International Expansion Strategy for Zarraffas Coffee - Essay Example

INTERNATIONAL EXPANSION STRATEGY in Zarraffa’s Coffee Executive Summary Zarraffa’s Coffee is renowned coffee brand from Australia. In its aim to stand above the rest among the league, it has been consciously trying to take innovative steps that can further make it a special treat for its customers. This paper aims to explore the internationalisation strategy that Zarraffa’s Coffee can adopt while trying to make foray into the Chinese market. The firm is supposed to take the franchisee route of entry into a growing foreign market. The paper discusses the business possibilities of entering into one of the fastest growing economies of the world. A market analysis of the Chinese coffee market has been conducted through industry analysis framework. The project also shed light on how Zarraffa’s Coffee should go about the expansion plan in the next five years through the franchisee model. Table of Contents Table of Contents 3 Introduction 4 About the Company 4 Purpose of the feasibility study 5 Strategic vision 5 Market Analysis 5 Competitor Analysis 5 Porter’s Five Forces Model 5 Bargaining Power of Buyers 6 Bargaining Power of Suppliers 6 Competition from Existing Players 7 Threat of Substitutes 8 Threat of New Entrants 8 Strategy for International Expansion 9 Advantages of Franchising 11 Five year Expansion Plan 11 Conclusions and Recommendations 11 References 13 Bibliography 14 Introduction The twenty-first century is often cited as the age of competition, this century is associated with globalisation, which has resulted in organizations breaching geographical boundaries to gain access to markets across the globe. Competition is the buzzword of globalisation with every product category being offered by numerous organizations resulting in a highly competitive environment. The present study deals with the issue of international expansion by organizations. International expansion can be of many types which include setting up Greenfield projects, Joint ventures, Tie ups and Franchising. The study would try to analyse the international expansion of a firm using the franchisee model. Zarraffa’s Coffee has been chosen as the firm for study, and the Chinese market has been chosen as the nation for the firm’s expansion. The choice of the nation assumes significance as it represents the fastest growing economy of the world whish offers a huge potential for players to expand their business operations. According to a study the Chinese coffee market is still in its growth phase, the report also states that the coffee consumption by the Chinese consumers has grown by approximately 20 percent (Li, 1995, p.6). About the Company Zarraffa’s Coffeein an Australian based coffee shop which was established in the year 1996 by Kenton Campbell. The first store of Zarraffa’s was based in the city of Southport in Australia. The company provides excellent service to its customers which are in accordance with its mission to provide a perfect cup of coffee to every customer (Zaraffa’s Coffee, n.d.). Presently the organization has its presence across 42 stores which are spread around Australia. The company has gone a long way in expanding its business; it has also received numerous accolades for its excellent product and service offerings. Some of these includes Gold Coast Business award of the year 2007 and 2008, Gold Coast Business Excellence Awards for wholesaling distribution and retail for three successive years (Zaraffa’s Coffee-a, n.d.). Purpose of the feasibility study The main purpose of the study would be to frame an international expansion strategy for the organization using the franchisee model. This study would also include an analysis of the merits and demerits of using a franchisee model in the process of international expansion along with an analysis of the target market. Strategic vision The strategic vision of the company is to provide greater value to the customers. Its main mission is to provide a perfect cup of coffee to each of its customers. Market Analysis China represents one of the largest and most lucrative consumer markets of the world. The nation is the world’s faster growing economy with GDP (in terms of purchasing power parity) levels of 8.748 Trillion US Dollars as of 2009. The nation has an impressive growth rate which is pegged at 9.1 percent annually. The nation is also characterised by a strong workforce comprising of approximately 813.5 million individuals as of 2009.Manufacturing sector has the highest contribution to the GDP which is followed by Services and the Agriculture sector. The figures above clearly indicate the presence of a considerably high purchasing power among of the Chinese population which makes it one of the most attractive consumer markets of the world in terms of market potential (CIA, 2010). Competitor Analysis Porter’s Five Forces Model The competitive analysis involves analysing the competitive framework