A a r h u s S c h o o l o f B u s i n e s s 2 0 0 9 Mark Sorgenfrey Lasse Munch M.Sc. Strategy, Organisation and Leadership Academic advisor: Mai Skjøtt Linneberg STRATEGIES FOR MARKET ENTRY: Fast Moving Consumer Goods Companies in Emerging Markets I Abstract Multinational enterprises (MNEs) are increasing their presence in the lives of more and more consumers as companies seek to expand and promote their products to a still wider range of markets globally. As markets change and develop, so does the strategy used to enter them, and companies must be able to choose the correct way to enter markets in order to remain competitive. This thesis takes a look at how MNEs in the FMCG industry enters new markets, more specifically emerging markets. In order to gain an understanding of this we look at three specific markets, namely Russia, India and China. We attempt to answer if the way MNEs enter emerging markets is in keeping with what would be expected from the OLI framework (Dunning 2000) as well as the work done by Buckley and Casson (1998). Additionally we try to gain an understanding of why any discrepancies exist and whether they can be explained by the nature of emerging markets as well as the characteristics of the FMCG industry. An ability to adapt and tailor specific strategies to individual markets gains more importance, especially with regard to emerging markets, as the difficulties and obstacles presented when entering these markets often proves both new and unique. In many cases there are difficulties in underdeveloped markets, specifically concerning consumer spending power and brand awareness, as well as logistics and infrastructural inadequacies compared to western markets which serves to make the correct approach to entering emerging markets of high importance. The methods first employed when entering emerging markets are often unsuccessful and needs to be modified as market knowledge is gathered and opportunities present themselves. In the three markets analysed in the thesis to illustrate emerging markets, Carlsberg is used as an example of a company present on all three markets. Examples of entry strategies followed by Carlsberg in the three markets are analysed and the reasons for their success or failure as well as the lessons learned are discussed in relation to the individual markets. In importance, this thesis contributes to the understanding of how MNEs enter emerging markets as well as to which challenges they face. II Contents 1 Introduction 1 2 Problem statement 2 3 Objectives and research method 2 3.1 Selection of cases for analysis 3 4 Market entry modes for FMCG firms 6 5 Reasons for conducting foreign direct investment 7 6 Internalization level and form of market entry 8 6.1 Transaction cost theory 8 6.2 The Resource Based View and internalization 10 6.2.1 The Resource Based View and mergers and acquisitions 12 6.3 The OLI framework 13 6.4 Model of foreign market entry 21 7 Fast moving consumer goods 24 7.1 Choice of the supplier side of the FMCG industry 26 8 Emerging markets 27 8.1 Circumventing infrastructure problems in emerging markets 29 9 Market analysis of the FMCG industry 30 9.1 Threat of new entrants 30 9.2 Rivalry among existing competitors 31 9.3 Bargaining power of suppliers 32 9.4 Bargaining power of buyers 32 9.5 Threat of substitute products 33 10 Carlsberg Breweries A/S 33 11 Markets 35 11.1 India 35 11.1.1 Infrastructure 37 11.1.2 Indian retail and the Indian consumer 40 11.1.3 Five forces analysis of the Indian FMCG industry 43 11.1.4 The Indian beer market 46 11.1.5 Carlsberg India 47 11.1.6 OLI framework 49 11.1.7 Discussion 55 11.2 China 56 11.2.1 Special economic zones and growth 56 III 11.2.2 Current state of the Chinese economy 57 11.2.3 Rural-urban wage gap 59 11.2.4 Infrastructure 60 11.2.5 Chinese business culture and the importance of guanxi 62 11.2.6 Chinese retail 63 11.2.7 Chinese consumers 64 11.2.8 Five forces analysis of the Chinese FMCG industry 66 11.2.9 OLI framework 68 11.2.10 Discussion for China 71 11.3 Russia 73 11.3.1 Market analysis for Russia 76 11.3.2 The Russian beer market 80 11.3.3 Carlsberg on the Russian market 82 11.3.4 OLI framework 83 12 Discussion and findings 87 13 Conclusion 95 Appendix Appendix 1 FMCG retail markets and supplier industries IV Figures and tables Table 3.1 GDP per capita and growth rate for emerging countries. Table 4.1 Market entry modes Table 11.1 Market segments in the Indian market Table 11.2 Carlsberg India’s facilities Table 11.3 Chinese urban and rural per capita income 2000-2008 (Chinese yuan) 1 1 Introduction This text is the final chapter of our education at the Aarhus School of Business, University of Aarhus. As M.Sc. students within strategy, organization and leadership, we have spent a considerable amount of time for the