The Rapid Globalization Process - Essay Example

Table of Content Content Page Introduction 01 2. Product Overview 02 3. Market Overview and Business Potential. 02 4. Customs requirements Import Destination (India) 04 1. Export Destination (UK) 06 5. Import and Foreign Exchange Regulations – India 06 6. Proposed Contract Terms 07 7. Physical Distribution Methodology 09 8. Proposed Marketing Methodology 10 9. Conclusion 12 10. References 14 Appendix I – Proposed Pricing Structure 15 1. Introduction Today, with the rapid globalisation process the Free Trade is increasing and some of the economies, which were closed in the past decade have opened up for foreign goods as well as foreign direct investments. These developments in the world market is producing extremely attractive business opportunities in terms of new and emerging markets in countries such as India, China, Brazil and Russia. India today is one of the most attractive markets with its vast population accounting for over one sixth of the human race. Having practiced closed economic policies until late 1980,s the country embraced open economic policies in 1990s and have steadily gained prominence in the global market place with its large market size as well as production capacities (Hill 2003). Although the Indian society traditionally took a nationalistic stance towards foreign imports and foreign investments, the trends have reversed today. With the Indian economy being widely boosted by its massive software development industry and Business Process Outsourcing operations, the country is becoming a hub for international dealings, and the life styles of the new generation of Indians are affected by global products and global trends (India and The Global Economy 2006). Although the country provides attractive potential in terms of market size, the vast diversity in cultures, religious and over hundred languages and dialects present, it a challenge for international firms to enter and succeed in the Indian market. The legacies of its closed economic policies are also still prevalent and bureaucratic red tape still surrounds the import-export regulations, foreign exchange policies as well as customs procedures. This report attempts to provide required background information for planning the export operation of Zingo Instant Noodles to the Indian market being manufactured in UK by NutriSnacks Company Ltd. The company will enter the market through an appointed agent – Partell Group that will act as the importing party of the product. 2. Product Overview Zingo Instant Noodles is a 80 grams instant noodle pack with seasoning sachet included. The existing product line carries 6 flavours in terms of the seasoning included within including chicken, roast beef, mushroom, tomato, cheese and seafood. The product is currently number two in the UK and a host of other European markets, closely behind the market leader Blue Dragon 3 Minute Noodles. Zingo positioning is based on offering a nutritious snack diet for the young kids who gets hungry easily. The two-minute cooking time coupled with flavours, which are mild and appealing to the young kids have made the product a firm top seller within this primary target group. The product retails at £0.35 per pack in UK. The current UK sales is 7 million packets per month while the international sales are over 17 million packets per month, with over 8 million packs being sold in Vietnam. The products being sold in Vietnam is now being manufactured in one of NutriSnacks Company Limited’s subsidiary established in Vietnam for catering to the East Asian markets. For the purpose of exporting to the Indian market, the company will select 4 flavours initially. While retaining the Chicken, Cheese & Onion and Tomato flavours, from its original line, a new flavour as sweet and sour will also be introduced to cater to elder children who prefer spicy meals, which is common in Indian cuisine. The initial market studies have indicated that brands available in the Indian market are all 65-70 grams. As the market is highly price sensitive, it is recommended for NSCL also to introduce their product in 65 grams size for the Indian market. As packaging has to be done exclusively for the Indian market, this weight change can be incorporated at the initial entry stage itself to facilitate closer price parity with the local manufacturers. The production department has confirmed that this weight change can be easily accommodated by making minor settings adjustments to the production line. 3. Market Overview and Business Potential. Although India’s population of over 1 billion people offers a vast market, an estimated 73% of these people live in rural areas and within close parity to the poverty line which makes this market a highly price sensitive market (Doing Business in India 2006). However “there is a growing middle class, with numbers varying between 150 million and 400 million, depending upon how "middle class" is defined” (Shelton 2002). With over 8.5% growth rate sustained across the past couple of years, the Indian economy is booming and the impact is favourable on the improving living standards of the people. Many foreign companies are now establishing manufacturing facilities in India to cater to the massive potential market. Multinationals as Levers, Nestle, P&G are well established in