STRATEGIES FOR
MARKET ENTRY:
Fast Moving
Consumer Goods
Companies in
Emerging Markets
Mark Sorgenfrey
Lasse Munch
M.Sc. Strategy, Organisation and
Leadership
Academic advisor:
Mai Skjøtt Linneberg
Aarhus School of
Business 2009
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.
I
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
II
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
III
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)
IV
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.
1
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;
2
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
3
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
$15.800 Indonesia
6,1%
Russia
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
4
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.
5
4 Market entry modes for FMCG firms
Root (1994) and Buckley & Casson (1998) have identified 15 and 20 different modes of
market entry respectively. These can however be categorized in the five main classes in
table 4.1, which are ordered in accordance with increasing control of the entrant
(Johnson 2007) and in general also with increasing commitment and investment.
Table 4.1 Market entry modes
The perhaps simplest form of market entry is to export products from the
domestic market to a company or individual in the foreign market who
then sells the products on. In addition to being a simple form of market
entry it does not require any particular investment either and it is highly
flexible. On the other hand, the exporting firm has very limited (if any)
control over functions such as marketing and distribution in the target
market(s).
Licensing
and
franchising
Licensing and franchising agreements permit an incumbent to produce and
sell the foreign firm‟s product(s) in the markets agreed upon. The
agreement thus allows the incumbent to use the foreign firm‟s proprietary
technology and/or knowledge. The incumbent then pays the foreign
company compensation for the right to do so, which could for instance be
through a fixed annual fee or as payment per unit sold. In licensing and
franchising agreements, the vast majority of the necessary investment lies
with the incumbent.
Strategic
alliance
In a strategic alliance a foreign and an incumbent firm agree to collaborate
in the foreign market in order to reach specific goals while remaining
independent organizations – there are no equity investments. A strategic
alliance is often aimed at attaining synergies through combined effort and
can additionally involve knowledge and technology transfer as well as
shared expense and risk. As opposed to joint ventures, which are described
below, strategic alliances require limited upfront investment.
Joint
venture
In a joint venture, a foreign firm and an incumbent in a target market agree
to share activities in the target market. This collaboration can for instance
take place through a subsidiary owned equally by both parties. Such an
agreement would in most cases involve a substantial investment from the
foreign firm although not as much as an acquisition or green field venture.
At the same time, a joint venture can benefit from knowledge and
technology of both parties.
Wholly
owned
subsidiary
A wholly owned subsidiary can either be obtained in a foreign market by
acquiring an entire firm or part of a firm in the target market or it can be
started as a green field venture; that is building production and/or
distribution facilities from scratch in the target market. Since all costs
associated with this sort of entry mode lies upon the entrant, this is
naturally the one which requires the largest upfront investment. In case of
a green field investment, the entrant cannot rely on an incumbent‟s
knowledge on the foreign market. A major advantage to a wholly owned
subsidiary is that the 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
likewise be simpler to export products rather than engage in FDI and setting up
subsidiaries with production facilities abroad – especially since this incurs costs of
communicating the company‟s technology (Buckley et al 1998). However, businesses
seem to increase their international focus year by year, which can be driven by a number
of different reasons according to Robock and Simmonds (1989 p. 310). The following
six points are focused on reasons for conducting foreign direct investment (FDI).
The search for new markets. Expanding internationally through FDI will often be
caused by companies seeking to increase turnover and, hopefully, profits by entering
new markets. Entering new and distant markets is often not feasible through export due
to factors such as logistical costs and import taxes as well as lack of knowledge on local
consumer demands.
The search for new resources. These resources1 could be unskilled labour, agricultural
products or natural resources such as minerals (Dunning, 2000 p. 164). FDI is in this
case not necessarily conducted in order to reach new customers but instead aimed at
servicing current customers (Hitt et al 2005 p. 468).
Production-efficiency seeking. Where economies of scale are present, it makes sense
to increase the customer base internationally and thus increase production volumes, as
this will lead to lower average costs for products which will increase the company‟s
competiveness (Ghoshal 1987 p. 434). This is especially the case when it is feasible to
concentrate production at a few international locations, preferably where production and
logistics costs are lowest, which can then supply nearby markets.
Technology seeking. Larger firms often buy smaller firms in order to acquire new
technologies, a common occurrence in the medical and biotech industries for instance.
In this way the acquiring firm can take advantage of the often more entrepreneurial and
innovative culture in smaller firms which often lead to development of superior
1
By a resource is meant anything which could be thought of as a strength or weakness of a given firm.
Examples of resources are: brand names, in-house knowledge of technology, employment of skilled
personnel, trade contacts, machinery, efficient procedures, capital, etc. (Wernerfelt, 1984 p. 172).
7
technologies. According to Ghoshal (1987), doing business in a global market may also
in itself aid development of diverse capabilities as companies are subjected to a
multitude of stimuli by operating in different environments. This should, ceteris paribus,
provide multinationals with greater opportunities for organizational learning.
The search for lower risk. Companies may seek to lower their risks by diversifying
into additional markets through FDI and thus lowering their dependence on the business
cycles of single markets (Hitt et al 2005 p. 468). For this reason, MNEs generally
diversify their FDI investments geographically so as “not to put all their eggs in one
basket” (Rugman 1979). Other risks which could be lowered by FDI are policy risks
from unfavourable national legislation, competitive risks from lack of knowledge on
competitor‟s actions and resource risks such as dependence on a single source of an
important raw material for production (Ghoshal 1987 p. 430).
Countering the competition. Companies can also engage in FDI as a reaction to
competitor moves, for instance as part of a tit for tat strategy (Frank 2003 pp. 461-462).
An example could be, that company X enters an important market of a competitor and
the competitor could then choose to retaliate by entering one of company X‟s important
markets making both parties worse off. This should then deter X from engaging in such
actions again.
6 Internalization level and form of market entry
As discussed in the previous section, a company wishing to sell their products abroad
can either engage in FDI or choose to license the right to sell the products to a third
party when they do not find it advantageous to export. The first question then becomes
whether the company should produce and sell the product itself on the foreign market or
if it should sell a license. Then, if the company estimates that FDI would be the best
solution, then which form of FDI should be used? Some of the theoretical attempts to
answer these questions will be covered in the following sections.
6.1 Transaction cost theory
One of the theories, which seek to answer why transactions are handled within a firm
instead of between independent parties in the market, is transaction cost theory. The
theory was introduced by Ronald H. Coase in his 1937 paper The Nature of the Firm
(Coase 1937). Though the theory is more than 70 years old, the concept of transaction
8
costs is still highly relevant today and is used within the field of industrial organization
where Coase‟s theories have been elaborated on.
To put it simply, transaction cost theory states that a company will grow if the internal
transaction costs are lower than the external transactions costs. For this to make sense, it
is necessary to define what is meant by transactions costs. Coase‟s 1937 paper mentions
three overall types of costs related to external transactions:
-
Costs associated with information gathering when searching for prices on external
offerings, e.g. components or services.
-
Costs related to negotiating contracts between the firm and external providers in
order to specify terms and conditions.
-
Some taxes and quotas, which have been established by governments for
transactions in the market, may not apply to transactions within firms.
As mentioned, Coase and others have elaborated on Coase‟s original paper and have
specified additional forms of transaction costs. First and foremost, even the most
comprehensive contract cannot cover every possible contingency (Williamson, 1975;
1985). This means that after a contract has been settled on after a highly meticulous, and
thus costly, negotiating process there will still be many issues that the parties can
disagree on later on. A contract may be excellent when times are good and both parties
are in a solid financial state but in times of economic difficulty, one or both parties may
attempt to attain a bigger slice of the pie by reinterpreting the contract. Even if it was
possible to make the perfect contract the amount of work involved with completing it
would most likely entail that it would not be cost effective to do so.
The fact that contracts must always be considered incomplete and thus unable to cover
every eventuality means, among other things, that both parties to the agreement must
monitor whether the other party is acting in accordance with it. Furthermore, if one or
both parties fail to comply with the terms and conditions of the agreement, and thus
behaves opportunistically, they may need litigation to settle the dispute. Both
monitoring a contract and settling disagreements in court can bring about considerable
costs. If the parties do not have a relationship built on trust, the uncertainty of future
costs may make it impossible to ever get to an agreement at all and it will thus be
necessary to internalize what would otherwise be done by the other party – or find
another, less suitable, supplier if at all possible. The fact that Williamson attributes
9
opportunistic behaviour solely to human nature has been criticised by Ghoshal and
Moran (1996). However, the fact that humans and organizations have a tendency to
behave opportunistically can hardly be disputed, especially in the current economic
climate. As an example, the majority of larger Danish firms are currently renegotiating
contracts with their suppliers in order to lower prices and achieve better terms (Bjerrum
2009).
To summarise, transaction cost theory states that if internal transaction costs are lower
than the above mentioned costs associated with transactions in the open market, then the
transaction should be handled internally. This is however only valid if other factors do
not change this recommendation – for instance it the company prefers the often higher
level of flexibility of using the market.
While transaction cost theory is highly relevant when deciding between using the
market and producing internally in a company, its focus is primarily on make or buy
decisions within markets. However, when the question is whether a company should
export to a foreign market or set up production there, a number of other factors need to
be considered and decided on. A later segment in this thesis will cover J. H. Dunning‟s
OLI framework (2000) which includes factors relevant to this decision. Before getting
to this, the next segment will turn to the resource based view and its views on
internalization.
6.2 The Resource Based View and internalization
While transaction cost theory mainly focuses on external circumstances and the
quantifiable, the resources based view is concerned with the firm‟s internal factors and
the more intangible subject of resources, also called firm-specific factors. In some of the
more classical writings on the resource based view, focus is mostly on the competitive
advantage of firms and thus not specifically with theory on market entry (Wernerfelt
1984; Peteraf 1993). However, the resource based view offers some interesting insights
with regard to the latter. For this reason, scholars have applied the resource based view
on subjects like the timing of market entry in recent years (see for instance Geng et al
2005; Frawley et al 2006). This thesis will use some of the resource based view‟s
insights on the choice between using the market and internalizing transactions; that is,
as an alternative view to transaction cost theory which we have covered above.
Moreover, transaction cost theory ignores the medium and long term strategic
10
considerations with regard to sustaining and expanding the firm‟s competitive
advantage. This is on the other hand central to the resource based view as it explains the
possession of competitive advantage from the control of superior resources.
Additionally, it highlights the importance of building competitive advantage and
suggests possible routes to this by acquiring new superior resources (Wernerfelt 1984).
Transaction cost theory is on the other hand focused on short term considerations and
profitability.
According to Wernerfelt (1984), a firm can use the possession of one or a number of
resources as a barrier, shielding its superior profits from entrants as well as from other
incumbents as long as these behave rationally. This shield comes from the fact that new
acquirers of a resource can be adversely affected, when it comes to costs and/or
revenues, by the fact that another company is already in possession of a resource. Given
this, the company already in possession of the resource thus has a competitive
advantage and a potential for superior profits. Wernerfelt has termed this a resource
position barrier as it is somewhat analogous to Porter‟s (1980) barriers to entry,
although Porter‟s entry barriers in product markets only protects against possible
entrants – not against other incumbents. Having satisfied and loyal customers could be
an example of a resource position barrier against entrants and incumbents, as it is a lot
easier to maintain such a position than it is to attract otherwise loyal customers from a
competitor.
A resource position barrier can of course be based on a number of different resources
besides having loyal customers. As mentioned above, the resource however needs to be
able to offer a competitive advantage, which means that the following four requirements
need to be met (Peteraf 1993):
1) There has to be heterogeneity in the resource bundles and capabilities underlying
production among firms. With heterogeneity, superior resources exists which results
in the potential of earning rents.
2) There has to be an imperfect market for the resource, as well as for substitutable
resources, so that such resources cannot readily be acquired by other firms. That is,
there has to be ex post limits to competition. Ex post limits to competition results in
rents being preserved as they cannot be competed away in the short term.
11
3) Before the resource is acquired by the firm, there has to be limited competition for
that resource, that is, there has to be ex ante limits to competition. This prevents the
costs of acquiring the resource from offsetting the rents.
4) Finally, there has to be imperfect mobility in the market for the resource meaning
that the resource has to be more valuable in the firm where it is currently in use than
it would be elsewhere. Imperfect mobility is often caused by the fact that
transferring the resource to another firm will incur costs. This ensures that the rents
are sustained within the firm.
