Bega Cheese Entry Strategy into the Norway Dairy Market - Example

Executive summary This report provides the results of a detailed analysis of the Norwegian and Argentina market with the aim of guiding Bega Cheese Company limited into choosing which of the two markets it should enter as it seeks to expand its footprints internationally. After a detailed market research, the report has provided a PEST analysis on the two markets with findings that doing business in Argentina would be more costly and cumbersome than it would be in Norway. The business environment in Argentina is characterized by huge barriers to entry as well as rampant corruption which lenders the business environment unattractive. On the other hand, the Norwegian market is more or less the same as Australia with exception of some degree of government interference with the agricultural sector. As such, this report recommends the entry of Bega Cheese into Norwegian market. However, a joint venture between Bega Cheese and one of the Norwegian dairies (Q- dairies ) is preferred owing to the fact that the company already has requisite infrastructure and a wealth of market experience in Norway. As such, Bega cheese will take advantage of these facts before making changes to the company’s offerings in accordance to its objectives. Table of Contents Executive summary 1 Table of Contents 2 Introduction 2 Company and product analysis 3 Comparative Country and Product Market Attractiveness 6 The preferred market 9 PEST analysis for Norway and how it compares with Australia 10 Comparison of Australia and Norway 13 Product market size 13 Competitive analysis 15 Buyer analysis 16 Target market segmentation strategy 16 Market selection with justification and opportunity statement 16 Entry strategy 17 References: 17 Introduction The purpose of this report is to perform an international market research on two dairy markets namely Argentina and Norway. This report is aimed at guiding Bega cheese into choosing one of the two markets as its next international entry point as it expands internationally. The report starts with analyzing Bega Cheese as a company as well as its products offering together with its performance and strengths with an aim of gauging its ability to enter the foreign market. The report then provides an analysis of the market conditions in the two countries before giving a recommendation of which of the two countries that Bega Cheese should enter. The report also analyses the state of the dairy industry in the two markets with an aim of gauging Bega Cheese competitive advantages over the foreign markets and hence the strengths it should capitalize on as it enters the new market. Finally, the report presents its recommendation of the best entry strategy that the company ought to pursue given the market conditions in the new market and the need to capture considerable market share in the new market as soon as it can. It is hoped that the management of Bega Cheese will find this report useful as they seek to expand Bega Cheese international presence. Company and product analysis Bega Cheese is rated the Australian number one cheese manufacturing brand that has a wide experience in its field. Since the company’s establishment in 1899, the company has earned a good reputation as a key player in the dairy industry not only in Australia but also on a global scale especially as far as the supply of natural and processed cheese to the retail and food service markets both in Australia and globally is concerned (Begacheese.com.au, 2015). The company is a listed public company after its successful IPO in 2011. The company has been acquisitive since 2007 doubling its size in just six years. It is worth noting that the company not only specializes in cheese production but it produces more than 100 sku’s that include infant formula, nutritional dairy products, milk powders, mozzarella, cheddar and cream cheese. This in line with the company’s aim of becoming a global leader in the production and sale of dairy products. This is aimed at ensuring maximum returns to the shareholders as well as suppliers. The company achieves this through aggressive innovation in a bid to remain ahead of the competition while conducting aggressive marketing of its products. In fact, its competitive advantage lies in its being highly innovative and hence its ability to supply high quality products in all the markets where it may be found. As stated above, the company’s main product is Bega cheese. The company’s portfolio also includes other 100 products which include infant formula, nutritional dairy products, milk powders, mozzarella, cheddar and cream cheese. The company’s products mainly satisfy consumer’s nutritional needs. It is worth noting that the company’s products have great nutritional value including calcium, protein, phosphorous, zinc, vitamin A. The product thus finds its use in the food service and bakery sectors across Australia and the global market as well. In this regard, Bega Cheese products are mainly targeted to the bakery, the hotel and retail sectors of the market. This is because the products mainly find their use in homes, hotels and the bakeries. As can be derived from the company’s website and the annual report, there is evidence that the company’s products have been performing very well in the markets the company operates. The company mainly distributes its products through direct sales as well as through its distributors that are evenly distributed in the markets where it operates. The company’s uses premium pricing for its products mainly to reflect their superior quality and the fact that the company is the market leader in Australia and also at the global arena. The company’s promotional efforts are largely done online through the company’s online platforms. It is also worth noting that the company also sets aside a considerable amount of budget for promoting its products on various channels including the various kinds of media as well as sponsorships for various sporting activities as well as through its corporate social responsibility activities. The