the country through joint ventures, catering to this massive national market. One of the key business risks lies in the political instability which companies such as Enron International – the US based power generator faced in 1995 when the power shifted from Congress party to BJP, bringing their US$ 300 million power plant project to standstill with political interventions (Nicholson 1996). Some of the emerging market trends worth noting include the growing pester power in the Indian society. With cable TVs in over 40% of the urban houses, the exposure levels of children to advertising has become increasingly high and their demands of preferred products are increasing. Zingo Instant Noodles with its appeal in the children market segments will therefore expected to perform well in the Indian market. India has a middle class population, which exceeds the size of total population of Europe and this too indicates the high potential for products such as Zingo Instant Noodles. In considering the secondary target segments of Zingo including young adults, bachelors and small families, this category too is increasing in India with new social trends favouring small families and households instead of the traditional extended families. The changing tastes of the new generation as well as increased exposure to foreign tastes is taking the breads and noodles in to the plates of the Indians in place of traditional rice and “chapattis”. The main players in the Instant Noodle market are Maggie, Top Ramen, Mamma and Prima. Maggie, which is the market leader is manufactured and marketed by Nestle India while Top Ramen is imported from Nepal under preferential tariff rates. Prima too is imported from Sri Lanka under zero duty rates under INDO SRI LANKA Free Trade agreement. Mamma is imported from Indonesia. Maggie holds close to 80% of the market share with over 16 million packets per month sales in terms of both 70gram and their mini pack, which is 40grams. While some of the middle and upper middle class households consume up to 20 packs per month, the average consumption is 2-3 packs per month by mainly urban households with children and young adults. Total instant noodle market is estimated to be around 20 million packets per month. Past growth rates indicate an acceleration in sales growth over the past two years, mainly fueled by national level advertising campaigns being carried out by Nestle and localization of the product through use of Atta flour (Hard wheat flour being used in making traditional Indian foods as Nanns and Chappatis) in and Indian flavours. The market is expected to expand widely at a rate of 7-8% over the next five years. 4. Customs requirements Import Destination (India) India still carries remnant of its close economic policy procedures of the pre 1990s and therefore the bureaucracy and red tape surrounding the import export procedures are cumbersome and costly. This is specifically applicable for imports to the country. It is important that the importers are fully aware of the required licenses and other approvals, which needs to be arranged prior to shipments. The import licenses are issued from Delhi and for States in Southern India there is no regional offices issuing these permits (Export Procedures 2006). It takes up to two months to acquire the permits and the matter is crisis ridden if it’s the 1st instance of importation. Informal payments have to be made to expedite the procedure at many levels of the bureaucratic hierarchy in getting these permits. Those who try to bypass there requirements have to take the risk of cargo being held in custody, perishables being destroyed and incurring of huge losses due to demurrages and loss of cargo. If the products are being imported under preferential duty schemes or under licenses, it is advisable that the clearing port customs officers are met in advance and the maters clarified. Due to sheer size of the country and the massive bureaucratic structure operating from its central office in Delhi, the dissemination of information such as these special tariff arrangements does not get conveyed effectively to the regional level offices. Even if it does, there is a marked tendency to use bureaucracy as a hindrance to importations. It is essential that importers get the required gazette notification copies prior to meeting the officials. Another area, which exporters need to be familiar with is the packaging requirements for products. This is specifically important for food items where there are country specific requirements such as marking of vegetarian and non vegetarian products with a green or red circle on the pack. Zingo noodles will have to carry this special symbol indicating that the products are non vegetarian and include animal based ingredients (Vegetarianism 2006). Packaging requirements also stipulate that two or more languages should be present. With a different language being spoken in almost all states, packaging is advised to carry Hindi and English along with two to three other regional languages as Tamil and Kanada and Thelegu. In the area of FMCG products imports the 1st time consignments are not released until the products are tested in the government labs. As these centralized labs are located in Mysore or in Delhi and products are sent from ports all over the country to these two locations. If