A wide range of things can be considered a resource. Many of these are also able to
comply with the above mentioned requirements for a resource to offer a potential
competitive advantage. Besides the example of customer loyalty stated above, such
examples include managerial skills, technological leads, and access to raw materials as
well as production capacity and experience (Wernerfelt 1984 pp. 173-174). We will
expand on some of these examples in later chapters of this thesis, including a few with
relation to our chosen cases.
All of this relates to market entry decisions because it is too short-sighted to only look
at the short term optimization of transaction cost theory. When entering a new market
and having to choose between the different modes of entry, it is important for the long
term success and profitability of the firm to consider the impact on the firms future
resource position. It may be that the alternative with the lowest cost is to license a firm
in the target market to produce and distribute the product. This short-term optimization
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 to societal and managerial
differences (Ghoshal 1987). This duality between optimizing in the short and the long
term is also what Tallman is talking about in Hitt et al (2001 p. 475-480) when he
discusses capability leverage and capability building strategies and the multinational
firm.
6.2.1 The Resource Based View and mergers and acquisitions
While not referring directly to market entries, Wernerfelt (1984 p. 175) offer some
interesting thoughts on the subject of mergers and acquisitions, which are highly
12
relevant to market entry decisions. One of his points is for instance, that when a firm
acquires another firm, it can be likened to buying a bundle of resources. The market for
these bundles of resources is highly imperfect as there are few buyers and targets and a
low degree of transparency due to the heterogeneity of firms. It can be extremely
difficult to assess the value of a possible acquisition, especially since such an
assessment must often be done discretely so as not to alert competitors or the
organization of interest. At the same time, the value of an acquisition is dependent on
the acquiring firm and whether synergies can be achieved or not (Wernerfelt 1984).
Additionally, when a MNE plans to expand in current markets or enter new ones, the
resource-based acquisition strategies are either to get more of the resources the firm
already has or alternatively to get access to resources which complements the ones it
already has (Wernerfelt 1984 p. 175). These reasons for acquisitions corresponds well
with the resource seeking, technology seeking and production-efficiency seeking
reasons to conduct FDI stated by Robock and Simmonds (1989 p. 310).
6.3 The OLI framework
The OLI framework, or eclectic paradigm, has been developed by John H. Dunning and
dates back to 1958 but it has been revised continuously through the years (Dunning,
2000 p. 168). OLI is an abbreviation for ownership, location and internalization, which
are the three sub-paradigms in the framework. The OLI framework combines a number
of theories such as transactions cost theory and the resource based view of the firm and
in this way serves “as an envelope for complementary theories of MNE activity”
(Dunning 2000 p. 183). The framework describes the three above mentioned factors
which are relevant for companies engaged in international expansion. We will give
further details about these sub-paradigms below.
The ownership sub-paradigm is about the ownership of unique resources, skills or
capabilities which can lead to a sustainable competitive advantage (Tallman in Hitt et al
2001). If a company is to expand from its home market into foreign markets
successfully, it must of course have some advantage, something to offer, which is not
available in the foreign markets already – it must have a unique and sustainable
competitive advantage (Dunning 2000 p. 164). This corresponds with the resource
based view discussed in the previous segment. These advantages can of course take
many forms but can in general be grouped into three segments (Dunning 2000 p. 168):
13
-
Possessing and exploiting monopoly power.
-
Having scarce, unique and sustainable resources and capabilities, based on the
superior technical efficiency of a particular firm relative to its competitors.
-
Having competent managers who are able to identify valuable resources and
capabilities throughout the world and who are likewise able to exploit these
resources and capabilities to the long term benefit of the firm in which they are
employed.
Firstly, companies in a monopoly position on a market are often able to use their
position as a barrier to entry to potential competitors. This advantage could for instance
consist of economies of scale for the monopolist. I could also be the presence of cost
disadvantages for entrants independent of their size such as the possession of
proprietary technology by the monopolist (Porter 1980 p. 37). The advantage could
likewise be due to product differentiation by the monopolist, for instance when it comes
to superior brand power. According to Porter, brewers generally use a combination of
scale economics and superior brands to keep potential rivals out of their markets: “To
create high fences around their businesses, brewers couple brand identification with
economies of scale in production, distribution and marketing” (Porter 1980 p. 37).
Possessing and exploiting monopoly power can thus be considered a competitive
advantage since it gives the monopolist a cost advantage relative to its competitors and
raises barriers to entry.
Secondly, a company is generally able to earn superior profits if it possesses scarce,
unique and sustainable resources and capabilities internally in the firm and are able to
apply these in the marketplace (Tallman and Fladmoe-Lindquist 2002). This is central
to the resource based view and is acknowledged by Dunning in the OLI framework.
However, it should be beneficial for the firm to persistently develop new resources and
capabilities, not just exploiting existing ones, in order to be competitive in the long
term. That is, striking a balance between exploiting existing resources and developing
new ones is important in order to achieve optimal growth (Wernerfelt 1984 p. 178).
Tallman and Fladmoe-Lindquist (2002 p. 118) expresses this by stating that: “the
multinational firm will sustain its competitive advantage only if it can continue to
develop new capabilities in the face of changing environments and evolving
competition”. But how does the possession of scarce, unique and sustainable resources
14
and capabilities result in superior profits? As mentioned previously in the segment on
the resource based view, when a firm is in possession of a resource, this resource can in
some cases act as a so-called resource position barrier (Wernerfelt, 1984). This means
that new acquirers of the resource can be adversely affected, when it comes to costs
and/or revenues, by the fact that another company is already in possession of this
resource. Given this, the company already in possession of the resource thus has a
competitive advantage and as a consequence superior profits.
Finally, besides being in a monopoly position or having scarce, unique and sustainable
resources and capabilities, a company wishing to expand internationally can also rely on
competent managers to identify and exploit resources and capabilities internationally.
According to Hamel and Prahalad (1994 p. 78), “To get to the future first, top
management must either see opportunities not seen by other top teams or must be able
to exploit opportunities, by virtue of preemptive and consistent capability-building, that
other companies can't”. Research has also shown that top managers really do have
significant influence on the performance of firms (Priem et al in Hitt et al 2005 p. 497).
Managers are thus in itself a resource that companies can “own” and benefit from in
international expansion and they can of course be considered unique since no two
people are alike. However, skilled managers can hardly give a sustainable competitive
advantage since they can be employed by another company and even by a competitor.
Peteraf (1993 p. 187) exemplifies this by stating that “a brilliant, Nobel prize winning
scientist may be a unique resource, but unless he has firm-specific ties, his perfect
mobility makes him an unlikely source of sustainable advantage”.
It is however not enough for a company to have a unique and sustainable competitive
advantage for FDI to be attractive, it must also be preferable to invest directly in the
foreign market instead of simply just exporting or employing the advantage solely in the
home market. This is the subject of the next section.
The location attractiveness sub-paradigm states that the foreign market must in some
way favour local production to export from the company‟s home market or other
markets where the company is present with production facilities. Many factors influence
whether local production is preferable to exporting. Examples of these factors could be
lower labour costs, more favourable legislation, high transportation costs, governmental
trade barriers, superior production processes or consumers preferring products with a
15
local image (Hitt et al 2005 p. 472). The following will expand on the above mentioned
factors.
Low labour costs. In recent years, the transfer of jobs from high wage western
countries to low wage regions such as Asia and Eastern Europe have attracted
considerable attention – as well as some anger and hostility from western workers. This
has especially been the case when production is outsourced to low wage countries only
for the products to be imported back to the home market. As mentioned above there are
however other factors which influences the attractiveness of different locations. For
instance, many less developed countries are more lenient than western nations when it
comes to legislation on environmental protection as well as worker safety. This leniency
can in some businesses lead to significant cost savings through outsourcing although the
overall effect on profits is somewhat unsure given the potentially adverse effect on
company reputation.
Superior production processes. Low labour costs is however not the only reason why
companies move production abroad. In some cases other countries or regions have
capabilities which offer superior production processes compared to other locations. This
could for instance be due to a workforce which is particularly skilled within a certain
field – such as it has been the case for Germany within engineering. Other examples
could be superior skills within wind turbine development and manufacture in Denmark
or within manufacture of electronics in South East Asia.
Governmental trade barriers. Besides their influence on issues such as worker safety
and environmental protection through legislation, governments also play their part in
determining the attractiveness of different locations via governmental trade barriers.
Among other things, governmental trade barriers include import tariffs, licenses and
quotas as well as subsidies to local producers. In some countries it may not even be
possible to sell imported goods as they require at least part of the final product to be of
local origin, the so-called local content requirements (LCRs). LCRs are often used by
governments in less developed countries in order to protect local intermediate product
companies from foreign competition (Belderbos et al 2002).
Ceteris paribus, when a country impose trade barriers on importers in one way or the
other, it becomes more attractive to produce locally instead of exporting to this country
thus raising the location attractiveness of the market.
16
Preference for local products. Another factor which can make it more attractive to
produce in a given market is the fact that products with a local image are often favoured
by consumers. Firms, industry organizations and even governments sometimes attempt
to increase this form of loyalty by calling upon consumers to buy domestic products
through campaigns, often in order to support the local economy.
Besides the patriotic reason for preferring local products, when consumers have
consumed a certain product for a long time – perhaps their entire adult life – it is often
very difficult to convince them to switch to an alternative product. A good example of
this is in fact the beer industry where consumers have often preferred to buy from the
local brewery. In China for instance, there is generally a high level of patriotism when it
comes to beer drinking (Heracleous 2001 p. 43). Combined with other factors, the
preference for local beers have made it highly difficult for the majority of the global
players in the beer industry to gain a foothold in China based on non-local brands
(Heracleous 2001 p. 37). Another example could be the Danish market for fresh dairy
products where there is a strong preference for Danish products among consumers with
only limited competition from mostly German products which has been introduced in
recent years.
Due to the preference for products manufactured locally, it can often be beneficial for
MNEs to acquire or join forces with local producers. In this way, the companies can
combine their respective competences and in this way improve the competitiveness of
both. An example of this could in this case be the strong local brands of the incumbents
in conjunction with the superior manufacturing and marketing skills of the MNE.
Transportation costs. Last but not least, transportation costs are a major factor when
determining whether it is beneficial to produce locally as opposed to exporting to a
given market. In a short term perspective, one should choose to export if the combined
costs of producing the goods and transporting them to the foreign destination are lower
than the costs of producing them locally. Otherwise it would be beneficial to set up
production locally in some way.
There are a number of different costs related to shipping products across large distances
and these are not just related to the price of shipping a container from for instance Asia
to Europe. These other costs include all sorts of handling costs, spoilage during
17
transport as well as inventory carrying costs2 which also include carrying costs during
the eight weeks of shipping from Asia to Europe. Besides these costs, exporters are also
vulnerable to changing demands of consumers due to their long supply lines as demand
may change before the products reach their target customers. These changes in demand
can make it necessary to lower sales prices in order to sell products or can make it
impossible to sell them altogether. Customer service can also suffer from long supply
lines – especially since companies try to minimize inventories as much as possible due
to the above mentioned inventory carrying costs. With long supply lines, average
inventory needs to be larger than with short supply lines due to the higher need for
safety stock3, if the inventory service level4 is to be maintained. In case some part of the
long supply line minimizes safety stock excessively, perhaps to avoid perishable
products going beyond their sell by date, this is likely to lead to occasional stock outs
here as well as further down the supply line. Products will thus periodically become
unavailable to retailers and final consumers leading to lower perceived customer service
and loss of sales. With other things equal, shorter supply lines can minimize the
problem of stock outs considerably.
Finally, some products are more or less perishable and have a sell by or freshness date.
If the products have been transported from the other side of the planet, they have a
relatively limited time left on the shelves near the final consumer when they eventually
get there before they have to be discarded. An example of this could be beer as beer
often has a sell by date or in some cases a freshness date, which indicates the date of
production or the recommended final date of consumption. The amount of time between
time of production and freshness/sell by date is mostly between four months for a
standard lager and 12 months for stronger brews (The Beverage Testing Institute). This
amount of time, the so-called shelf life, is however dependent on correct storage of the
products. If the products are not stored correctly the actual shelf life will be lower as
product quality will decrease at a faster pace in poor storage conditions.
2
Inventory carrying costs include the cost of money tied up in inventory, storage space, loss and
obsolescence, handling, administration, insurance etc. (Waters 2003 p. 257).
3
Safety stock/inventory is a reserve inventory held in addition to the expected needs in order to add a
margin of safety. (Waters 2003 p. 267).
4
The inventory service level is the probability that a demand is met directly from inventory thus avoiding
backorders. Having safety stocks increases the service level (Waters 2003 p. 268).