company has witnessed solid growth in its performance in all areas that may be considered for analyzing financial performance with each indicator registering solid improvement year by year. The following table compares the company’s performance in both income statement and balance sheet items for the period between 2010 and 2014. Year EBITDA Profit before tax Net Assets Production-Tonnes 2010 $52,139,000 $21,799,000 $177,616,000 185,220 2011 $51,728,000 $22,090,000 $205,475,000 186,223 2012 $56,773,000 $27,079,000 $246,440,000 203,767 2013 $65,134,000 $35,349,000 $261,952,000 210,052 2014 $122,506,000 $93,580,000 $314,388,000 208,120 From the table, it can be seen that the company’s performance both in terms of assets and income as well as production has generally improved in the last five years. In addition, it is worth noting that the company’s balance sheet for the year 2014 shows that the company has a total of $210,746,000 in terms of both reserves and retained earnings (begacheese.com.au, 2014). Furthermore, the company has been operating in the international arena for quite sometimes with the company’s export business mainly dealing with consumer packaged goods business that centers on natural cheese, processed cheese and cream cheese products for the retail and food service segments in Asia and the Middle East. The company has also been exporting processed cheese and cream cheese for the food service and bakery sectors in China and South East Asia. In serving these foreign markets, the company uses various strategies including direct exportations of its products to the markets, joint ventures and strategic alliances in a bid to ensure that its products perform well in these markets. As such, this is an indication that the company does have enough resources and experience for going overseas. Comparative Country and Product Market Attractiveness Background information concerning Norway Norway is a party to the European Free Trade Agreement. The country is led by the Prime Minister Erna Solberg of the conservative party. Under him, the government has promised to lower taxes, increase investment in infrastructure, curtail immigration and decrease reliance on oil production. The country is ranked as one of the world’s most prosperous nation with fisheries, oil and metal being considered its most important commodities. Background information concerning Argentina The country is led by President Christina de Kirchner though it is to elect its new president this month. The country’s investment profile is badly damaged through fiscal and monetary mismanagement, expropriations and protectionism. The country has also been characterized by debt defaults both in 2001 and 2014. The country has seen its economic growth plummet causing increase in poverty rate while capital controls have aggravated capital flight with the economy dropping from the third to the fourth largest in Latin America. Comparison of Australia and Norway business environment Norway is characterized by a solid banking system as well as having significant natural resources as stated above. The country has been rated as having a strong business environment and has the second highest per capita income in Europe after Luxemburg. In addition, the country is credited for having highly skilled and educated workforce. However, the country’s, main weaknesses includes having very high household debt burden while it is described as losing in competitiveness. In addition, the country is highly dependent on oil prices since its economy lacks diversity. Argentina on the other hand has its main strengths in its abundance of natural resources that include agricultural, minerals and energy products. The country also boasts of a dynamic and developed agricultural sector and is also hailed for having a stable and democratic political system. Just like Norway, the country has highly educated and skilled workforce compared to its regional pears (Bradley, 2004). However, Argentina’s main weaknesses lies in its strong state interventionism which include prices, imports and capital controls as stated above. The country has also been accused of lacking data transparency especially on inflation and also of having a high risk of expropriation and nationalization. The country also lacks access to international financial markets owing to debt defaults as well as poor relations with lenders. The country is also characterized by an unbalanced policy mix of high inflation and loose fiscal policy. In general, the country is described as having a weak business environment. The 2015 economic freedom report ranks Norway 5th least corrupt country out of 177 countries. The country has put in place well established anti-corruption measures that reinforce a cultural emphasis on government integrity. The country’s judiciary is independent while its court system operates fairly both at the local and national levels. In addition, private property rights are securely protected while commercial contracts are reliably enforced. On the other hand, Argentina has been described as being corruption plagued with scandals being common. In addition, Argentina’s justice system has been afflicted by scores of tenured but incompetent and corrupt judges. The judiciary has also been described as being highly politicized. The highest individual income tax rate for Norway is 47.8% with the highest corporate tax rate being 27 percent the country’s other taxes include value added tax, tax on wealth and environmental taxes (Eulerhermes.com, 2015). The country’s overall tax burden stands at 42.2 percent of its domestic economy while its public expenditure amounts to 43.3 percent of its domestic production with its public debt amounting to 30% of its GDP. On the other hand, Argentina’s corporate and individual tax rates are 35 percent. There are other taxes that include value added tax, wealth tax and tax on financial transactions. The country has a tax burden of 29.5 percentage of gross product while government spending amounts to over 40 percent of the country’s GDP. The country’s public debt is about 50% if it’s