the products are of perishable nature and have reached a distant port such as Tuticourin, the quality of the product sample when it arrives in Mysore or Delhi may be badly affected, resulting in wrong test results. It is therefore important that samples consignments are 1st taken in and tested prior to main consignments. When inbound shipments are being made, Indian customs requirements indicate that entry documents have to be filed ahead of shipment arrival. This is to reduce the delay in clearing as large amount of inbound cargo has to be handled by the customs. Therefore, it is important that a copy set of the documents are faxed ahead of time to allow the importer in India to fill out the inbound entry forms and file with customs, in anticipation of the shipment (Export Procedures 2006). Export Destination (UK) UK export regulations are minimal in food categories and most of the restrictions pertain mainly to arms and ammunitions, technology transfers or software, which comes under UK’s Strategic Export Control List (UK Strategic Export Control List 2004). The UK export controls for these strategic exports items are based on the “Wassenaar Arrangement for the control of dual-use exports, and the Australia Group and Nuclear Supplier Group for the control of chemical, biological and nuclear-related goods. The UK also supports United Nations sanctions restricting exports to certain destinations” (Country Commercial Guide 1999). A key customs requirement for UK exports of food items pertains to GMO products where “the exporters must state that the product contains or consists of GMOs and produce the codes assigned to those GMOs which allow them to be identified clearly” (UK GMO Export Regulations 2004). Customs requirements pertaining to export documentations are standard and requires invoices, packing lists, and copy of bill of lading to file the export entries. . 5. Import and Foreign Exchange Regulations. The Indian import and foreign exchange regulations have become less stringent over the past decade since being liberalised but still subjected to a high level of scrutiny. Those items which are restricted for imports through licensing requirements or banned from importing are mentioned in the restricted list of ITC(HS) Classifications of Exports & Imports items. Prohibited items include Tallow, Fat or Oils rendered, unrendered or otherwise of any animal origin, wild animals including their parts and products as well as ivory and any parts or products made of ivory. There is also a third category of restricted goods within the Canalised list of items which are permitted to be imported through Canalising Agencies. As Instant Noodles does not fall within such restricted lists, the product can be freely imported in to the country. However all importers must register themselves with Regional Licensing Authority is a pre-requisite for import of goods. The Customs will not allow clearance of goods unless. In terms of country of origin restrictions, imports are allowed from any country other than Fiji and Iraq. All foreign exchange transactions are closely scrutinized by the Reserve Bank of India which is the Central Bank of the country. India ranks 118 in the index of economic freedom (Economy of India 2005). Most feasible payment mode for foreign exchange is establishing letter of credits with stipulated transaction terms. The letter of credit funds should be acquired by the beneficiary within a period of 6 months or the money is automatically credited in to the RBI’s scrutiny accounts. As the product is a low price item and the value of each shipment will be moderate, establishment of LCs will be fairly straightforward for the importing party- Partell Group. 6. Proposed Contract Terms NutriSnacks Company Limited will enter into a 1- year contract with Patel Group initially with renewable clause, which will allow to extend the contract upon evaluating the performance of the business relationship.. Although Partell Group has requested for credit terms of 60 days for the Letter of Credits being established, the NCL has decided that for initial 6 months the transactions will be strictly on confirmed Letter of Credit from an International Bank on document present basis so that the exposure to non payment can be limited. Although confirmation of LC’s add on to the cost of establishing LC, the higher cost to the importer has been justified by the added financial assistance being provided by NCL to Partell Group in promotional and logistic areas of marketing the product. The terms of contract would include the key points mentioned below: Product, Standards and specifications. – 65gram Instant Noodles confirming to HACCP & ISO 9002 production quality standards. Minimum Order Quantity – 500,000 packets per month during initial launch period of 3 months and to reach 1 million packets within the 1st year of operations. Terms of Delivery – To be within 3 weeks of establishing LC. Pricing – On CIF Indian port basis whereby the importer is liable for the payment of all duties and charges payable in India on importation. The British Sterling Pound is currently trading at INR 77.556 (Universal Currency Converter 2006). Packing, Labeling and Marking. – To adhere to the Indian Packaging Act requirements. (Inclusion of red/green circle to denote vegetarian or non-vegetarian