18
Since shipping a container by container vessel from for instance Italy to China takes at
least three weeks (Maersk Line 2009), and in most cases considerably longer, exporting
beer across such distances limits the shelf life at retail stores considerably. This will not
only decrease the average quality of the products sold to end consumers but will also
increase the number of products which are not sold before the sell by date. Lower
quality will first of all lead to lower customer satisfaction but also to more products
which has to be discarded as they go beyond their sell by dates. All in all, shipping
perishable products over long periods of time incurs considerable costs besides the cost
of the transport fee itself.
Finally, companies can also seek to attain strategic resources they are currently lacking
by investing in foreign countries. In this case, investment in foreign countries is
conducted in an attempt to enhance their knowledge and global competitiveness, not to
use current advantages in new markets to earn higher returns (Chen & Chen 1998 p.
446). The presence of companies in possession of complementary competences in a
given country or region can thus attract FDI as foreign companies seek to attain these
competences (Dunning 2000 p. 178).
The internalization sub-paradigm concerns whether entry into foreign markets is
preferable through some sort of inter-firm non-equity agreement such as licensing, by
engaging in FDI through investing in green field production facilities, or by purchasing
a company in the target market (Dunning 2000 p. 164). As described in the section on
transaction cost theory, this decision can be based on a somewhat simple assessment of
whether an arm‟s length market transaction incurs the lowest cost or whether
conducting the activity internally is the less costly alternative. That is whether activities
in a foreign market should be handled internally or should be performed by a partner in
the market. The cost of conducting transactions in the market is in most cases positively
correlated with the imperfections of the market (Dunning 2000 p. 179) as this will often
allow companies to charge higher prices. Examples of these imperfections could be
information asymmetries between the parties to an exchange as well as common
property resources, public goods and externalities (Lipsey in Dunning 1999 pp. 83-84).
The former is in this case the most relevant, as information asymmetries has a highly
significant influence on the costs of conducting transactions in the open market as
described earlier on in this thesis in the section on transaction cost theory. Information
19
asymmetries between buyer and seller leads to costs associated with gathering
information, negotiating deals, monitoring compliance to these deals as well as costs
due to litigation in order to settle disputes between the parties to an agreement. Since
the transactions are to be performed between a domestic and a foreign market,
information asymmetries are likely to be more prevalent and significant than between
parties in the same market. This is of course due to the fact that firms will in general
have less knowledge of foreign markets than they have of their domestic market which
is exacerbated by language and cultural differences. In addition to information
asymmetries as a reason for internalization, it may also, as mentioned earlier, be cost
effective to internalize functions when certain governmental taxes or quotas can be
avoided by doing so.
While a transaction cost based analysis of where the boundaries of the firm should be
drawn is valid, it does however ignore other reasons why firms may choose to
internalize functions in foreign markets aside from pure cost optimization (Dunning
2000 p. 180). As covered previously in this thesis, Robock and Simmonds (1989 p. 310)
state six reasons for conducting FDI: the search for new markets, resources, technology,
production-efficiency or lower risk as well as countering the actions of competitors.
Consequently, a firm entering a foreign market can choose to set up its own production
in the market even though it at first glance would be more cost-effective to allow a local
producer to produce the company‟s product(s) on license. This could for instance be
relevant if the firm needs qualified engineers and these are in limited supply
domestically. The company could then attempt to gratify two needs at the same time by
reaching a new market through FDI while also gaining better access to competent
engineers. In order to do so, the firm could seek to establish itself in an attractive
foreign market, which at the same time maintains a high-quality education system, as
this could secure a steady flow of potential candidates. The firm may be able to market
their products in this market at a lower cost through a local partner via a licensing
agreement than through internalizing the function. But since this would not enable them
to access well educated labour in the same way, the overall benefit of internalizing
could be larger than the benefit of an arm‟s length market transaction.
The eclectic paradigm has managed to remain the dominant paradigm within MNE
activity and market entry as a result of regular revisions and updates. It is however, due
20
to its complexity, difficult to apply in the business world and it is at the same time not
particularly useful when it comes to advising on research designs and hypothesis testing
in academic research (Dunning 1980). By simplifying and expanding on Dunning‟s
framework, Buckley & Casson (1998) have constructed a model intended to guide
decisions on foreign market entry. This model will be the subject of the next section of
the thesis.
6.4 Model of foreign market entry
When firms plan to enter a new market, the decision of entry mode is an important one
since it can be of considerable significance to the firm‟s success in the market
(Woodcock 1994 p. 268; Yigang 1999 p. 98). Under all circumstances the entry mode
chosen will constrain the marketing and production strategy of the firm (Johnson 2007).
Thus if firms could make use of a simple model – or a complicated one for that matter –
in order to find the correct form of entry, this model would of course be of great value.
However, the world is seldom so simple and neither are decisions on market entry.
Buckley & Casson (1998) have nevertheless contributed with a model on foreign
market entry strategies which offer advice on which entry modes are preferable under
different circumstances. Unfortunately, the simplification process required to make a
model has involved the inclusion of a large number of assumptions. These assumptions
can however be relaxed although this increases the complexity of the analysis (Buckley
& Casson 1998 pp. 543-547).
Because of the large number of assumptions in Buckley & Casson‟s model, it is beyond
the scope of this thesis to describe them in detail but we will however shed light on
some of the more important assumptions. First of all, the firm is engaging in its first
foreign market entry and thus lacks knowledge on this subject as well as knowledge
related to the chosen market. It is thus relevant for the company to attain this knowledge
at as low a cost as possible which among other things depends on the mode of market
entry. Secondly, the model distinguishes between production and distribution of goods
in the target market as these functions can be owned independently. There are thus four
different possibilities of ownership or in the final case of non-ownership:
-
The firm can own both distribution and production facilities in the target market.
-
It can own the production facility solely, either in the target market or at home, and
then franchise the right to distribute the products to a local company
21
-
It can own the distribution facility solely and import products from its home market
to supply it or alternatively subcontract a local facility to handle production.
-
Alternatively, it can choose to own neither production nor distribution. In this case
the firm leaves both production and distribution to an incumbent in the market.
Finally it is assumed that the firm faces a single local rival in the target market. The
incumbent firm, who would of course have to be a monopolist, owns the only existing
facilities which can meet the needs of the market. In case the MNE chooses acquisition
as the mode of market entry, the incumbent firm‟s monopoly power can thus be
acquired by purchasing a majority equity stake in the firm.
Whether acquisition or green field investment is the most attractive option is also
dependant on the costs of technology adaption. If the MNE and the single incumbent
have very similar technology it is always more profitable to enter the market through
acquisition instead of green field investment. This is because green field investment in
this case will lead to low profits as the entrant will not be able to outperform the
incumbent directly. If the incumbent is acquired on the other hand, the entrant will yield
monopoly profits. If the MNE and the incumbent have sufficiently different
technologies however, the entrant should be able to outperform the incumbent through
green field investment, and the cost of technology adaptation can be avoided.
Nevertheless, if green field investment costs are too high, it may not be profitable to
enter the market in this way or through acquisition at all (Müller 2007 p. 98).
The assumptions stated in Buckley & Casson‟s model can as previously mentioned be
relaxed, but this will however add additional complexity. At the same time the
assumptions do not limit the applicability of the model per se but serves more as a
checklist for researchers and practitioners of things to consider when applying the
model (Buckley & Casson 1998 p. 543).
With the assumptions defined Buckley & Casson‟s model lines up the possible ways of
entering a foreign market, which amounts to 20 different possibilities. This follows
from the five dimension of foreign market entry that they set forth (Buckley & Casson
1998 p. 547); the question of 1) where production is located; 2) whether production is
owned by the entrant or the incumbent; 3) whether distribution is owned by the entrant
or the incumbent; 4) whether facilities are fully owned or shared through an IJV; and 5)
whether ownership is obtained through acquisition or green field investment. The cost
22
structure of the 20 different combinations can then be compared with a profit norm as
well as to each other. The profit norm is defined as market entry through green field
production and distribution facilities in a market without competition. The profit norm
will thus be; revenues at monopoly price, less the costs associated with a fully owned
green field venture, less the cost of internal transfer of goods (Buckley & Casson 1998
p. 550). This is considered the ideal form of foreign market entry meaning that every
other form of entry incurs additional costs. Since such an ideal entry in a market without
rivals is a rare occurrence, if at all possible, focus is primarily on finding the alternative
with the lowest costs among the 20 alternatives when entering already occupied
markets. This is initially done by eliminating alternatives which are strictly dominated
by other alternatives. What is meant by one alternative dominating another is, as an
example, that two alternatives, A and B, each lead to the same costs; W, X and Y.
However, alternative A additionally leads to cost Z and will thus always be more costly
than alternative B since changes in W, X and Y influences A and B in the same way.
When comparing the different market entry strategies, the assumptions are important to
keep in mind since the process of elimination will get increasingly difficult if the
situation under analysis fails to be as it is assumed in the model. When the assumptions
are not satisfied, the alternatives must be weighed more carefully against each other as
the effect of each deviation must be considered.
The process of elimination reduces the number of alternatives to a more manageable
amount, which can then be compared to each other by assessing the major tradeoffs.
Buckley & Casson (1998 p. 552) concludes that, given their set of assumptions, there
are three superior strategies to choose from:
-
Green field production combined with acquired distribution.
-
Green field production combined with franchised distribution.
-
Licensing.
The choice between these possibilities in any particular situation depends on six
different types of costs. If the cost of acquisition is low, green field production
combined with acquired distribution is attractive compared to the other options as these
do not involve acquisitions. In contrast, green field production combined with
franchised distribution involves market transactions of intermediate products between
the MNE and a local franchisee. If these costs are low, this will make this option
23
relatively more attractive. Since this option leaves the incumbent in a position to
compete, as the incumbent‟s production facility has not been acquired, the potential cost
of losing monopoly status must also be considered. If this cost is low, green field
production combined with franchised distribution becomes yet more attractive.
The attractiveness of the final option, of licensing the right to produce and distribute the
product to a single incumbent that is, is dependent on two types of costs. If the
transactions costs of licensing a technology and the costs of adapting local production
are low, this will make licensing a viable way of entering the market. The relevance of
adaptation costs is due to the fact that this is the only option among the three, which
requires already existing production facilities (Buckley & Casson 1998). In order to find
the most attractive solution for entering the market, these six types of costs must be
estimated and weighed against each other in order to find the option with the lowest
costs. This estimate can then be used in the final analysis where other factors are
considered including the long term strategic consequences of each possible solution.
In this thesis, we will make use of Buckley & Casson‟s model as a checklist for things
to consider in a market entry situation when analysing our chosen cases, especially the
Chinese market. The thesis will thus not use it as a step by step guide since the cases
under analysis do not comply with the assumptions set forth in their model. This use of
their model fits nicely with their own opinion on how researchers and practitioners can
make use of their work (Buckley & Casson 1998 p. 543). The OLI framework will be
used as the primary reference in our analysis as it, like Buckley & Casson‟s model,
encompasses many of the thoughts brought forward in transaction cost theory as well as
the resource based view.
From the theoretical part we now turn to description and analysis of the FMCG industry
as well as the emerging markets. Hereafter we turn to Carlsberg and our selected cases.
7 Fast moving consumer goods
The fast moving consumer goods (FMCG) sector is a large and important part of almost
every economy in the world, insofar as the products associated with the industry
represents a big part of every consumer budget. The goods produced by the industry are
basically necessities and the inelastic nature of the goods makes their impact on
economies worldwide significant. The FMCG are sometimes referred to as consumer
24
packaged goods and the various products are characterized by being sold quickly, in
large quantities, and at low costs and include almost all consumables regularly bought
by consumers. According to the International Standard Industry Classification, the retail
part of the industry are classified into 7 different categories and the supplier part into
some 22 categories (appendix 1), meaning there are many diverse products that are part
of the industry as a whole. The diversity of the industry is evident from the fact that a
typical European retail chain will have up to one or two thousand suppliers.
The FMCG industry consist of both a supplier side that manufactures the goods and a
retail side such as wholesalers or supermarkets, that sell the products produced by the
suppliers. The link between the manufacturers of FMCG and the retailer side are
logistics providers and intermediaries that constitute a smaller but significant part of the
industry. Few industries rely more on efficient logistics systems than the FMCG
industry (ATKearney 2009). In a modern economy, an efficient transportation system is
of great importance and it can perhaps be considered especially important for FMCG
firms. This is because most FMCG firms would ideally want their products to saturate
the market by being available at practically every outlet in order to increase sales 5. In
the soft drink industry for instance, consumers may have a preferred brand. If this brand
is not available however, they will in most cases simply purchase a rival or substitute
product – not go to another store to buy their preferred brand. You can thus have a high
value product and spend heavily on advertisement, but if the product is not widely
available in stores, revenues will be limited as consumers will mostly buy their second
choice product instead. Being able to distribute your products widely in the market,
making them accessible when and where a customer wishes to purchase it, is as a
consequence highly important to FMCG firms.