past two years learning about and working with the concept of strategy. The vast majority of this time has been focused on strategy regarding the choice of which product markets to be in as well as how to develop these markets – not concerning which geographical markets would be worth while pursuing and how best to enter these markets. As we find the geographical aspect just as interesting as the product market aspect however, we decided to spend our final semester delving into the topic of market entry strategies. That market entry strategies should be the main topic of our thesis was not our first thought though as we discussed the first ideas for the thesis in the autumn of 2008. We settled relatively quickly on the idea of involving the major Danish brewer, Carlsberg, in the thesis however. Carlsberg had at that time only just completed the joint acquisition of Scottish & Newcastle together with Dutch rival Heineken in the biggest foreign acquisition by a Danish firm ever made. This deal reinforced Carlsberg‟s position among the leading global brewers and increased their activities in high growth foreign markets as well as their dependence on these. This made Carlsberg a highly interesting case for analysis in our perspective. Based on our desire to delve into the topic of market entry strategies as well as our interest in Carlsberg, the idea for the thesis thus became to evaluate the options available to Carlsberg and similar multinational enterprises when entering high growth foreign markets as well as the actual entry strategies pursued by Carlsberg in such markets. The thesis draws information and data from academic articles and books, corporate websites, and news reports as well as governmental and other publicly available statistics. Additionally, we attended Carlsberg‟s annual general meeting in Copenhagen in March of 2009. In importance, this thesis contributes to the understanding of the challenges faced by MNEs in emerging markets. Additionally, it adds to the knowledge on how MNEs enter emerging markets and on the conceivable reasons behind choosing the respective modes of entry in different emerging markets. This is relevant due to the increasing globalization of markets as especially western MNEs look to emerging markets for growth as they face stagnant growth in their core markets in the west. 2 2 Problem statement A great deal has been written about strategies for market entry and we will present some of the more important contributions in this thesis in order to offer the reader an overview of relevant theories. When it comes to entry strategies in emerging markets the amount of literature is limited however and is often confined to investigating single economies. This study will therefore contain a comprehensive analysis of a small number of emerging markets in order to offer a better indication of the challenges firms face when entering emerging markets in general. The objective of the thesis will be to make a contribution to the understanding of the challenges and problems associated with entering emerging markets, and why these strategies are implemented and carried out in the way they are. The main focus will be on the differences between what are to be expected based on theoretical approaches and what is actually observed. In order to shed light on this subject, the thesis will analyze three cases covering Carlsberg‟s strategy on the Russian, Chinese and Indian markets respectively. The main question which this thesis will seek to answer is the following: Can the choice of market entry strategies for FMCG producers in emerging markets be explained through the OLI framework (Dunning 2000)? Secondary question: If differences between actual and expected market entry strategies exist, how are these explained by the special characteristics of emerging markets and/or the FMCG industry? 3 Objectives and research method The primary objective of this thesis is thus to determine whether firms within the FMCG industry follow the theories on market entry in emerging markets. That is, can the market entries of FMCG firms in emerging markets be explained through the theories presented in this thesis; transaction cost theory (Coase 1937, Williamson 1975; 1985), the resource based view (Wernerfelt 1984, Peteraf 1993), the eclectic paradigm (Dunning 2000) as well as the model on foreign market entry developed by Buckley & Casson (1998). Providing this is not the case, the secondary objective of the thesis is to determine whether FMCG firms follow a different pattern in market entries compared to non-FMCG firms due to the characteristics of their particular industry or alternatively; 3 can the differences be explained based on the differences between established and emerging markets. In order to answer these questions, we have