items. Language requirements.) Terms of Payment-Amount, Mode & Currency. – All payments to be made in Sterling Pounds and by confirmed non-revocable Letter of Credit raised through a reputed international bank. Financial Contributions – NCL will bear 50% of all pre-approved costs of promoting the Zingo Noodles in the Indian market. The company will also contribute 50% towards the transport subsidy being proposed for the appointed agents of Partell Group who will purchase above a stipulated order quantity per order. The Non –performance of mutually agreed sales targets may result in termination of agreement with 3 months notice. Arbitration of any disputes to be in an International court or by the International Arbitration Council – Singapore 7. Physical Distribution Methodology Managing logistics in Indian market is a challenging aspect with the vastness of geographic coverage involved. Although land haulage is well developed mode of inland transportation the associated cost is high. In the rural areas, the retail outlets are located sparsely. Therefore, the physical distribution process will have to take in to account the high geographic reach yielding low sales productivity in certain areas. The country’s retail system is still dominated by over 80% being accounted for by small corner shop style outlets. The urban cities are now being offered the experience of supermarket shopping by few key players such as Food World and Wenkies. “Most Indian manufacturers use a three-tier selling and distribution structure that has evolved over the years: distributor, wholesaler and retailer. As general examples, a company operating on an all-India basis could have between 400-2,300 distributors. The retailers served directly by a company’s distributors may similarly be between 250,000-750,000” (How to Do Business In India: A guide 2006). With the Indian ports strategically located in many parts of the country, the physical entry to the market should be multiple. Zingo Instant Noodles can be dispatched to 4 key ports – Mumbai, Chennai, Culutta and Tuticourin. The Tuticourin port located at the southern most tip of India will serve as the entry location for stocks intended for the southern States as Kerala and Goa. Chennai port will serve for the state of Tamil Nadu as well as Bangalore. Mumbai and Kalcutta ports will be the entry points for stocks intended to reach the northern region of the country. The stocks will be transported from ports to strategically located warehouses operated by the import partner of NCL. The dispatch of goods to Appointed Agents for each demarcated area will then pick up the stocks or request for delivery to their warehouses. These Agents are primarily the wholesale operators who trade a wide variety of grocery merchandise and act as the middleman between importer or manufacturer and the stockiest. The Agent carries out physical distribution of stocks by lorries, to the stockists who are appointed by the Agent. These stockists are responsible for catering to the retail outlets within their demarcated area and will physically transport a range of grocery items in small lorries or vans to each retail outlets. Replenishment of retail outlet stocks are done on a 14-day cycle usually for grocery items. The documentation requirements to facilitate the above physical distribution process involves following: Sea transport from UK to India – Bill of Lading /Invoice / Packing List. Port to Importer’s Warehouse – Container Dispatch Note and Land haulage invoice. Importer’s Warehouse to Appointed Agent – Delivery Note and Invoice Appointed Agent to Stockists – Delivery note and Invoice Stockist to Retail outlet – Invoice It should be noted that delivery notes and invoices being used by the Agents and Stockists will be common documents which they will use for the full range of merchandise being traded and not exclusively for Zingo Noodles. The Importing party will be the only party using documentation exclusively designed for the purpose of marketing Zingo products. 8. Proposed Marketing Methodology NutriSnacks Company Limited will enter the Indian market with a exclusive dealership agreement established with a large scale importer and distributor of FMCG items, Patell Group based in Mumbai with its branch offices and warehouses located in majority of major cities in various states. Their already established network of appointed dealers and the stockists will facilitate smooth physical distribution of the Zingo product. Currently Patell Group does not handle any Instant Noodle items and as such the product exclusivity is assured. Therefore NCL will initially choose appointed agent mode as the mode of entry to the country. However the two companies are exploring the possibilities of establishing manufacturing joint venture in the time to come, should the initial market entry proves successful. In developing the marketing methodology the company will localise the product offer slightly in view of the taste differences as well as certain cultural and social preferences such as abstinence from eating beef in India. The product size too will be modified to 65grams so that the offer is same as competition present in the market. The packaging will also be adopted as per local needs and regulations. The pricing strategy is one of the most crucial aspects in launching Zingo