The higher sales connected with intense distribution of FMCG should of course increase
profits in itself, and since it also leads to higher production it should also lead to better
opportunities for economies of scale. This should then 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 an exclusive image. Since these products may not be “fast moving” with such low distribution
intensity they may not be considered as FMCG however.
25
negative effect of poor infrastructure on sales should especially be evident when it
comes to a poor transportation system and to a lesser degree on for instance poor
sanitation and communications infrastructure. This is simply because only the former
influences distribution directly. A consequence of this is that many FMCG companies
spend large amounts on maintaining and running distribution networks, either by
themselves or with partners, in order to assure they have the necessary options for
bringing their products to markets.
The products in the FMCG industry are by nature defined as bulk products, meaning
they are produced and consequently sold in large quantities to wholesalers and retailers.
Additionally there are many customers, both directly downstream from the production
company as well as the end user. This means that the consumers bargaining power goes
down as they are not concentrated and buys in relatively small amounts compared to
amounts produced. Mainly this is true for FMCG retailers and less for FMCG suppliers,
since the latter sells to the former to a large extend. As previously mentioned, a large
part of the income of most households are set aside for FMCG products since there are
so many of the products that consumers use on a daily basis and which needs to be
bought regularly. This results in a very high number of products being produced and
consequently sold by the FMCG industry at all times. The enormous sales in the FMCG
industry combined with relatively low entry barriers in many parts of the industry
results in stiff competition and often low margins.
The FMCG industry is largely dependent on macroeconomic factors such as oil prices,
and this makes long term forecasts difficult and often dangerous as the economic
climate changes rapidly in this regard (Russia today 2007). This means that the industry
can be very hard to predict at the moment, as the fluctuations in oil prices, inflation and
spending power as well as most other significant variables tend to be prominent as the
economic climate adjusts to the recent upheaval. This will make the situation on
individual markets different both from each other but also from what the markets
usually looks like.
7.1 Choice of the supplier side of the FMCG industry
While the FMCG usually gets mentioned as a whole there are in fact several different
aspects of it that display significant differences compared to one another. The retail side
is what most often gets mentioned when talking about the industry and while retailers
26
undoubtedly constitutes a large part of the industry, the supplier side which
manufactures the goods plays as significant a role. While retailers tend to be quite
similar with their marketing strategy and customer bases with differences mainly
attributed to size the supplier side will often contain a wide variety of companies both
large and small with a multitude of products being manufactured.
We find that the supplier and manufacturing side of the FMCG industry to be more
interesting than the retail sector, both as far as entry and development strategy goes, but
also with regards to scope and differences between companies in the individual segment
of the industry. While it seems that the other parts of the industry have received
comparatively greater attention with regards to being mentioned and analysed the
manufacturing companies often gets treated as outside the FMCG industry and as part
of other industries as for example the beverage or canned goods industry, where the
similarities between companies is far greater. For instance, Carlsberg and Heineken
display rather more similarities than for example Carlsberg and Sara Lee Corporation
does, even though they are all part of the FMCG industry. Based on these facts and
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 now a more or less accepted term when 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 that are not developed, in the sense
that first world countries such as most western European nations, the USA, Canada and
Japan are. This however would make most countries qualify in some way as an
emerging market, so it is necessary to keep in mind that several different criteria must
be met in order to distinguish between emerging and non-emerging markets. This
27
includes factors such as growth rate, level of income and infrastructure as well as other
related measurements
As can be seen from lists commonly available, markets that are considered as being
emerging markets are not necessarily the same between different lists. MSCI classifies
22 countries as emerging (MSCIBarra 2009), FTSE Group have 23 countries as
emerging markets (FTSE group 2009) divided into two categories while some
companies and institutions such 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 regions where there are countries experiencing economic
transformation and change on a broad scale. Meyer & Tran (2006) define emerging
economies as economies with high growth or growth potential, but lacking the
institutional (infrastructure, legislation, experience) framework prevalent in European
and other western markets. As such, this makes the term emerging economy dependent
on the immediate economic circumstances in a country or market, making the term
emerging economy applicable to any country or region at a given time if they fulfil the
criteria set. The term will be used in this thesis according to the definition and not based
upon a pre-existing list of markets. Despite the different definitions of emergent markets
there is generally an agreement that certain countries, such as the BRIC-countries
(Brazil, Russia, India and China) are to be included, as well as some other large and
populous countries. Together they constitute a large portion of the global consumers,
more than 50% of the world population according to globalEDGE (2008), and represent
a rapidly growing part of the world consumption and production output. This makes the
emerging markets both interesting as well as significant for the world economy as a
whole.
One of the factors that make emerging economies interesting at the moment stems from
their apparent ability to come through the economic downturn and credit crisis better
than most other economies. The counter-cyclical policies are seen more often in
emerging economies, and they are a more or less the norm in richer countries. What
counter-cyclical means in this setting is basically that a rich country will endeavour to
28
diminish the fluctuations in their economy so that in bad times they try to stimulate their
economy and try to minimize the losses, while they in god times they try to slow the
economy down and prevent it from overheating. Emerging economies on the other hand
often tries to amplify their business cycles and one of the main reasons for this is that
they often struggle to fight the cycles, since the peaks and conversely also the lows are
more pronounced in smaller or less mature economies. One of the reasons for trying to
amplify the economic cycles are that since they are more pronounced in emerging
economies they are also harder to fight since they must do so on a smaller tax base and
often on revenues more susceptible to outside influences. Since this makes emerging
economies less robust than their richer counterparts, they often experience that investors
are reluctant to buy into bonds during downward trends and this in turn leads the
economies to be unable to borrow to smooth the economic cycles. Since they are unable
to borrow they naturally tend to save more in times where this is possible. This have
caused the somewhat curious case that many emerging economies are rather better
prepared for the current economic downturn than their 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 represents
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 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
regard to the transportation network, is highly important if goods are to be distributed
efficiently beyond the major metropolitan areas by FMCG companies. It can therefore
29
be attractive to enter limited geographical areas with a high density of potential
customers which will most often mean large urban areas for FMCG firms. Given the
usually larger per capita income of urban consumers compared with rural consumers,
city dwellers are also often more attractive customers to companies; especially to
foreign companies who often sell premium products targeted the middle and upper
classes.
The thought of entering concentrated markets within larger national markets, such as the
major Indian cities, instead of entering the entire market is consistent with Drejer
(2009). Drejer mentions entering so-called hotspots which could be cities like Berlin or
New York or regions such as Eastern China, as these hotspots may be more attractive to
enter instead of entering entire national markets.
9 Market analysis of the FMCG industry
In order to develop an understanding of the industry as a whole we will use the
framework developed by Michael Porter (1980; 2008) to develop a brief description of
the factors that influence and shape the market for FMCG. This five forces analysis will
provide an overview of the industry and a starting point for further analysis, which will
focus on the individual emerging markets chosen for study in the thesis.
9.1 Threat of new entrants
In the FMCG industry, as well as in several other industries, the nature of the products
and the technology necessary for the production process naturally gives rise to
economies of scale. Economies of scale in this instance relates to the fact that if
obtained, the unit costs goes down as output rises. Following from this it can be
concluded that these scale economy industries provide a substantial barrier for new
entrants, as there is a likelihood that not all companies will be able to obtain economies
of scale in a given market to a degree where they are effectively competing. There is
some difference between the various sectors of the industry with regard to the impact on
competitiveness of 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.
30
This includes the production or supplier companies in the FMCG industry, which will
likely not be as affected at the early stages in market development as they will later on.
In the FMCG industry there are few or no patents and little proprietary knowledge to
consider when entering the market. What exists in this category mainly relates to brand
names and production methods that are next to impossible to copy for any company
willing to attempt this. This negates to some degree the restriction of access suffered in
some industries.
9.2 Rivalry among existing competitors
Mainly there are many firms operating in the FMCG industry on all markets, due to the
rather diversified number of products being produced and sold. Largely the retail part of
the industry will be fairly consolidated and competition will be between few but large
retail chains that, as mentioned above, sell all of the different categories of FMCG.
While the firms in the retail segment are generally large and have few real competitors,
there does exists the smaller individual retail stores usually present in the form of
convenience stores in the cities, or small independent retail shops in rural areas, where
the larger chains are not present due to lower customer concentration. These
independent retailers are especially prevalent in undeveloped areas as well as in
countries with a historical and cultural bond with small retailers and street vendors. As
the markets develop, these will in most cases be outcompeted by organized retail
however.
As distribution and by extension infrastructure are so important in the FMCG industry
the ability to control the delivery and transport of goods are of vital importance to most
companies in the FMCG industry. This will lead to increasing competition and
concentration of logistics suppliers in the same way as in the retail part of the industry,
as the economies of scale as well as the ability to provide services across an entire
market will become of high importance to most companies. There are more supplier
companies in the FMCG industry than retailers, as they tend to specialize in certain
parts of the industry instead of being involved with all aspects. Individual companies
will concentrate on a certain type of product, or in some cases several different types,
and only in a few cases large conglomerates will produce most of the goods that are
attributed to the FMCG industry. Conglomerate type firms will make it possible to
operate on the same market, the FMCG market that is, without cannibalizing on their
31
own products as the products in the industry are as different as it is the case. On the
other hand, they will be able to take advantage of considerable synergies in areas such
as logistics and marketing as well as adding market power as all their products are sold
to the same wholesalers and retailers.
The FMCG industry offers different competitive conditions for many of the categories
even though they display the same characteristics and developments to a large extent.
Mainly there will be a tendency towards few large companies to dominate the individual
categories as can be seen in the case of the market for beer, where only four companies
have any meaningful size worldwide. As is the case with the industry as a whole,
economies of scale in production plays a part but as mentioned the benefits of size are
also present when it comes to successful branding, which will serve to make the number
of companies competing in the industry larger and fewer. As a result of the
characteristics of the FMCG industry, it is often associated with significant risk to
attempt to compete in the industry as it does not offer newcomers much in terms of
revenue initially. Thus the competition in the industry as a whole is very high in general
an even though this is more pronounced in mature markets, the less developed markets
will become more and more competitive as they develop their economies.
9.3 Bargaining power of suppliers
Since so many and completely different goods and materials goes into producing most
FMCG products, it is generally hard for suppliers to obtain any significant bargaining
power over most companies in the industry. Often the scarce resources needed to
produce some FMCG are either directly controlled by the companies utilizing them,
such as quality malt and barley in the beer industry, or acquired and controlled by legal
contracts and long term association between companies, although this is not as prevalent
in emergent markets. While this can give suppliers some power over FMCG producing
companies, there are relatively few resources that are sufficiently rare for suppliers to
obtain much power over their customers. Examples of such resources can be extremely
diverse depending on location and the produced goods, but usually they can be obtained
from other sources if the local suppliers are not competitive.
9.4 Bargaining power of buyers
Given the nature of the goods produced by FMCG firms, the customer base represents
most households and persons giving relatively low bargaining power to the final
32
consumer due to the sheer amount of customers. Additionally the large part of total
expenses used by households to buy FMCG as well as the necessity of these goods
lessens the customers‟ relative power with regards to companies in the industry. The
fact that customers overall have easy access to any given FMCG, due to the many retail
stores and other access points, gives the customers some degree of power since it is easy
for them to chose where to buy, and to switch to another product or retailer if they so
desire. Of course switching to another FMCG supplier or retailer would still mean the
customer is buying the products and as such it is not really feasible for customers to
stop buying the products offered by the industry. In the industry the retailers hold
considerable power, often directly related to their size, for example Wal-Mart that has
very great control over most of its suppliers. As the consolidation in the retail sector of
the industry continues, meaning fewer and larger retailers, they attain greater power
over both their suppliers and customers. Overall the customers hold significant power as
group, but little power as individuals, in the industry, since the degree of competition in
the industry are very high and as often as not the margins are low and retention of
customers are important for survival.