economic size. It is worth noting that the country’s government is in technical default owing to restructured bond payments. Norway has an efficient and transparent business framework that is supportive for private sector development. Business incorporation in Norway costs about 1 percent of the level of average annual income and involves only four procedures. The non-salary cost associated with employing an employee is high though severance payments are not overly burdensome. The country has maintained monetary stability though the government has subsidized several renewable energy projects. On the other hand, Argentina has seen government regulation increase thus undermining efficiency and productivity growth. Establishing a new business in Argentina is cumbersome while obtaining the necessary permits remains costly. The reforms aimed at the labor market have stalled while the government has been accused of underreporting official inflation statistics the government also regulates electricity prices, gasoline, water and other essential products while it pressures companies to fix wages and prices. Norway has a 0.3 percent average tariff rate though the country’s agricultural sector is subsidized and protected from competition. The country experiences few barriers to international trade and investment while foreign investors generally receive national treatment. The country has a well-developed financial system that provides a wide range of services while bans generally remain well capitalized the state has retained ownership of the largest financial institutions on the other hand, Argentina has a 5.6 tariff rate percentage with non-tariff barriers including import licensing and an official import substitution policy (Eulerhermes.com, 2015). Foreign investment in some of the Argentina’s sectors of the economy is regulated. In addition, the government exerts considerable control of financial activities. The country’s largest bank that is state owned and the sole financial institution on some regions is known to allocate credit based on political expediency. The preferred market Based on the above factors, Norway is ranked the 6th most competitive economy globally. However, Argentina’s competitiveness is hindered by corruption and government interference with business. In other words, Argentina faces a lot of barriers to entry and even doing business in Argentina has been found to be more costly compared to Norway. Limited access to financing owing to the fact that Argentina is rated poorly owing to its defaulting on paying debts, high rates of restrictive labor practices, many non-tariff trade barriers, bureaucracy in business, political interference in business and the fact that there is high risk of nationalization including capital restrictions are some of the factors that undermine Argentina’s competitiveness as an investment destination. Consequently, the country is ranked 169th globally in terms of economic competitiveness. It is for this reason that Bega Cheese would want to venture into the Norway market because as can be seen from the above analysis, it would be easier and less costly to do business in Norway than in Argentina. Though there would be tax savings in Argentina, the country’s regime that is characterized with corruption, trade barriers and restrictions and little respect for private property makes decisions to invest in Argentina highly risky. PEST analysis for Norway and how it compares with Australia Political environment Just like Australia, Norway’s political environment remains one of the most stable globally. The country’s fragmented party system leads to the formation of a large number of minority governments thus resulting in culture where decisions are made based on political consensus. Though the country is not a member of the EU, it is part of the European Economic Area which gives it full access to European markets. The government in Norway has an important role to play in the country’s oil sector and it has a controlling stake in the country’s largest oil company that accounts for 20% of the government’s revenue. The government’s role in business is increasingly dwindling with increased privatization of key industries as well as increasing public-private partnerships. The country has also heavily invested in new infrastructural projects that include road, railway, health and educational infrastructure with a$16.8 billion fund being set aside. As stated above, the country is open for foreign relations and trade with foreign direct investments in 2014 being $9.3 billion. In addition, though the country is not a member of the EU, it has access to all the EU markets having adopted almost all EU directives. As stated above, there are limited trade barriers in Norway. Though the dairy industry has for a long time been regulated by the government, it has now been deregulated with private sector increasingly entering the industry. This provides a market for Bega Cheese since the industry is still in its early stages and hence the competition is not much intense. Just like Australia, the country has very low security risks with the country experiencing low crime rates and hence crime is not considered a threat to business in Norway. Norway just like Australia is characterized by efficient enforcement as well as low levels of corruption owing to strong anti-corruption regulations and authorities. It is also worth noting that business licensing in Norway just like in Australia is relatively easy while it takes just a short time. Economic environment Just like Australia, Norway is a free market economy that has the second highest per-capital income in Europe after Luxemburg. The government has successfully provided a corruption free environment while the economy has a highly educated and skilled workforce. With the government’s promises to diversify the economy from overreliance on oil, the Dairy industry can expect to grow which would be ideal for Bega Cheese. The country has relatively stable exchange rates that are characterized with a stable monetary and fiscal environment. It should however