of a particular nation. Michael Porter proposed a model that takes into account various factors that affect the competitive framework of an organization. He proposed five forces or factors that tend to shape up the competitive framework. These five forces are stated below- 1. Bargaining Power of Buyers 2. Bargaining Power of Suppliers 3. Competition from existing players 4. Threat of substitutes 5. Threat of New Entrants (Haag, 2007, p.72-73) Figure 1: Framework of Porter’s Five Forces Model (Source: Planware, n.d.) Bargaining Power of Buyers Bargaining power of buyers represents the extent to which the consumers have the ability to influence the pricing strategy of a company. The Chinese consumer market represents one of the fasters growing consumer markets of the world. The consumers of the nation are known to have a high purchasing power. Economic liberalisation of the nation has resulted in tremendous growth which has enhanced the purchasing power of the citizens. Moreover, the presence of a large number of global players like Strabucks has put the consumer in the driver’s seat as they have the option of switching between players (China.org, n.d.). The coffee shop market in China is characterised by consumers who generally go in for numerous small transaction rather than large transaction. The profitability of the coffee shops depends on the presence of large number of customers, hence it can be concluded that extent of bargaining power of consumers is medium in nature (Li, 1995, p.49-50). Bargaining Power of Suppliers Bargaining power of suppliers depends on the extent to which suppliers can influence a firm’s profitability. High bargaining power of suppliers ensures a considerably unfavourable situation for firms as they become a crucial stakeholder in the functioning of the firm. Moreover high bargaining power of suppliers also leads to a situation where firms cannot negotiate prices. In case of coffee shops suppliers constitute labour, suppliers of raw materials and suppliers for different equipments that are required to prepare coffee. China has one of the largest workforce which leads to easy availability of cheap and skilled workforce. Coffee beans which constitute the most important ingredient for the beverage could be acquired both domestically as well as by import of goods from other nations. The reduction in the import duty of coffee beans to 8 percent has also made import of goods a viable option for coffee retailers. Machines and equipment could be procured domestically as well as by imports from other nations. The presence of a large number of suppliers for these equipments has considerably lowered the bargaining power of suppliers for this product category. Hence it can be concluded that the extent of bargaining power of the suppliers is medium in nature (Li, 1995, p.29-32). Competition from Existing Players Competitive rivalry plays a major role in deciding the profitability of an organization. Presence of large number of competitors often reduces the profit margins of the individual players as they cannot have high margins in their product or service offerings. This affects the profit margins of a firm. The Chinese market has a high growth rate in terms of consumption of coffee. The coffee industry has been showing consistent growth rates of about ten percent, this represents great market opportunity for coffee shops. The lucrative nature of the Chinese consumer market has prompted global giants like Starbucks to enter the Chinese market in a big way. Moreover most of the present competitors have noted their presence in the market for many years which has intensified the competition among the existing players who are trying their best to grab a share of the consumer’s wallet. Real estate costs also have an effect on the firm’s profitability; coffee shops need to be primarily located in commercial areas which often have a high cost of retail space. Choice of location also assumes importance as the presence of a large number of competitors requires the coffee stores to be present in a location that grabs the eyeballs of the customers. The staggering real estate costs and upmarket and commercial locations in China have led to emergence of this factor as a threat for the firms trying to operate coffee shops in the nation. Hence it can be concluded that the intensity of competition among the exciting players is significantly high in the Chinese consumer market (Li, 1995, p.67-70). Threat of Substitutes Substitutes are essentially those products which can be used as a complete alternative to the original product. Presence of substitutes tends to offer customers with an alternate product which satisfies all the needs of the customers. Presence of substitutes with low prices or better product features poses considerable threats to the original products. The substitutes for coffee include other related beverage items like tea, soft drinks and instant coffee. Coffee shops have a distinct