9.5 Threat of substitute products
Due to the nature of fast moving consumer goods there are inherently some threats of
substitution, not from outside goods but from the industry itself. To a large extend the
goods produced are interchangeable, which is one of the reasons branding and
differentiation plays such a large role in the industry. When many of the products are
virtually indistinguishable from competitors in a strictly physical aspect other methods
exists to differentiate a product. As can be seen on the retail part of the market and in
the market concentration in various segments of the industry, the trend is toward
concentration into fewer but larger firms, leading to a smaller variety of products and
minimizing the threat of substitutes from small local competitors and firms. Aside from
inter-industry competitors the threat of substitute product is therefore negligible.
10 Carlsberg Breweries A/S
The Danish brewer Carlsberg is the fourth largest brewer in the world, and an
internationally recognized brand name in all of its markets. Carlsberg is present on most
markets in the world, including Northern and Western Europe, Eastern Europe and
Asia. Additional markets include Africa and the Middle-east, while notable exceptions
33
are North and South America. Originally Carlsberg mainly followed a strategy of
diversification on its domestic markets, while the main focus was on the two prominent
brands Carlsberg and Tuborg in foreign markets, to the exclusion of local brands. The
company has gradually shifted from this strategy and now prefers to depend on the
companies‟ core competencies in order to market and produce beer in local markets and
often with local brands. This has generated a significant shift in the production of the
company‟s brands and products, and a large part of the beer brewed by Carlsberg is
brewed in the same country or market where it is sold. Additionally the focus is now
mainly on beer as this is where Carlsberg believes it has its core competencies.
Carlsberg produced 109.3 million hectolitres of beer in 2008, a rise of almost 33%
compared to 2007. 47% of the total volume produced and sold annually is sold in the
mature markets in Northern- and Western Europe, 43% in Eastern Europe including
Russia, Carlsberg‟s biggest market, and 10% in Asia (Carlsberg group). The company‟s
net revenue reached DKK59.9 billion in 2008, also a significant rise compared to earlier
years, which makes Carlsberg one of Denmark‟s biggest companies as well as the
fourth largest brewery in the world, behind AB InBev, SABMiller and Heineken. The
main reason for Carlsberg‟s recent growth was the joint acquisition of Scottish &
Newcastle with Heineken which transferred complete control over Baltic Beverages
Holding to Carlsberg (Carlsberg annual report 2008). This and other acquisitions made
by Carlsberg follow the trend of consolidation and concentration in the global beer
industry in recent years into fewer, more international companies 6. This trend is perhaps
most obvious in the merger between the two largest beer-makers by sales, AnheuserBusch and InBev, that took place in late 2008, and created the biggest beer company as
well as one of the biggest FMCG firms in the world. Additionally, SABMiller has
combined their U.S. operations with Molson Coors‟s Brewing Co. in order to better
compete on the North American markets (SABMiller 2007) .
Carlsberg has accumulated substantial knowledge on entering markets, rarely as first
mover, but often as an early mover, in Eastern European countries such as the Baltic
nations and Poland. This is valuable in their goal to maintain their position as one of the
biggest and most significant global players. Even though Carlsberg follows a strategy of
6
In 2003 the beer market were far more fragmented, with the biggest 10 beer producers‟ only accounting
for around 45% of the total volume sales, as opposed to a volume share of around 65% in 2009
(Euromonitor 2005).
34
expansion they rarely follow the same template when entering different markets.
Foothold strategies have been pursued in some Asian markets such as China, where
Carlsberg have a limited presence, or the two joint ventures that marked the company‟s
entry into Vietnam. As opposed to this, Carlsberg has sometimes followed a more
aggressive strategy aiming for market leadership with large scale acquisitions in for
example Russia and Poland.
Carlsberg has amassed considerable experience with marketing, producing and selling
beer and their excellence programs draw on these strengths to enable the company to
systematically improve and develop their abilities in different markets. The Excellence
programs help Carlsberg deal with their customers as well as minimize costs and
standardise processes (Carlsberg Group 2006) and is a strong tool for the company with
their strategy in entering new markets as well as developing more mature markets.
As it is the case with most FMCG companies, Carlsberg depends strongly on their
distribution network and logistics in order to be competitive in its markets. Carlsberg
spends around 15% of its total costs on logistics and logistics related activities, and it is
therefore a highly important function when it comes to the profitability of the firm.
11 Markets
In order to describe the situation on the chosen markets and come to an understanding
of the implications their individual characteristics have on entry strategies for foreign
firms, we will first look at the macroeconomic level. Afterwards there will be a micro
analysis building upon the Porter analysis above in order to describe the factors a
foreign company would face in the FMCG market, and further the understanding of the
specific factors and challenges in each market.
11.1 India
India is the world‟s second largest nation by population after China and is the world‟s
largest democracy. India has been among the world‟s fastest growing economies in
recent years with an average GDP growth of 9% for the last four years (CIA 2009) but
has however felt the current downturn in the world economy following the financial
crisis. Since a considerable part of the Indian GDP growth is driven by domestic
consumption (Das 2006), the effects of the economic crisis on India was initially
expected to be limited. However, the crisis caused a sharp decline in the Indian stock
35
market followed by foreign institutional investors withdrawing funds. This drop in
available venture capital from foreign investors led to greater demand for capital from
the domestic market and eventually to soaring interest rates (Kannan 2009). This greater
cost of capital put negative pressure on the output of the Indian economy. India‟s GDP
growth rate was thus significantly lower in the final quarter of 2008 compared to
previous years at around 5.3% (World Bank). While this rate of growth is still relatively
strong in a global perspective, it is not enough to sustain the current rate of employment
in the country as the normal growth rate of India is likely to be higher than 5.3%7. This
has also been confirmed by surveys in the country indicating significant job losses
recently (World Bank).
The Indian government has sought to minimize the impact of the economic crisis on
India by means of two stimulus packages totalling US$8 billion, which is less than 1%
of the country‟s GDP. These have however widely been seen as insufficient to boost
economic growth. In comparison, the Chinese government intends to spend in excess of
US$ 586 billion in order to stimulate domestic demand (Candelaria et al 2009).
The amount of FDI in India is estimated at $142.9 billion in 2008, which is only slightly
more than FDI in Denmark. Compared to the other BRIC countries, India is also lacking
in foreign investment as Brazil receives almost twice as much, Russia more than three
times as much and China more than five times as much FDI (CIA 2009).
In our discussion on the Indian FMCG market, we will spend considerable time on the
country‟s infrastructure. This is because infrastructure is one of the areas which separate
India the most from other major emerging markets such as China and Russia, as these
countries in many cases offer infrastructure significantly superior to that of India. Poor
infrastructure is also a likely reason for the comparatively low amount of FDI in India.
We will therefore describe India‟s infrastructure in some detail in the subsequent
segment of this thesis. This also means that the thesis will focus less on Porter‟s five
forces in the analysis of the Indian market compared to our analysis of the Russian
market as we find it to be more useful in somewhat more established, less turbulent
markets.
7
Given a productivity growth rate around 8% and a population growth rate of 1.5% (CIA 2009) the
normal growth rate should theoretically be around 9.5% (Blanchard 2003 p. 183). Since the Indian
unemployment rate has declined in the last four years with an average GDP growth rate of 9%, the real
normal growth rate should however be less than 9%.
36
11.1.1 Infrastructure
The current state of infrastructure in India makes the country a challenging environment
for foreign firms in the market as well as for firms who are considering a market entry.
As will be elaborated on in this chapter, the Indian infrastructure is in general under
pressure from the growing wealth and population in the country as development
projects struggle to keep up with the rate of change. The poor infrastructure often
cripples Indian and foreign businesses through the absence of adequate and consistent
power supply, inadequate port capacity as well as an insufficient transportations system
(Kumar 2007). Another example of the struggle to keep up with the country‟s growth
can be witnessed in India‟s airports, which are for most travellers the first impression
they get of India when they arrive in the country. This first impression is rarely a
particularly pleasant one as India‟s airports are for the most part in appalling condition,
but recent privatisation of the largest airports has lead to heavy investment and as a
result to great improvements in capacity and service (Cook 2009). Upgrading India‟s
airports to standards worthy of the world‟s biggest democracy thus seems to be
successful. Unfortunately, other parts of the country‟s infrastructure do not seem to be
able to follow this success story as we will expand on in the following.
Road and rail network. Given the importance of a well-developed infrastructure to
FMCG firms, as discussed previously in this thesis, the poor state of India‟s
transportation system is naturally a major concern for foreign FMCG firms. Indian
roads in general are in a poor condition except for the newly constructed expressways
(Makar 2008 p. 43) and there were only around 200 kilometres of these in the entire
country by 2006 (CIA 2009). While the overall state of the country‟s road network
remains poor, improvements to the Indian highway system are however under
construction and additional kilometres of high-quality roads have been added to the
highway grid in the last couple of years. The primary transportation project in India
currently is the so-called Golden Quadrilateral, a diamond shaped highway system
connecting India‟s major population centres; New Delhi, Mumbai, Chennai and
Kolkata. The Golden Quadrilateral is a multi-billion dollar project intended to give the
Indian economy a boost by connecting the major cities with each other as well as with
smaller communities in between.
37
While these new additions to the Indian road network are of vastly superior quality
compared with the general state of roads in India, this nevertheless does not change the
Indian traffic culture. Even though you are driving on a six-lane express highway, it is
not unusual to come across oxcarts, rickshaws, water buffalos and sacred cows in
considerable numbers. At the same time, it is not unusual to meet traffic head on
although you are on an express highway, as fellow travellers take a shortcut in opposing
lanes or simply because they are confused (Belt 2008). This combination of poor roads
and chaotic traffic means that you should only expect truck shipments to reach an
average of maximally 30 kilometres an hour in India – on the country‟s better roads,
that is (Runckel 2009).
The Indian road network is thus in no respect comparable to western standards; or
Chinese standards for that matter as they in comparison have in excess of 41,000
kilometres of expressways (CIA 2009). But with the amount of funds invested in India‟s
roads currently, and with constant improvements in the quality of Indian road vehicles,
the efficiency of road transportation should improve significantly in the coming years. It
is however unsure whether the improvements are able to keep up with the rapidly
increasing number of road vehicles in the country.
The developments in the Indian road network and the shift from collective to individual
modes of transport are putting the country‟s rail network under pressure. India has in
excess of 63,000 kilometres of rail making it the fifth largest in the world (CIA 2009). It
has been a highly important part of the Indian infrastructure since it was introduced by
the British in the 18th century but is expected to lose influence to road and air transport
in the future (Civil Engineering News 2008). For FMCG firms, rail transport is in many
cases too inflexible to be used for distributing finished products but it may be relevant
for transporting raw materials for production. Since Indian road vehicles, including
trucks, are very often underpowered, large shipments of goods could still be transported
most cost-effective by rail for years to come. This situation is prolonged by the
congestion on the road network. Bulk shipments are also expected to be the only area
where rail transport can remain in a dominant position in India (Civil Engineering News
2008).
Other parts of a country‟s infrastructure besides airports and the road and rail networks
are of course also a major consideration for FMCG firms. For instance, the capacity and
38
efficiency of seaports is highly relevant to firms engaged in importing or exporting
goods and will be discussed in the following section.
Seaports. India has 12 major seaports along their 7,000 kilometre coastline with the
port of Kandla in the western corner of India currently handling the most cargo. The
biggest seaport when it comes to container traffic is the ports of Mumbai however,
which handle around 58% of India‟s container traffic (Indian Ports Association).
As it is the case with other parts of the Indian infrastructure, the capacity of the
country‟s ports is insufficient to cover demand efficiently. To illustrate this, the
Jawaharlal Nehru Port Trust of Mumbai has berths for nine container vessels to load or
unload simultaneously while the port of Singapore can handle a total of 40 vessels at the
same time (The Economist 2008a). This lack of infrastructure, combined with a highly
inefficient bureaucratic system, leads to very lengthy turnaround times for container
vessels in Indian ports. It takes around three days to turnaround a container vessel in
Mumbai. In comparison, it takes only around eight hours to turnaround the same ship in
Shanghai (Runckel 2009). This difference in turnaround times of course ads cost to the
users of Indian ports but also ads unpredictability since turnaround times are likely to
vary considerably more than in more efficient ports.
The inefficiency of Indian ports does not stop with slow turnaround times however.
When goods have been unloaded in India it takes an average of 21 days to clear the
imported cargo, most likely due to time-consuming customs clearing, while the same is
done in Singapore in just three days (The Economist 2008a). FMCG firms importing
perishable goods to the Indian market will thus loose almost three weeks of shelf life on
their products compared to more efficient markets.
