recognize the role of technology and innovation in business and say “it is a powerful force that drives the world toward a world of converging commonality in a global market.” In the case of Canada, technology levels are very high in the wine industry, this fact is best explained by the invention of new hybrid grape varieties, new and better faming methods and also processing. Telecommunications and distribution channels are excellent. This presents Newman Vintage with a favorable opportunity to market and distribute her products within the various provinces. 3.5 Legal factors The laws and regulations governing the Canadian wine industry are largely divided into two, national and provincial. While the national laws override those of the province, the provincial laws and regulations vary accordingly. The federal government has not placed any wine imports quotas. Although the Canadian wine market is highly regulated, there are no quotas for importation. In 2007, the country imported C$1.6 billion worth of wine registering a 10% increase from the previous year. The increase in importation in Canada comes in a time when global wine consumption is falling. However, the Financial Post reported that the wine consumption was on the increase in Canada as shown by the increase in the last few years. British firm IWSR reports that wine consumption in Canada increased by 26.6% from 2003 to 2007. The report also expects that the rates will have increased further by 2012 (Shumel, 2009). In fact the Australian Wine and Brandy Corporation terms Canadians as “sophisticated wine drinkers who tend to rate quality over price.” According to the same source (Shmuel, 2009) importers are leading the growth in the industry implying that the local manufacturers have given more concern to price than quality. Quebec favors imports from France and Italy while other provinces such as Ontario and Alberta prefer Australian wines. However, this observation should not be expected to override the popularity and market power of the Canadian Icewine which enjoys a good market share. 3.6 Environmental factors Canada has maintained a good environmental record by global standards despite her intense natural resource exploitation. The Canadian Environmental Protection Act (CEPA) offers and formulates environmental guidelines whose enforcement is undertaken by the three levels of government. This act regulates emission of toxic waste. It requires consultation with the local people insetting up business and calls for penalties for defaulters. This act calls for the suing of directors of companies that default this law (Osler). The Environmental Protection Act (EPA) in collaboration with the Ontario Water Resources Act proscribes secretion of water and sewage in the excess of 50 000 liters daily. Each province provides it own guidelines on the acceptable levels of greenhouse gas emissions. 4. 0 Market entry strategy Lockshin and Hall (n.d.) observe that wines from New World carry brand names which the consumers in the target markets such as Canada are not aware of. They therefore check out for the region, sub-region and country of origin, the vintage date, the grape variety or blend, the negotiant (blender of the wines), style (eg, bottle fermented, late harvest), the wine maker, and the specific vineyard if any. Basically, they tend to rely on the intrinsic and extrinsic values of the wine. Extrinsic values can such as price, brand name and packing can be changed without changing the product while intrinsic values entail changing the product. Consequently, consumer behavior in regards to wines is more complex than in other contemporary goods and services. Mann (2008) quotes Piercy (1982) who stresses the fact that the level of expansion into foreign operations “depends on endogenous versus exogenous motivating factors, that is, whether the motivations were as a result of active or aggressive behavior based on the firm's internal situation (endogenous) or as a result of reactive environmental changes (exogenous). In the case of Newman, the expansion programming is explicitly stated in the company’s mission statement and hence its part of the endogenous factors and not a reaction to exogenous factors. As such, the author recommends that the expansion should be slow and gradual in order to take in all the market factors and determinants that have the capacity to interfere with existing company processes. The Trade and Enterprise department of New Zealand, groups the Canadian wine market into four geographic market segments. the western provinces (British Colombia, Alberta, Manitoba and Saskatchewan) Ontario Quebec the Maritimes (New Brunswick, Prince Edward Island, Nova Scotia, and Newfoundland). Hill (2006) says that the essence of market segmentation is to allow marketers to target different markets and audiences in the most appropriate manner that appeals to that segment. That way, the marketer achieves high efficiency in the marketing efforts. In the case of Canada, wine marketing in the above markets has to be done with the approval of the provincial VQA’s whereby they obtain a license. In Canada, all marketers and more so importers have to go through authorization and approval by the liquor boards both at the federal and provincial levels. These provincial boards in exception of Alberta, regulates the importation, distribution and retailing of all alcoholic beverages in their areas. Basically all exporters must have their products ‘listed’ with each board in whose jurisdiction they wish to operate in. A successful market entry strategy in such a highly regulated market therefore would be establishing an alliance with a registered local agent who already operates in the targeted company’s products and processes the licenses in order to avoid the impending legal requirements. As such, Newman Vinatge is best positioned to seek an alliance with an established wine firm in Canada well positioned in New World wines affiliated provinces. Increased and growing demand for New World wines. Wine tourism is best understood to involve travel though the Hill (2006) informs us that experimenting with various wine varieties and labels is a good form of wine tourism. Australia’s position in the global wine market puts the company in a favorable position as the country as a brand name in wine production enjoys good recognition. The growing affecting for premium wines and those from the New World wines coincide with company’s entrance into the new market. 