advantage over other substitutes as drinking coffee in a coffee shop presents greater emotional appeal to the customers, moreover since the Chinese consumers are considered to be less conscious about the price owning to their greater percentage of disposable incomes. This considerably reduces the threat of substitutes as far as coffee shops are concerned. Certain other factors that score heavily for the coffee shops include presence of a proper ambience in coffee stores, diversified range of product choices available to the customers etc. Instant coffee serves as the most powerful substitute for coffee shops as they have considerably low price value. Given the aspect of being insensitive to price of products the threat from instant coffee also does not pose considerable threat to the coffee served at coffee shops. Hence it can be easily inferred that substitutes offer considerably lower extent of threat to the coffee shops (Li, 1995, p.47-50). Threat of New Entrants The threat from new entrants arises from the ease of entry for the new players in the market. Market conditions favouring the entry of new players pose considerable threats from the exiting players. The advent of globalisation has compounded this aspect as global firms having high expertise in business operations may pose considerable challenges to the existing players. Entry barriers for new firms include cross cultural factors, government legislations, and distribution channels, presence of economies of scale, differentiation of products, cost and the extent of competition prevailing in the market. The analysis of the Chinese market reveals that it is comparatively easy for a new player to set up shop in the nation. Certain challenges would include mainly the cross cultural aspects, product differentiation etc. This implies considerably high levels of threats for the existing market players as the lower switching costs make them vulnerable to competition especially form multinational organizations that have high degree of expertise in grabbing the market share. Hence it can be concluded that new entrants pose considerable threats to the existing players. The analysis also revels that the present market scenario is quite favourable for any new player who wishes to tap the tremendous market potential of the lucrative Chinese consumer market (Li, 1995, p.22-29). Strategy for International Expansion The analysis of the Chinese market represents considerable business opportunities to Zarraffa’s Coffee with regards to opening up a business centre in the nation. Johnson & Tellis (2005) proposed certain modes of entry that can be used by organizations o enter and set up business in a new market. The modes of entry are stated below- 1. Export Strategy 2. Franchising and Licensing strategies 3. Alliance with partners 4. Joint Ventures 5. Setting up a Wholly Owned subsidiary Organizations intending to enter a new market may either use one fixed strategy or a combination of the above stated strategies. The choice of a strategy depends on the present organizational structure and long term goals of the organization (Johnson & Tellis, 2005, p.5). Figure 2: Market Entry Strategies (Source: Marketing in China.org, 2010) Method of International Expansion-Franchising Zarraffa’s Coffee has a considerable expertise in expanding its business operations through franchisees. The organization has made considerable progress by using the franchisee model of business expansion. Henkel & Brown (2006) defined a franchising as a marketing plan in which individual business units operate under the brand name of a large organization with a formidable brand image. Under the franchisor agreement the “supplier or the franchisor sells the right of operating a business to the franchisee by using the franchisor’s brand name and products”. The agreement between a franchisor and a franchisee is generally valid within the diameters of particular geographical area (Henkel & Brown, 2006, p.2). Zarraffa’s Coffee has a franchising strategy in which the company encourages franchisors to expand their business using the expertise of the organization. The firm provides employee and staff training, turnkey based operations and also bank certification to the franchisees who wish to be associated with the organization (Zarrafa’s Coffee-b, n.d.). Figure 3: Modes of Market Entry (Source: Longenecker & Loeza, 2010, p.454) Koslow & Scarlett (1999) identified four factors that must be taken into account before going into an international franchising contract. They stated that a firm must resort to international franchising in case of the flowing factors namely, 1. The organization does not have access to sufficient resources for investing in global markets 2. The distributor model cannot be applied 3. The market situation does not favour a traditional licensing method 4. The organization has considerable expertise in operating through a network of franchisees (Koslow & Scarlett, 1999, p.225) Zarraffa’s