India’s Hotspots. Since India has a large urban population concentrated in very large
cities, it is possible to reach a significant number of Indian consumers by entering a few
major cities – what could be defined as market hotspots. For instance, cities like
Mumbai, New Delhi and Kolkata has a population around or in excess of 15 million
people each and the 10 biggest cities in India have a combined population of more than
86 million people (City Mayors). This is more than the entire population of Germany.
As these consumers can be reached by means of the country‟s better developed roads
and railways, it is possible to service a considerable market in India without the hassle
of long haul transports to distant rural regions at less than 30 kilometres an hour. Firms
39
hesitating to launch a full-scale market entry on the Indian market due to infrastructure
concerns can thus perform a limited entry to the market in the country‟s hotspots.
Other issues concerning India’s infrastructure. Besides the challenges India faces
with worn down and too small airports, seaports and transportation systems, the country
have two additional problems relevant to foreign companies. First of all, India‟s
overstressed power grid leads to power failures on a daily basis all around the country,
sometimes hour long, and even in the most developed areas (Runckel 2009). The
country suffers from a chronic shortage of electricity as new additions to the grid have
failed to meet the increasing demand due to the high level of economic growth. The
power shortages are expected to persist in the coming years (Trusted Sources 2009) and
should therefore be taken into consideration before engaging in FDI in India. When
establishing new facilities in the country, whether it is administrative or associated with
production or distribution, firms should make sure to install a reliable generator with
adequate fuel storage to handle power supply when, not if, the grid fails (Runckel
2009).
Secondly, the availability of freshwater is expected to become a major problem in India
in the not so distant future when industrial consumption rises and running water
becomes accessible to the majority of the population. Water shortages are most likely to
hit the poorest part of the population though while most businesses and their workers
are unlikely to be affected. In industries where water consumption is especially high, the
lack of a steady supply of freshwater may however become a problem. Some parts of
the FMCG industry are likely to be among companies with a significant need for good
quality freshwater. Examples of these could be producers of beverages or food products
for instance. In order to secure a steady supply of needed freshwater these firms may
need to equip facilities with water reservoirs and this of course adds costs.
11.1.2 Indian retail and the Indian consumer
From the analysis of the Indian infrastructure, we now turn to the country‟s consumers
and the retail sector. Since FMCG are sold primarily through retail outlets, the
characteristics of the retail sector in a target market are important when deciding on a
market entry strategy for a foreign firm. As previously discussed, a company‟s sales
will be reduce if products are not widely available at retailers as there is a direct link
between number of outlets and sales. It is thus important to know how you achieve
40
intensive distribution in the marketplace before entry as this will influence the
attractiveness of each entry method. This is especially important to discover when
entering an emerging market since retail sector characteristics tend to be somewhat
different and less organized in comparison to well known developed countries.
The Indian retail market is dominated by street-side vendors and small neighbourhood
shops, the so-called kirana stores, which are primarily family owned and independent
(Mishra 2008). Organized retail is a relatively new concept in the country and accounted
for only around 5.9% of the total retail industry in India in 2007 (India Retail 2008).
Due to the somewhat low standard of living in India, the food and grocery category
accounted for 59.5% of the total retail industry in the country (India Retail 2008) which
is a high percentage in comparison to developed markets. As an example, the equivalent
share in Denmark is around 39.7% (Danmarks Statistik 2002). This difference of course
comes from the fact that low-income consumers will make sure to serve a basic need
such as food before other, less necessary goods are purchased. The result of this is that
from the total amount of money an average Indian consumer spend on retail items; they
spend the majority on food and groceries and these to a large extent falls under the
FMCG category. The Indian market for FMCG is as a consequence larger than the
country‟s GDP per capita testifies.
Although the Indian FMCG market is of considerable size, it is not a straight forward
market to enter however. Given the extremely fragmented nature of the retail market
caused by the low share of organized retail, India is a considerable challenge for FMCG
firms entering the market as a fundamentally different approach to distribution is often
needed. In developed markets, FMCG firms will in many cases only have to deal with
one or perhaps a few major retailers if they wish to achieve nationwide market
coverage. In India on the other hand, it is necessary to tailor your distribution to the
segment of the population you wish to target and you may need to interact directly with
a large number of local wholesale and retail firms in order to reach the chosen segment
effectively.
Mishra (2008) has divided the Indian market into four segments based on the level of
difficulty associated with supplying the markets as well as the per-capita demand. These
segments are summarised in the figure below and then expanded on subsequently.
41
Table 11.1 Market segments in the Indian market
High
Low
Easy
Urban and semi-urban market
Emerging market
Hard
Market
access
Per-capita demand
Oasis market
Bottom of pyramid market
Source: Mishra (2008 p. 177). Edited by the authors.
Urban area consumers. The urban and semi-urban market primarily consists of
consumers from metropolitan areas in and around major cities. Urban and semi-urban
markets are usually supplied by relatively efficient distribution channels due to high
population density and superior infrastructure compared with rural areas. At the same
time, this market has high per-capita demand compared with the Indian market as a
total. The characteristics of this market segment also make it the only one where
organized retail is realistically possible at present. The combination of easy access and
high per-capita demand make the urban and semi-urban market the first choice of most
market entrants. There is an unfortunate side effect to this fact however, as the
attractiveness of the market has a tendency to increase the number of entrants and
consequently competition. So what at first glance seems attractive may not be that
attractive after all as superior profits may be competed away.
The emerging market, which is not to be confused with the primary definition of
emerging markets in this thesis, is defined as consumers in satellite towns around the
major metropolitan areas. The term emerging is used because such satellite towns often
blossom when the adjacent metropolitan area grows in population and wealth, as this
increase the demand for labour and goods in the satellite itself. Income and thus percapita demand is lower in the emergent market than in urban and semi-urban market,
but given the close proximity to a major metropolitan area, such areas have better than
average infrastructure and fairly efficient distribution channels.
Rural area consumers. Another market segment in India which is not normally the
first choice of market entrants within FMCG is the so-called oasis market. The oasis
market is, as the name implies, small areas with relatively high demand situated in low
demand areas – often villages in rural areas. This is caused by the fact that a large group
42
of Indians live and work abroad and transfer funds to family members in India. These
Indian expatriates have to a large extent found work in Middle Eastern countries but
also in recent years in Europe and in The United States. While the village populations
are somewhat prosperous, this has rarely influenced the infrastructure in and around
these remote oases of wealth. Reaching these consumers is thus a considerable
challenge for FMCG firms as established distribution channels are missing. Therefore, it
often requires innovative distribution practices to be successful in the oasis market.
The final segment in the Indian market is the so-called bottom-of-pyramid (BOP)
market. This market segment is characterised by having low per-capita demand as well
as being difficult to access. The BOP market consists of low income consumers in rural
areas who are without support from expatriate family members. As these consumers
have extremely low purchasing power, it is a highly difficult market to earn a profit. For
this reason, successful FMCG firms in the BOP market have often had to find highly
alternative ways of raising sales and frequently a long time perspective with regard to
profits is needed (Mishra 2008 p. 180).
11.1.3 Five forces analysis of the Indian FMCG industry
Threat of new entrants. Because of the enormous size of the Indian market and the
high level of growth, India should be considered attractive for most major international
FMCG producers. Such firms not yet in the country should thus be considered potential
entrants. In addition to the major international players on the FMCG market, India has a
large number of regional producers serving narrow geographical markets due to the
poor infrastructure in rural areas. These regional firms have adapted to the specific
demands of consumers and the difficult conditions for efficient distribution in less
developed areas (Mishra 2008). As the infrastructure in rural areas is unlikely to be
improved significantly in the foreseeable future due to investments being concentrated
on highway construction and urban areas, such producers can continue to emerge and
offer considerable competition locally.
While India‟s poor infrastructure leads to an increased threat of domestic entrants to the
FMCG market in the country, it is on the other hand also likely to dampen the eagerness
of foreign companies who are considering a market entry. At the same time, the lack of
an organized retail sector is also likely to keep possible international entrants out since
this can make it necessary to deal with a very large number of small retailers. This
43
problem as well as the problem with poor infrastructure can be amended by entering
major metropolitan areas in the country; the so-called market hotspots.
Rivalry among existing competitors. As mentioned above in the segment on buyer
power, the Indian government has attempted to deny entry for foreign retail giants like
Wal-Mart and Carrefour by excluding multi-brand retailers. With regard to producers on
the other hand, India is more open to FDI. Therefore, a considerable number of large
well-known MNEs are active in the country including Procter and Gamble, Nestlé,
Cadbury, Unilever (Mishra 2008) as well as PepsiCo, Coca-Cola and SABMiller. As
mentioned earlier, India also has a large number of regional FMCG producers in
addition to the multinational producers. These serve narrow geographical markets,
predominantly in rural areas, and as they are adapted to the characteristic of their local
markets they will often have a competitive advantage. This advantage is likely to be
based on a well-established and intensive distribution system thus reaching a large
number of consumers in their region. For others, the competitive advantage is not so
much in distribution but instead in their ability to skilfully copy the brands of the wellknown MNEs.
The presence of a number of large multinational producers in combination with a large
number of regional producers should lead to a relatively low industry concentration in a
nationwide sense. However, the focus on hotspots for multinationals may lead to high
industry concentration in the major metropolitan areas while diversified regional
producers can result in high industry concentration in rural areas. This means that while
the industry concentration may be low in a national sense signifying a very competitive
market, the competitiveness of the market is in fact likely to be somewhat lower due to
the difficulties of reaching the final customer for MNEs in less accessible areas.
Bargaining power of suppliers. India produces a wide range of agricultural products
due to the country‟s size and its diverse agro-climatic conditions, and is ranked first or
second in the world when it comes to the production of livestock, milk, sugarcane, rice,
wheat, fruits and vegetables. Additionally, the country has an abundant supply of the
raw materials in the production of soaps and detergents. Consequently such products,
which are used extensively in the production of many forms of FMCG, are widely
available in the country and potentially at low prices due to low wages (IBEF 2006),
although agricultural productivity is low in comparison to neighbouring countries. As
44
an example of this, rice yields in India are one third of China‟s and about half of those
in Vietnam and Indonesia (World Bank 2009). Suppliers of FMCG firms are also likely
to be unorganized, as it is the fact among retailers, resulting in low concentration and
thus limited supplier power. This is certainly the fact among producers of food products.
While the majority of raw materials should be available internally in India, some
products may need to be sourced from abroad or may be available at a lower cost
elsewhere. In order to protect local businesses however, India has maintained tariffs on
a number of imports, especially on agricultural products where tariffs average 30-40%
(World Bank 2009). Nevertheless, India has reduced controls on foreign trade and
investment in recent years (CIA 2009) and if this development continues, sourcing from
abroad should become easier in the coming years.
Bargaining power of buyers. As mentioned previously, the neighbourhood kirana
stores and street vendors are the dominant retailers in India. They have very limited
buyer power due to their small size and because they are unorganized. If these retailers
were to organize joint buying they would be able to increase their buyer power and
achieve quantity bonuses as well as better terms. Such initiatives could also help in the
competition against organized retail chains which are expected to show considerable
growth in the coming years. In any case, the level of organization of the Indian retail
sector will rise in the coming years. This rising share of organized retail will increase
average buyer power in the future as order sizes increase and suppliers become
increasingly dependent on a number of large retailers. The move from independent
stores to chains can be speeded considerably if global retail giants such as Wal-Mart and
Carrefour are allowed to enter. Currently only single brand retailers are allowed to
conduct foreign direct investment in the country which has kept out the likes of WalMart and Carrefour, as they offer a large number of different brands (Mishra 2008). It
remains to be seen whether the legislation limiting FDI will persist or will be softened
with time.
Threat of substitute products. Illegal copying of products and fake brands is not only
a problem in fashion, electronics and music in India but also within FMCG, especially
in rural areas with a low education level (Mishra 2008). The loss of revenue caused by
copy producers is not the only problem for original manufacturers as such copy
products will often be of inferior quality compared to the original products. This is
45
likely to give consumers negative experiences which could transfer to the original
product by reducing brand image and customer loyalty (Kannan 2006).
11.1.4 The Indian beer market
India is not your average market for beer or other alcoholic beverages as alcohol
consumption is limited due to cultural and religious reasons. As an example, it is in
general unwelcome to appear under the influence of alcohol in public. This is especially
the case among the Hindu population as well as the Muslim population, which make up
around 80.5% and 13.4% of the entire population respectively (CIA 2009). There is also
general agreement among experts that alcohol use is low in the population as a whole.