in to the price conscious Indian market. Currently a pack of Instant Noodles is retailing at INR 10.00. Due to the extra layers of intermediaries present in the distribution channel, the available margins are further squeesed. The import products face further pressure from high tariffs as well as a number of import taxes. IN the case of Instant Noodles, following taxes and levies will be applicable: Basic Duty – 35% Surcharge – 3.5% ( 10% of duty rate ) Countervailing Tax – 4% The pricing tactics proposed for Zingo would be to price the product to retailer at par with the competition while offering additional margin to retailers so that the “push” strategy will be at work where retailer will also participate in the promotional effort due to extra profitability of selling a pack of Zingo in place of another brand. Maggie currently offers 10% on consumer price to retailer. Margins to importer will be on a 4% net after covering estimated expenses of IRS 0.50 per pack. NCL will cost the product at variable cost and use a cost plus approach to ensure a competitive price is arrived at. NCL margin will be not on full cost but as a contribution towards overheads. Agents and stockists will receive standard margins of 5%. Please refer to annexure I for price calculation sheet. Considering the distribution strategies and tactics recommended, the NCL will largely depend upon the local agent, Partell Group’s already existing distribution network. The products will be marketed through a network of over 430 appointed agents and 8000 stockists reaching over 600,000 retailers . A separate institutional sales team will canvass sales from large retailers such as food world chain of supermarkets where purchasing decisions are centralized. The company will offer 50% subsidy on the transport costs to Agents who purchase over 500 cases, which is the full load for a large land haulage truck. This strategy is expected to encourage the Agents to purchase in large quantities and promote the product aggressively so that benefits of added profitability can be enjoyed. The promotional aspects of the product is also an important issue although the NCL is currently entering the market through an Import Agent. The company will invest in outdoor advertising campaign where strategically located billboards will be used to advertise the product. Brand and pack recognition is expected from this activity. Further, local product promotions and in-store sampling in larger retail outlets and super markets are also recommended. Free sampling in schools in urban areas will be a main promotional tactic, which will target the primary customer group of children. 9. Conclusion In conclusion, it can be noted that while the Indian market which offers attractive potential for a new product such as Zingo also poses challenging tasks in terms of being price competitive, with the burden of successive layers of tariffs as well as the multi layered distribution channels. Another aspect which needs to be taken in to consideration is the competitive nature of the existing market players and the strength of market leader – Maggie which is a Nestle brand. NCL will also have to surmount possible issues surrounding cross-cultural differences in doing business with its Importing agent – Partell Group. However, despite these challenges, NCL is keen to repeat the Vietnam success story in India as well. References Hill, C.W.L. (2003) International Business: Competing in the Global Market Place. 4th ed. New York: McGraw-Hill Publishing Company Ltd. “Doing Business in India.”(2006) [online] Available from “Export Procedures.” (2006) [online] Available from < http://www.import-india.com/export_procedure.php> “India And The Global Economy.” (d.n.) [online] Available from “Vegetarianism.” (2006), [onine]. Wikipedia, The Free Encyclopedia. Available from “How to Do Business In India: A Guide” (2006) [online] Available from Universal Currency Converter (2006) Available from Nicholson M, “Dabhol Plant Finally gets Green Light” (1996). Financial Times, January 9. “Economy of India.” (2006) [online] Wikipedia, The Free Encyclopedia. Available from . Shelton, S. (2002) “Entering Indias Dietary Supplement Market” [online] Available from “UK - GM Export Regulations.” (2004) [online] Agrifood News Archive. Available from “UK Strategic Export Control List” (2004) [online] Available from “United Kingdom - Country Commercial Guide – 1999.” (1999) [online] Available from http://www.mac.doc.gov/tcc/data/commerce_html/countries/Countries5/UnitedKingdom/CountryCommercial/1999/CountryCommercial.html Appendix I Proposed Cost and Price Structure – Zingo Instant Noodles 65g pack to Indian Market In Sterling Pounds Variable Cost to NCL NCL Contribution Ex-Factory Price Freight & Insurance CIF Price 0.055 9% 0.0608 0.0050 0.0658 In Indian Rupees (Conversion of Pound – 1 = 77.556) CIF - IRS Duty - 35% Surcharge 3.5% Counter Vailling Tax4% Total Tax Landed Cost Other Costs Total Cost 5.10 1.79 0.18 0.20 2.17 7.27 0.53 7.80 In Indian Rupees (Conversion of Pound – 1 = 77.556) Net Margin to Importer Price to Agent Margin Price to Stockist Margin Price to Retailer Margin Price to Consumer 4% 8.12 5% 8.55 5% 9.00 10% 10.00 Market Analysis Report for Exporting Zingo Instant Noodles to India Name : Course Module : Tutors Name : Date : University Name : Read More