5.0 Competition The Canadian market is well served with local and imported wines and hence the market is well served. However, there still are existing opportunities for good wines with the right marketing mix and marketing skills. The Canadian Icewine is the dominant variety of wine made from high-quality grapes. The wine is marketed on the promise of a unique processing that entails pressing immediately after harvest, while still frozen solid to release small amounts of intensely flavored juice with a very high natural sugar content that is fermented slowly and bottled several months later. This process gives out the characteristic immense sweetness and high acidity levels that the icewine is known for. Canadian vintners have adopted a global perspective by incorporating a wide range of grapes such as Vitis Vinifera varieties deviating from the traditional Labrusca grapes. The Agriculture and Agri-Food Canada assists the vinters in the development of new grape varieties, processing and testing and improvement of production methods thereby a means of subsiding the industry. This has seen the industry grow which in 2007 manufacturing shipments of wine totaled $727.7 million, a 76% increase over $413.5 million in 1997 (The Australian wine industry). 6.0 Conclusions As shown above, the Canadian wine market has many opportunities presented by the change in taste by the people to new world wines. Canadians are seeking to explore what other parts of the world have to offer in terms of wine. Seemingly, there is very little brand loyalty in such a market as consumers are seeking adventure by exploring new wines different from what the already well developed wine industry in the country has to offer. In such a market, Fatehi (2007) advises that a marketer should keep on making brand extension or inventing entirely new brands to feed the market. Newman Vintage has an excellent opportunity in the Canadian wine market presented by willing and economically empowered wine consumers. Again the country has the political stability that is needed to guarantee non interference with marketing activities. In addition, the infrastructure allows smooth operations necessary to manage and coordinate activities in Australia and Canada. Again trading relations between the two countries favors our venture. References Agri-food trade service “Canada's Wine Industry”, Retrieved on 16th April 2009 from, http://ats.agr.gc.ca/supply/4227_e.htm “Alcohol consumption rises by 13% since 1997,” Retrieved on 16th April 2009 from, http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20051215/alcohol_statscan_20051215/20051216/ AP LA Times April 8 2009 Americans top the world in wine-drinking as global consumption shrinks, Retrieved on 16th April 2009 from http://www.latimes.com/business/la-fi-wine8-2009apr08,0,3819303.story Australian Wine and Brandy Corporation, Retrieved on 16th April 2009 from, http://www.wineaustralia.com/australia/Default.aspx?tabid=361 Australian treasury department, international comparison taxes, http://comparativetaxation.treasury.gov.au/content/report/html/10_Chapter_8-06.asp Canada Country Brief - March 2009, v Retrieved on 16th April 2009 from, http://www.dfat.gov.au/geo/canada/brief.html CIA Factbook, Retrieved on 16th April 2009 from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html DFAT, The Australian wine industry, Retrieved on 16th April 2009 From, http://www.dfat.gov.au/facts/wine.html Fatehi, Kamal, Managing Internationally: Succeeding in a Culturally Diverse World London: Sage, 2007 Government of Canada http://www.cra-arc.gc.ca/tx/bsnss/tpcs/bn-ne/ndn/menu-eng.html Hill, Charles (2006) Global Business Today 4th ed, Boston: McGraw Hill Lockshin, L., and Hal, John, Purchasing Consumer Behavior for Wine: What We Know and Where We are Going, Retrieved on 16th April 2009 from http://www.unisa.edu.au/winemarketing/conferences/docs/File030.pdf Mann, Robert, Reducing alcohol-related deaths on Canada’s roads, Presentation to the Standing Committee on Justice and Human Rights, 2008, Retrieved on 16th April 2009 from, http://72.14.235.132/search?q=cache:sMNjmbotKkMJ:www.camh.net/Public_policy/Standing%2520CommitteeImpaired%2520Driving08.pdf+alcohol+related+deaths+canada+2008&cd=2&hl=en&ct=clnk Osler, Retrieved on 16th April 2009 from, http://www.osler.com/resources.aspx?id=8745 Ramburuth, Prem and Welch, Catherine (eds) Casebook in International Business, Sydney: Pearson Education, 2005 Shumel, B. “Wine consumption on rise in Canada”, Financial Post 31 Jan 2009, Retrieved on 16th April 2009 from http://www.financialpost.com/story.html?id=1238220 Stockwell, T., Leng, J. and Sturge, J. Alcohol pricing and public health in Canada, Center for addictions and Research of BC University of Victoria British Columbia Feb 2006 Taxation of wine, Retrieved on 16th April 2009 from, http://comparativetaxation.treasury.gov.au/content/report/html/10_Chapter_8-06.asp Trade and enterprise, Retrieved on 16th April 2009 from, http://www.nzte.govt.nz/explore-export-markets/market-research-by-industry/Food-and-beverage/Pages/Wine-and-alcohol-market-in-Canada.aspx Appendix table 8.3.1: Taxation of wine — OECD-10 Source: OECD Consumption Tax Trends, 2004. Read More