The National Household Survey of Drug and Alcohol Abuse 2000-01 (Ray et al 2004),
conducted on a nationally representative sample of males, estimated that 26% of male
adults had ever used alcohol, while the prevalence of current users was 21.4% (WHO
2004 p. 27). Consumption of alcoholic beverages is even more limited among Indian
women since women drinking alcohol is generally frowned upon (Raffensperger 2008).
Besides a low consumption of alcohol in general, the Indians do not have a beer
drinking culture. When they do consume alcohol, they mostly prefer to drink distilled
spirits and the average Indian drinks around one litre of distilled spirits each year.
Therefore, the consumption of beer per capita is extremely low at only around 1.4 litres
per person (Mitra 2009). The low consumption of beer compared with distilled spirits is
not so much a matter of taste however. The reason is primarily a high average tax level
on beer making up 49% of retail prices compared to 33.6% on average globally (Mail &
Guardian Online 2008). At the same time, legislation and taxes across states varies
greatly and there are even import and export taxes on beer between states. Legislation
has been changed slightly in recent years in favour of the breweries however and
Carlsberg expects that many of the restrictions and taxes will be eased in the coming
years (Kastberg 2008). The Indian consumption of beer is thus likely to increase
significantly in the coming years, especially if legislation becomes more favourable.
Carlsberg expects a growth rate of 15-20% per year between 2008 and 2013 (Kastberg
2008), although the current economic downturn could cause these percentages to drop
temporarily.
Although the Indian beer market is relatively small at present on a global scale, around
the same size as the Dutch market, it is showed a lot of interest by the world‟s major
46
breweries. SABMiller, The world‟s second largest brewer after AB InBev, is present in
the Indian market and has a market share around 35% (Mail & Guardian Online 2008;
Mitra 2009; Nielsen 2008). The biggest player in the market is however the local firm
United Breweries with its highly successful brand Kingfisher. United Breweries is
owned in part by Heineken, who acquired Scottish & Newcastle‟s 37.5% share through
their joint purchase with Carlsberg, and Heineken brand products are therefore produced
by United Breweries in India. Besides SABMiller and Heineken, AB InBev is also
present in India as well as Carlsberg, who entered the market in 2006. Mohan Meakin,
an Indian brewer with a long history, is the final large brewery in the country (Canadean
2008) which additionally has around 60 smaller breweries (Mail & Guardian Online
2008).
11.1.5 Carlsberg India
Carlsberg entered India through a joint venture with the Danish government‟s
Industrialisation Fund for Developing Countries (IFU) and a group of investors led by
the Lion Brewery Ceylon. The joint venture was initially named South Asia Breweries
but was renamed to Carlsberg India in 2009. Carlsberg holds 45%; the IFU holds 10%,
while the remaining is held by the Lion Brewery Ceylon and other investors (Mukherjee
2009).
Carlsberg
additionally
owns
25%
of
the
Lion
Brewery
Ceylon
(www.carlsberggroup.com).
The unique selling proposition for Carlsberg in the Indian market is that their products
are the only all-malt beers in the market and so they will attempt to create a niche
category for such products (Mukherjee 2008). At the same time, Carlsberg has priced
their products in the gap between low quality local beers and the prices charged for
imported beers in the premium segment. The Indian market is price sensitive due to the
low per capita income and firms doing business in India should thus price products with
this fact in mind (Kumar 2007). By offering their products at relatively low prices,
Carlsberg will be within economic reach to a larger share of the Indian population
compared to the competitors in the premium segment (Kastberg 2008).
The product portfolio currently consists of three beers; Carlsberg, Tuborg and Okocim
Palone (Majumder 2009). Carlsberg India has invested heavily in marketing in order to
launch the brands, especially Tuborg which is considered the power brand in the
portfolio (Sayal 2009). While a considerable amount has been invested, around 500
47
million DKr in total (Denta 2008), Carlsberg has still opted for a relatively cautious
form of entry however by entering through a joint venture so that the investment is
spread on more parties. It could also prove to be too much of a gamble to invest
additionally in India since the possibility of profit rests greatly on the expectation of
political reforms. While these reforms are likely to come eventually, it may require a
long period without adequate profits before the necessary changes are made. It seems
however that Carlsberg India is willing to accept the risks as they are looking into
expanding their business to South India in the medium term (Børsen 2009).
Carlsberg India currently has four breweries in operation and is headquartered in the
New Delhi satellite of Gurgaon. The table below shows an overview of the firm‟s four
breweries.
Table 11.2 Carlsberg India’s facilities
Location
Ponta Sahib, Himachal Pradesh
Alwar, Rajasthan
Aurangabad, Maharashtra
Kolkata, West Bengal
Total
Operational
Q3 2007
Q1 2008
Q2 2008
Q2 2008
Mode
Acquisition
Green field
Green field
Green field JV
Capacity (hl)
150.000
450.000
500.000
120.000
1.220.000
Source: Carlsberg Group 2008; Denta 2008
The construction of the brewery in Alwar in the state of Rajasthan was the first to be
initiated followed by the facilities in Aurangabad and Kolkata. The latter is a 60/40 joint
venture between Carlsberg India and local partners. It has limited capacity but it is
possible to expand the facility significantly in case of increasing demand (Carlsberg
Group 2008). Before any of the three brewing facilities became operational however,
Carlsberg India acquired a small brewery in Ponta Sahib, Himachal Pradesh, 280
kilometres north of New Delhi. The brewery is one among a few breweries in northern
India which has European standard brewing equipment and can also be expanded if
necessary (Carlsberg Group 2007). The relatively high technology level at the acquired
brewery corresponds well with the previously stated fact that Carlsberg attaches
importance to this factor when evaluating acquisitions in order to minimize postacquisition investment.
With the acquisition, Carlsberg India was able to launch their products in the Indian
market around six months earlier than previously planned and could thus begin to build
brand recognition and image earlier. The expected growth in demand resulting from the
48
increased brand recognition and image, combined with a positive response to all-malt
products and aggressive pricing, could then be met by the green field facilities already
under construction at the time. Given the amount of interest in the Indian market by
competitors and the inflow of investments, it seems to be a sensible move to acquire the
brewery in Ponta Sahib. Carlsberg India can in this way take advantage of pre-emption
of assets as well as the learning curve effects of being in the market earlier than
originally planned (Finney et al 2008). Besides these positive effects, Carlsberg has also
achieved a market share of 5-8% already in its first year of operations in India (Denta
2008) and expects to reach 10% by the end of 2009 (The Hindu Business Line 2009)
and around 15% by 2010/11 (Nyhedsbureauet Direkt 2009). A 5-8% share is quite
impressive already since the vast majority of the investment has been done through
green field facilities and no established brands in the market have been acquired. It
remains to be seen whether Carlsberg India are able to increase their market share
further and it is likely to require entering South India as well, as this part of the country
accounts for 55-60% of the total domestic beer consumption (The Hindu Business Line
2009).
Given the undeveloped status of the Indian beer market, Carlsberg has entered the
market relatively early. However, since the two major breweries in the market has been
there for a considerable amount of time, it can perhaps to some extent be possible for
Carlsberg to free-ride on the efforts of United Breweries and SABMiller. This is for
instance with regard to their lobbying on changing regulations for sale, distribution and
consumption of alcoholic beverages and beer in particular. At the same time these firms
have spent heavily on advertisement, not just to increase their respective market shares,
but also in order to increase beer consumption in the country in general. Carlsberg will
of course also be able to profit from the strong market growth caused by the investments
of their competitors through recent years.
11.1.6 OLI framework
The following segments will evaluate Carlsberg‟s opportunities for entering the Indian
market using the three sub-paradigms of the OLI framework; ownership, location and
internalization. The findings will subsequently be compared with Carlsberg‟s actual
market entry.
49
Ownership. The question here is whether Carlsberg is in possession of unique
resources, capabilities or skills which can give them a competitive advantage in the
Indian market. The following is primarily a comparison of Carlsberg compared to
domestic firms, not compared with the MNE competitor SABMiller, as we in general
expect SABMiller to be as competitive as Carlsberg.
First of all, Carlsberg has a competitive advantage in production and product quality.
Domestic beer production in India is in many cases of poor quality and Carlsberg is
therefore able to offer products of superior quality (Kastberg 2008). At the same time,
they have superior production processes and technology compared to domestic firms
and should thus be able to produce with greater efficiency leading to lower costs.
Carlsberg has worked intensively with production efficiency in recent years through
their Excellence programmes and claim to have saved 500-1,000 million DKr over a
three to four year period from 2005 in production alone. The excellence programmes
spread “best practice” to acquisitions and joint ventures in order to minimize costs
(Olsen 2008).
At the same time, given the size of the acquired brewery in Kolkata, the local breweries
are likely to have limited capacity. This should make it possible for Carlsberg India to
take advantage of economies of scale in production by an intense marketing effort to
increase volumes. Carlsberg has for instance used considerable funds on advertisement
during their launch of the Tuborg brand in India in 2009 (Sayal 2009). With larger
volumes the current capacity can be utilized to a lager degree and the capacity of the
firm‟s smaller facilities can be expanded. Expanding the smaller facilities should lead to
lower unit costs and thus increased benefits from economies of scale as minimum
efficient scale is extremely high within brewing. It has been estimated at above 4.5
million barrels, around 5.3 million hectolitres (Tremblay 2005), which is more than ten
times Carlsberg India‟s largest brewery.
Secondly, Carlsberg‟s managers and board members have been involved in a substantial
number of joint ventures, mergers and acquisitions in recent years. Most notable are the
merger with Orkla in 2001 followed by Carlsberg‟s buyout in 2004 and later the joint
acquisition of Scottish & Newcastle with Heineken in 2008 (www.carlsberggroup.com).
Besides these major deals, Carlsberg has been involved in a large number of joint
ventures and acquisitions – primarily in Asia – involving smaller breweries. Through
50
these activities the Carlsberg organization, and its managers and board members in
particular, should have developed skills in identifying the right targets for mergers,
acquisitions and joint ventures as well as handling the transition, and finally in
optimizing operations subsequently. This is in itself a capability that can offer a
competitive advantage.
Carlsberg has a third competitive advantage through their excellent capabilities within
logistics (www.carlsberggroup.com) which is likely to become especially important in a
market like India where the infrastructure is particularly poor. In spite of the poor
conditions, Carlsberg India has thus managed to achieve more than 80% market
coverage, only missing the southern part of the country, just 18 months after becoming
operational (Sayal 2009). Keeping logistics costs low is highly important since these
costs account for 15% of Carlsberg‟s total costs (www.carlsberggroup.com). Carlsberg
India is however not able to use their logistics capabilities to save costs freely as some
states have local distribution monopolies for alcoholic beverages (Mitra 2009) and some
of these use highly inefficient manual loading and unloading of goods. At the same
time, while Carlsberg is likely to have a competitive advantage within logistics in India
compared to local firms, this advantage is likely to be minimal matched up to the
market leader United Breweries as they have superior knowledge of the market and are
of considerable size.
In conclusion on the ownership sub-paradigm, Carlsberg has a competitive advantage
compared to domestic firms through superior product quality, logistics and technology
in production as well as through economies of scale. They do not have an advantage
with regard to economies of scale compared to United Breweries however – it may on
the other hand be that the opposite is true. With regard to management and board
member capabilities and knowledge, especially on handling mergers, acquisitions and
joint ventures, Carlsberg should be far superior compared to domestic firms. Ultimately,
Carlsberg may not be superior to all their competitors in the Indian market with regard
to the resources, skills and capabilities discussed above. However, the combination of
these is likely to give them an overall competitive advantage.
Location attractiveness. As discussed above, it seems clear that Carlsberg has
ownership advantages compared to incumbents in the Indian market and it should thus
be possible for the firm to enter and compete successfully. The question is then whether
51
the Indian market favours local production or production abroad as this can influence
the mode of entry. It is hard to find a definite answer to this question or to whether it is
cost-efficient or not for Carlsberg to produce in India however.
First of all, Carlsberg needs huge amounts of malted barley in their production,
especially since they produce all-malt beers. Other producers in the market use malted
barley as well but in smaller amounts since they supplement with other types of grain
such as maize or rice. However, the barley produced in India is not of the same standard
as available abroad and therefore fails to meet Carlsberg‟s strict quality standards. For
this reason, Carlsberg imports all the malt used to make their products (Mitra 2009).
This is sure to bring about some logistical challenges, especially for breweries far from
the coast such as the one in Ponta Sahib, since the nearest seaports from Ponta Sahib
capable of handling bulk shipments is more than 1,100 kilometres away. This brings
into play the poor status of India‟s transportation system and the inefficient seaports
which adds to the complications Carlsberg faces of sourcing raw materials for
production. The Indian railways should however be able to handle the bulk shipments of
barley relatively reliably and efficiently since bulk shipments are their primary
expertise.