chosen to analyse a total of three cases of market entry by the Danish multinational FMCG firm, Carlsberg A/S. 3.1 Selection of cases for analysis When the numbers of emergent markets are so large and diverse the question becomes what markets are worth taking a closer look at in order to define the problems and challenges facing FMCG manufacturers and to test their adherence to the theories on market entry. In this thesis we have taken the approach of looking at the three largest emerging economies, namely Russia, China and India, who amongst them represents a significant percentage of the world population as well as the world market. We believe that these countries will provide an interesting view of emerging markets. In our view their size make them more interesting than smaller markets which has less influence on the world, since these three countries could very well be the engines that drive the economy of tomorrow. Additionally, the three markets shows themselves to be interesting in the context that they, despite their large size, shows significant differences in their market structure as well as the challenges entrants and domestic companies face. This means, that these markets will give a fairly representative picture of the numerous challenges faced by the companies operating in emerging markets. In addition to the above mentioned reasons for our case selection, we have further justification for our choices. Looking at the cases in a more scientific view, we consider the Russian, Chinese and Indian markets to be diverse cases with regard to wealth (Gerring 2007 p. 97), which is evident by the differences in GDP per capita in the three countries. As can be seen from table 3.1 below, the Russian GDP per capita was estimated at $15,800 in 2008, the Chinese $6,000 and the Indian $2,800 (CIA 2009). Russia is thus among the wealthiest third on FTSE‟s list of emerging countries (FTSE 2009) and given the market‟s size and Carlsberg heavy involvement in the country, it is as a result a logical case to include in our analysis. At the same time, Russia has shown considerable growth in recent years and is part of the upper third of the emerging countries in terms of growth. China is on the other hand part of the lowest third of emerging countries when it comes to GDP per capita. China is however likely to advance on the list in the coming years as it has the highest GDP growth rate of all the emerging countries, and has sustained this 4 growth rate for a number for years. For this reason, we consider it fair to use China as our median case, also because Turkey is the only market among the middle third where Carlsberg is active and we do not consider Turkey particularly interesting compared to China. This is primarily due to its more limited size, GDP growth and market potential compared to China. As stated, our final case is the Indian market. India is like Russia and China among the upper third of the emerging countries in terms of growth, but it is however also the one with the second lowest GDP per capita, only slightly superior to Pakistan. These facts combined with a population in excess of 1.1 billion people and a very low consumption of beer makes India an intriguing case for analysis. Table 3.1 GDP per capita and growth rate for emerging countries. Rank Country GDP per capita Country GDP growth rate 1 Taiwan $31.900 China 9,8% 2 Czech Republic $26.100 Peru 9,2% 3 South Korea $26.000 Argentina 7,1% 4 Hungary $19.800 Egypt 6,9% 5 Poland $17.300 India 6,6% 6 Russia $15.800 Indonesia 6,1% 7 Malaysia $15.300 Russia 6,0% 8 Chile $14.900 Morocco 5,9% 9 Mexico $14.200 Pakistan 5,8% 10 Argentina $14.200 Brazil 5,2% 11 Turkey $12.000 Malaysia 5,1% 12 Brazil $10.100 Poland 4,8% 13 South Africa $10.000 Philippines 4,6% 14 Colombia $8.900 Chile 4,0% 15 Thailand $8.500 Czech Republic 3,9% 16 Peru $8.400 Thailand 3,6% 17 China $6.000 Colombia 3,5% 18 Egypt $5.400 South Africa 2,8% 19 Morocco $4.000 South Korea 2,5% 20 Indonesia $3.900 Taiwan 1,9% 21 Philippines $3.300 Turkey 1,5% 22 India $2.800 Mexico 1,4% 23 Pakistan $2.600 Hungary -1,5% Countries in italic type are Advanced Emerging Countries Source: CIA 2009 and www.ftse.com 5 When using the diverse case selection method, the chosen cases should in combination be somewhat representative of the population due to the selection of high, low and median value cases. It is should therefore also be fair to say that diverse case selection is often more representative than other forms of case selection as it encompasses a greater range of variation (Gerring 2007 p. 101). This requires however, that GDP per capita values are fairly evenly distributed between high and low values. When this is the case, it should be representative of the population to pick one low, one median and one high. If the majority of the population had a low GDP per capita however, that is if there were more “low” than “high” cases, it would perhaps be more representative to add an additional low score case (Gerring 2007 p. 101). Since the GDP per capita values seems to be somewhat evenly distributed between the high and low values in the population of emerging countries, it should be fair to select one high, one median, and one low case. [...]