be noted that taxation rates are relatively high in Singapore compared to Australia. It is also worth noting that Norway is the fifth largest oil exporter globally while it ranks second in natural gas exportation. As such, lowering oil prices are likely to affect the country’s economy negatively. However, the country has been rated as having low economic risk and has been rated as the 6th globally in terms of ease of doing business. Social and cultural environment Norway has a population of 5.1 million people. Of these, slightly less than one percent are the indigenous Sami minority while the rest of the population is mainly composed of immigrants mainly from Sweden and Denmark. Norway’s social cultural environment is characterized by stable social conditions that include low levels of unemployment, equitable income distribution as well as widespread acceptance of cultural diversity and immigrants thus helping keep security risk at bay (Kluyver, 2012). Of importance to Bega Cheese is the fact that the most typical Norwegian food is brown cheese that is eaten on bread. Milk products including cheese, butter and yogurt also form an important part of Norwegian meals. This implies that given the high quality of Bega Cheese products, they will find a ready market in Norway. Technological environment Norway just like Australia is a highly industrialized country with the government setting aside $16.8 billion fund for railway, roads, education and health infrastructural development. In the same vein, the country is considered one of the most industrialized countries in the world. As such, Bega Cheese can expect to find the right technology for production of superior quality products in the country. It is also worth noting that the country is also highly advanced as far as information technology and telecommunication is concerned with the whole country being connected to some source of internet. This is important for Bega Cheese as it can take advantage of the technology in advertising and selling its products in the country. Agricultural factors Norway just like Australia has the right climate for dairy farming and hence production of dairy products. The government of Norway is also very supportive to the agricultural industry. It should be noted that until recently, the dairy industry in Norway had been a highly regularized one. However, efforts have been made to deregularize the industry though the government still shields the agricultural industry from imports. Comparison of Australia and Norway As discussed above, there are a lot of similarities between Australia and Norway as far as the marketing environment is concerned. It is however worth noting that THE Norway dairy industry is not as developed as the Australian one. It is worth noting that the industry had for a longtime been regulated by the government until 2002 when deregularization started it is also worth noting that the government has a lot of support for the agricultural sector and sometimes it restricts importation of agricultural products with an aim of protecting the industry. As such, this will affect Bega Cheese entry strategy for the Norway market In this regard; the company intends to first enter into a joint venture with one of the major dairies in Norway which has wide experience for the market. Product market size Norway Dairy market is mainly composed of retail sales of Cheese, chilled desserts, cream, fromage frails, spreadable fats and yogurt. The market has been generating about $2.8 billion with an annual growth rate of 3% for the last five years. It is however worth noting that Cheese sales are the most lucrative for the Norwegian dairy market given that it generates total revenues of more than $780 million which equals to 27% of the overall market value. as stated above, the market is expected to continue growing at 3% and is expected to reach a value of $3.3 billion by the end of this year. As indicated above, the dairy market in Norway is segmented into a number of segments with the most significant segment being that of Cheese that accounts for 27% of the market. The market generates sales revenue of more than $780 million with a large portion of it being made of imports mainly from the EU countries based on quotas where Norway is allocated around 5,000 tomes. Another important sector is the drinking milk sector which is still underdeveloped compared with those of Norway’s neighbors since organic products accounts for only 1% of the total market sales (Staahl, 2010). However, the sector is expected to continue developing with it expected to experience 2% annual growth. The yoghurt and sour milks is also an important segment in the Norwegian dairy market. The sector is driven by product innovation and rising popularity of imported yoghurt such as Greek yoghurt as well as increasing competition from alternatives including fromage frais and quark. The health and wellness awareness trends have also been noted to greatly impact growth in the sector. It is worth noting that imports in the segments accounts for about 15% of the segment’s total sales while the segment is expected to grow by 8% annually. The dairy market in Norway is still in the growth stage given that it as a highly regularized industry until recently. Competition is not intense as the industry is still controlled by Tine that controls 54% of the market the market is supplied by both local and foreign sources though majority of the suppliers are locals. The sources of foreign supplies are mainly from the European Union including Denmark and Greece. It is also worth noting that Australia is also a minor player in the imported milk products in Norway. The major forms of marketing/distribution channels used in Norway are direct sales where retailing is most prevalent. Competitive analysis The market is composed of one big company controlling more than half of the market although there are also other minor players. Tine is the dominant company in the Norwegian dairy industry where for instance it controls 54% of the cheese market. In addition, the company controls prices in the market