Coffee has a considerably high expertise in operating with a franchising mode. Hence it can easily emulate the model in China to gain strategic advantage. Advantages of Franchising Brooke (1996) identified certain advantages of franchising in the international context. Firstly use of a franchising model helps in expanding into a market without incurring risks of distribution, promotion etc. Secondly, franchisors have a better understanding of the local markets. In the context of the present study this factor assumes considerable importance considering the influence of cross cultural factors in the Chinese markets. Finally by using a franchising model an organization can expand its business by the use of minimal resources (Brooke, 1996, p.85). Five year Expansion Plan The market entry strategy for Zarrafa’s Coffee would involve a franchising contract in which the company would enter into a franchising agreement with a local firm who would carry out the business under Zarrafa’s brand name. In the initial years it should only target top cities like Beijing and Shanghai which offer a high market potential. Subsequently after 2-3 years of successful operations it could expand into the other towns and cities. The company should chose a favourable location for its store as the success of these stores depends on the choice of a favourable and upmarket location. Conclusions and Recommendations The study conducted above reveals clear market opportunities for Zarrafa’s Coffee in the Chinese market. In order to craft a success story in the nation, the organization should consider the following aspects like choice of location, cross cultural factors, product differentiation etc. The company should enter into a franchising agreement as it has considerable expertise in operating under a franchising model. Secondly the use of a local partner would help in a better understanding of the cross cultural dimensions which are significant for the success of an organization. Collaboration with a local partner would help in implementing the strategy of ‘thinking globally and acting locally’. Under this strategy a company aims to tap foreign markets but also considers local sentiments while undertaking its market expansion programme (Morley, 2002, p.35). The company must also take advantage of market opportunities by implementing a step by step market entry strategy where it would first target cities like Shanghai and Beijing which offer greater market potential. Subsequently, based on the leanings from the above stated cities, the company could plan a foray into other cities and towns of the nation. The company should also chose a favourable location for running its business since the success of the coffee shops depends on the strategic choice of locations. As a part of the generic strategy, Zarrafa’s Coffee can implement a differentiation strategy where it would enter the market with varied range of products. This would serve two purposes. Firstly it would help in reducing the threat of substitutes and secondly it would offer a large range of products to the customers. The Chinese market has considerable potential for organizations like Zarrafa’s Coffee. The key to success lies in effective analysis of consumer behaviour and delivering the right set of product mix so as to attain maximum strategic advantage. References Brooke, M.Z. (1996). International management: a review of strategies and operations. Nelson Thornes. China.org. (No Date). A Coffee War Heats Up in China. Retrieved on November 1, 2010 from http://www.china.org.cn/english/Life/119143.htm. CIA. (2010). The World Factbook-China. Retrieved on November 1, 2010 from https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html. Haag. (2007). Management Info Systems 6E (Sie). Tata McGraw-Hill. Henkel & Brown. (2006). How to Open a Financially Successful Pizza & Sub Restaurant. Atlantic Publishing Company. Johnson, J & Tellis, G.J. (2005). Drivers of Success for Market Entry into China and India. Retrieved on November 1, 2010 from http://www-bcf.usc.edu/~tellis/ChinaIndia.pdf Koslow, L.E. & Scarlett, R.H.(1999). Global business: 308 tips to take your company worldwide. Gulf Professional Publishing. Li, H. 1995. Establishing a Western Coffee Chain in China. Retrieved on November 1, 2010 from http://ir.lib.sfu.ca/bitstream/1892/9449/1/etd3173.pdf Longenecker, J.G & Loeza, M.E.T. (2010). Small business management. Cengage Learning. Marketing in China.org. (2010). China Market Entry Strategies (Entry Modes). Retrieved on November 1, 2010 from http://marketing-in-china.org/market-entry-strategies-entry-modes.html Morley, M. How to manage your global reputation: a guide to the dynamics of international public relations. Palgrave Macmillan. Planware. (No Date). Strategic Planning Software: Business Insight - Strategic Plan Evaluator. Retrieved on November 1, 2010 from http://www.planware.org/salebi.htm Zaraffa’s Coffee. 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