... describing certain types of markets (Authers 2006) The emerging markets differ from emerging economies specifically in the fact that markets are not constrained by geographical boundaries or national borders in the same way that emerging economies are, but generally there are widespread differences in how exactly to define a market as emerging One way to look at emerging markets is to define them as markets. .. as ISI Emerging Markets lists more than 80 markets as emerging (Emerging Market Information Service 2009) This fact goes to shows that there are indeed different definitions and as such some confusion as to which group of markets does qualify as emerging Without trying to come up with a new list of emerging markets this thesis will work from an assumption that emerging markets are prevalent in most... to an increase in the intake of foreign investments and currencies, increasing reserves and lessening the impact of economic influence from other markets (Rahlf 2007) 8.1 Circumventing infrastructure problems in emerging markets As mentioned above, the infrastructure of emerging markets is generally in a poor state compared to established markets But a well functioning infrastructure, especially with... not obtaining sufficient economies of scale But ultimately it will influence both supplier companies as well as retailers and will result in consolidation of the industry as markets become more mature This will be less of an obstacle for entrants on emerging markets in most industries, including the FMCG industry, as they are defined as being markets in growth and thereby has more room for new companies. .. advantageous markets to invest and operate in Emerging markets will generally be influenced by changes in the growth in more mature markets to a degree but they will also experience a lessening of the impact declining or negative growth has on them This is because this will often be accompanied by rising prices of the natural resources that many emerging economies export, leading to an increase in the intake... western countries, since they have greater fiscal strength due to this saving In part due to the above mentioned factors, the GDP in most emerging markets are still expected to grow or at least remain stable, as opposed to most other markets around the world (AT Kearney) In many cases this leads to the fact that with comparatively faster growing buying power and faster growing markets, emerging economies... entrant will retain full control of the venture Increasing control as well as commitment and investment Export 6 5 Reasons for conducting foreign direct investment In general, doing business in a company‟s domestic market, or in markets geographically and culturally close to this market, should be much simpler than expanding globally If a company do wish to sell to distant foreign markets, it should... result in even higher profits As intense distribution is highly difficult, or at least expensive to attain in a market with poor infrastructure, profits should, all other things being equal, therefore be lower in such markets compared with comparable markets with better infrastructure The 5 Firms selling high-end FMCG may only want their products to be available at selected outlets in order to maintain... observations we will mainly be analysing and using the supplier companies for the FMCGs as we progress with the thesis 8 Emerging markets The term emerging market is commonly used about markets or economies that fit into a narrow description about size, growth rate and development The term emerging in relation to markets or economies stems from the 1980‟s, but came into common usage around the 90‟s and is... may however restrict the firm from developing new favourable resource positions thus decreasing the firm‟s competitive advantage later on For instance, licensing instead of internalizing the activities in foreign markets could mean that the firm would not benefit from the organizational learning and innovation which can be achieved by being present in foreign markets as the organization is subjected . Mai Skjøtt Linneberg STRATEGIES FOR MARKET ENTRY: Fast Moving Consumer Goods Companies in Emerging Markets I Abstract Multinational enterprises. Fast moving consumer goods 24 7.1 Choice of the supplier side of the FMCG industry 26 8 Emerging markets 27 8.1 Circumventing infrastructure problems in