where it has been accused of charging high prices for its products in Norway at more than 5% above the competitive rate while exporting the rest at lower prices. However, it should be noted that the quality of its products is poor though it is owned by the main famers cooperative union in the Norwegian dairy industry with its Norvegia and Jarlsberg cheese brands being household names in Norway (Euromonitor International, 2014). Its Gudbrandsdalost is Norway’s third largest cheese brand and is the leading brown cheese alternative. There are other smaller dairies in Norway which include Q-Meieriene that controls about 30% of the market. Other smaller competitors include Synnove Finden that is considered a small national competitor. It should be noted that all these competitors are locally based. As can be seen above, there lacks any serious competition in the sector and hence Bega Cheese stands a chance to secure a considerable market share in the market. This is because the company has many years of experience in producing high quality cheese as well as advanced technologies with which to produce superior products than the company’s competitors to be. This coupled with the company’s high levels of being innovative will be our competitive advantage in that we will provide the alternative competition that is so much desired in this market. As such, our company’s segmentation strategy will be based on the above strengths of providing high quality innovative products at highly competitive prices to the market. In addition, we will put in place a substantial budget that will be used in promoting and positioning our products as the best in the market. Buyer analysis The Norwegian buyer can generally be grouped into domestic consumers given that Cheese is an important part of Norwegian meals as well as the bakeries and hotels segments where our products would find increased use. Norwegians generally like brown cheese though they can’t be described as having much interest in the drinking milk. As such, our products will mainly be cheese and other processed products such as yoghurt and cream for this market. Target market segmentation strategy Bega Cheese will mainly segment its markets based on demographics and behavior. With regard to demographics, our products will mainly be targeted to people of all ages. However, our main focus will mainly be on families since Cheese forms an integral part of their meals. On the other hand, the behavioral segmentation will be based on the fact that tourists are big consumers of cheese. On the other hand, the students and the working class like milk products such as yoghurt as well as products that have cheese as ingredients (Reidar, 2012). In this respect therefore, we will also concentrate on selling our products to the bakery and confectionery industry as well as the hotel industry where our products might find great use. Market selection with justification and opportunity statement As stated above, the Norwegian dairy market is still in its growth stage and there lacks strong competition. As such, the dominant market player (Tine) has been accused of misusing its dominant position by offering poor quality products and setting very high prices for the consumers. As such, this is a gap that Bega Cheese seeks to fill in the market. This will be done by offering high quality products that are not only innovative but offered at competitive prices by investing in the right technology in Norway. Entry strategy Bega Cheese entry strategy in to the Norway Dairy market is intended to be a joint venture. In this regard, the company intends to enter into a joint venture with Q dairies where it will have a controlling stake of 51%. The joint venture is preferred above any other entry strategy given the fact that the Norwegian government is very much protective of its agricultural sector sometimes putting in imports restrictions in a bid to protect the industry from competition from imports. As such, the joint venture is preferred in this case. Furthermore, Q dairies already has considerable experience of the Norwegian market given that it has a considerable market share and hence the market share will readily be at our disposal (Jeremy, 2011). In addition, the company already has established infrastructure in Norway while it has control on a supply chain. This means that after the deal is signed, we can hit the ground running and thereafter gradually effect changes that will see the joint venture gain a larger market share in the market by introducing high quality and more innovative products into the market which will be competitively priced. References: Begacheese.com.au, 2015, Bega Cheese, Bega. Real Town. Real Cheese, Retrieved on 12th October 2015, from; http://www.begacheese.com.au/ begacheese.com.au, 2014, 2014 Annual Report Bega Cheese Limited, Retrieved on 12th October 2015, from; http://www.begacheese.com.au/wp-content/uploads/2014/08/Annual-Report-June-2014- final-signed.pdf Bradley, F2004, International marketing strategy, Pearson Education, Canada. Eulerhermes.com, 2015, Argentina economic research, Retrieved on 12th October 2015, from; http://www.eulerhermes.com/economic-research/country-reports/Pages/Argentina.aspx Eulerhermes.com, 2015, Norway economic research, Retrieved on 12th October 2015, from; http://www.eulerhermes.com/economic-research/country-reports/Pages/Norway.aspx Kluyver, C2012, Fundamentals of global strategy, London, Rutledge. Staahl, G2010, The Tine Case- the question of dominance, Retrieved on 12th October 2015, from; http://www.competitioneconomics.org/dyn/files/basic_items/346- file/The%20Tine%20case.pdf Euromonitor International, 2014, Dairy in Norway, Retrieved on 12th October 2015, from; http://www.euromonitor.com/dairy-in-norway/report Reidar, A2012, Norwegian dairy industry: A case of super-regulated Co-Operativism, Retrieved on 12th October 2015, from; http://www.researchgate.net/publication/242336491_Norwegian_Dairy_Industry_A_Cas e_of_Super-Regulated_Co-Operativism Jeremy, S2011, International marketing strategy, New York, John Willey & Sons. Read More