While it is difficult for Carlsberg to source raw materials for production in India, they
are likely to face similar problems regarding the country‟s infrastructure should they
have chosen to import their products instead. In this case they would also face the
inefficiencies of customs clearing which are likely to be especially difficult due to the
alcoholic content of the products. As mentioned previously, the inefficiencies in
customs clearing means that mainly finished products and intermediate goods can
remain in custody of customs authorities for weeks. As beer is a perishable product, the
loss of shelf life caused by this delay adds costs which are not brought upon firms that
produce domestically.
Clearing imported goods through customs can be a lengthy and thus costly process but
for the brewing industry the import duties laid upon imported beer play an even bigger
role nevertheless. Import duties of 100% (InfodriveIndia 2009) effectively eliminate any
thought of importing beer for breweries that wish to be among the dominant players in
the Indian market. Largely thanks to the import duties, imported beer only accounted for
1% of beer sold in India in 2008 (Euromonitor 2009). In addition to import duties on
52
beer entering the country, breweries also face taxes between states within the country.
This is also likely to add additional costs when beer is distributed throughout the
country. The only way to avoid these taxes is to have a brewery in every state where
you wish to sell products which of course leads to limited opportunities for economies
of scale. For this reason, the biggest brewing facility in India has a capacity around 1
million hectolitres (Mitra 2009). In comparison, Carlsberg‟s single brewery in Denmark
has a capacity of 4.3 million hectolitres (Holt 2009) and the biggest brewing facility in
the world, located in Mexico, has a capacity of 60 million hectolitres (Mitra 2009).
A factor which makes it attractive to produce in India is the low labour cost in the
country which is also indicated by the low GDP per capita. These low labour costs may
also be the primary factor which makes it possible to earn a profit in a market where
only slightly more than one third of the sales price goes to the producer (Mail &
Guardian Online 2008). Another factor which makes it attractive to produce locally is
the poor state of India‟s infrastructure as this has a huge impact on the logistics costs.
Ceteris paribus, the closer production facilities are to the final consumer geographically,
the lower the cost of distributing products to these consumers will be. The cost of
supplying a larger number of breweries, especially with barley as it has to be imported,
will of course rise with the number of breweries.
In the end however, for breweries that intend to reach a double digit market share,
producing in India for sale domestically is likely to be considerably less expensive than
producing abroad – even in a country with similar low cost labour. This is because
import taxes, transportation costs and costs associated with customs clearing exceeds
the savings by producing abroad which primarily consist of lower sourcing costs and
increased economies of scale.
Internalization. In the two latest segments of this thesis we have found that Carlsberg
possess resources, skills and capabilities making them competitive in the Indian market
and we have determined that it would be advantageous to produce the firm‟s products
locally instead of importing from abroad. In this segment, the question is whether
Carlsberg should produce their products in India themselves or should license the right
to do so to an incumbent.
As discussed in the segment on Carlsberg‟s reasons for conducting FDI, we regard the
firms search for new markets as the primary motivation for entering foreign markets.
53
This is definitely also the case with regard to Carlsberg‟s entry in India as they see it as
a highly interesting market for the brewing industry. This is due to a population of 1.1
billion where 60% are below 30 years of age and the middleclass is growing steadily
(Kastberg 2008). As mentioned previously, good quality malted barley is an essential
ingredient in Carlsberg beer and the same is the case for hops. Neither of these is
available from Indian producers and it can also become a problem to get a steady supply
of freshwater in some areas of the country. All things considered, India is hardly an
ideal place for beer brewing and Carlsberg have therefore not decided to initiate
production in the country due to the availability of raw materials. It is also unlikely that
Carlsberg are attempting to access superior technology and the tax system makes it
impossible to reach significant economies of scale in production. Finally, the market
entry in India has served more to increase rather than decrease the company‟s risk and it
is difficult to see that it is a response to actions by a competitor. This clearly leaves the
search for new markets as the dominating reason for Carlsberg‟s entry into the Indian
market. It is however not necessary to invest directly in order to reach the Indian market
as it can also be done through a licensing agreement and Carlsberg could therefore just
as well serve the Indian market through a partner in the market. There are however two
circumstances which prevents Carlsberg from using licensing. First of all, a potential
partner would have to be able to produce to the quality standards set by Carlsberg and at
the same time be able to offer extensive market coverage for their products. Another
major brewery would thus be the only probable candidate which in practice leaves only
United Breweries, which is owned partly by Heineken, and global competitor
SABMiller. However, it is difficult to see why any one of these two would be willing to
produce and sell Carlsberg products in the Indian market.
Another fact which inhibits an entry to the Indian market through licensing by Carlsberg
is that they rely on meticulous information gathering from retailers, down to every
single shop carrying Carlsberg products. This gives Carlsberg excellent market
knowledge, updated on a day-to-day basis by the firm‟s sales representatives. The
information also helps the sales representatives to advise the customers on marketing,
advertisement and prices as well as which products the customer should be selling
(www.carlsberggroup.com). If Carlsberg licensed both production and distribution to an
incumbent in the Indian market, it is highly unlikely that such a program could be
carried out.
54
Finally, the transaction costs involved with agreeing on a licensing contract between
Carlsberg and an Indian firm, as well as monitoring compliance with the contract
afterwards, could be quite considerable due to huge cultural and economic differences.
The language differences are however unlikely to be a problem due to the good English
skills of Indians in general. Nevertheless, internal transaction costs should be lower than
external transactions costs. It thus seems attractive for Carlsberg to internalize their
Indian business and a licensing agreement with an incumbent therefore seems
unattractive.
11.1.7 Discussion
In conclusion to Carlsberg‟s entry on the Indian market, based on the evaluation of their
possibilities through the OLI framework above, the expected market entry strategy for
Carlsberg would be to enter through green field investment.
We concluded that Carlsberg has ownership advantages compared to incumbents; that it
would be most attractive to produce locally, and finally that transactions should be
internalized as this should minimize costs. This means that Carlsberg should enter the
Indian market through acquisition or green field investment. Entry through acquisitions
seems difficult however. Among the approximately 60 small breweries in India, there
are none with a dominating position in a local market through strong local brands. This
means that there are no obvious acquisition targets in India. In China on the other hand,
as will be discussed subsequently in this thesis, beer production and consumption is
highly regionalized which has made it possible for Carlsberg to acquire local breweries
who has monopoly status in specific Chinese regions. The lack of such options in India
is primarily due to the strength of the two major breweries in the country, United
Breweries and SABMiller, as these breweries hold a combined market share around
80%.
While we have found green field investment to be the most attractive option, Carlsberg
has chosen to enter the Indian market through a joint venture with a non-domestic firm
of which Carlsberg currently owns 25%, the Lion Brewery Ceylon. Carlsberg has thus
only partly internalized their Indian business which should lead to additional transaction
costs compared to a fully owned subsidiary. Therefore, the market entry would perhaps
have been handled differently if attractive acquisition candidates were available in the
Indian market. The Lion Brewery Ceylon is nevertheless likely to have considerable
55
market knowledge on the Indian market due to the close geographical and cultural
closeness to its home market, Sri Lanka. This market knowledge is likely to be the
primary reason for Carlsberg‟s decision to enter India through a joint venture as it
would be costly and time consuming to obtain this knowledge single-handedly through
experience in the market.
The joint venture has until now primarily entered the Indian market through green field
facilities but also through an acquisition and a joint venture with a domestic brewery.
The market entry thus seems to follow the OLI framework to some degree by focusing
primarily on green field investment, but at the same time Carlsberg India attempts to
take advantage of other opportunities as they arise. This was for instance the case with
the acquisition of the brewery in Ponta Sahib as this allowed the joint venture to
initiated production earlier than previously planned.
11.2 China
The most populous country in the world, China offers some unique opportunities as
well as challenges for most companies that chose to do business there. Generally China
is viewed as one of the most successful and rapidly growing of the emerging economies
around the globe, and the sheer size of the markets present in China along with their
current development, promises to make the country one of the most important in the
years to come.
11.2.1 Special economic zones and growth
In later years, China‟s economic growth has been averaging a growth of around 8%
annually in GDP, and has achieved a position as the world‟s second largest economy
only surpassed by the USA when measured in purchasing power parity (Sino Daily
2009). This economic growth has been occurring steadily for the last 30 years and if it
continues unabated will make China the worlds‟ largest economy within this century.
Despite this impressive growth the average consumer in China does not have nearly the
same spending power as most western countries‟ consumers (EconomyWatch) and the
relative difference between consumers in the Chinese markets have widened in later
years. It is likely that this is a result of the Chinese way of liberalizing their markets and
encouraging growth by establishing so-called special economic zones (SEZ). The SEZs
date back to the 1980‟s and mostly encompasses coastal communities and capitals of
inland regions. The Chinese SEZ program has grown steadily through the years with
56
additional SEZs being opened and these zones serves as the main driver of the growth in
the Chinese economy. The special benefits granted to these areas include tax incentives,
more independence with regards to international trade and focus on attracting foreign
capital and FDI to the zones (Richard Wang & Co 2006). Some of the most notable
amongst these SEZs are Shenzen, Xiamen and Zuhai and a common characteristic
amongst most SEZs are the fact that they mostly are coastal areas and in the south of the
country, or more recently along the Yangtze River.
Like the major Indian cities of Mumbai, New Delhi and Kolkata and the cities of
Moscow and Saint Petersburg in Russia, the SEZs can in many cases be considered as
market hot spots. As it is the case with the above mentioned cities, the population of the
SEZs have above average incomes and growth compared to the country in general and
especially compared with rural areas. This makes the SEZs attractive markets for MNEs
that do not wish to enter the entire Chinese market.
11.2.2 Current state of the Chinese economy
While China has been affected by the recent and ongoing economic crisis, the country
as a whole has been affected far less from this than almost any other economy in the
world. The growth of the Chinese economy is currently lower than previous years and
according to some sources it could be the lowest for the country since 1990. In spite of
this, the Chinese economy maintains a growth rate far above what most western
countries would consider high. The Chinese economy thus remains relatively healthy as
can be seen from sources such as The Economist, which has raised its estimate of
growth to 7.2% for 2009. The World Bank estimates the Chinese growth rate at 7.5%
(The Economist 2009).
The effects of the economic crisis on the Chinese market have mainly been through
failing demand from foreign markets and foreign companies that have suffered from the
crisis. This in turn has translated into problems in China where the level of FDI as well
as export of Chinese goods and services has been impacted. Mainly the markets for
Chinese goods in Europe and the USA have dramatically decreased which influences
most companies in the SEZs to some degree, as they are mainly geared towards export
and foreign trade.
The Chinese government has recently passed a stimulus package of some four trillio n
yuan ($586 billion) that are to be implemented over a two-year period. The stimulus
57
package aims primarily at strengthening domestic demand and spending in order to
counteract the lower growth rate in 2008 due to the economic crisis. Initially, the
package focuses heavily on reconstructing damaged or destroyed property from a recent
earthquake in the country as well as investing in public infrastructure. Additionally
technology advancement, sustainable development, educational- and culture-projects,
rural development and social welfare are part of the package, the composition of which
however is amendable as the economy, both domestic and foreign, changes (Candelaria
et al 2009). This stimulus package has served to keep China‟s economy stable and more
or less free of many of the problems affecting other economies of its size. While the
package is big by most international standards and compared to all other countries, the
Chinese economy can afford the expenses better than most countries. A sign of this
strength can be seen in the fact that China sits on the world‟s largest foreign reserves;
$2,132 trillion according to the Federal Reserve. In addition, these currency reserves
continues to rise as foreign investments continues to flow into the country as investors
perceive that the Chinese economy will emerge from the current crisis better than most
other economies. The Chinese federal bank, People‟s Bank of China, mainly acquires
dollars in order to prevent exchange rates from increasing (Bloomberg) and a concern is
that the dollar will suffer further destabilization as a result of the recent crisis.
Lending from Chinese banks has, as a response to government orders, remained high,
and new loans has actually risen in the first three months of 2009 making many of the
problems experienced by other countries with regards to financing and loans almost
nonexistent on the Chinese markets. In conjunction with this fact, the stimulus package
and the general strength of the economy, makes China seem like an attractive market for
investment for foreign FMCG companies at this time.
China has also made great progress in developing human capital which has been one of
the main reasons why China has experienced such an explosive growth in recent years,
compared to most other developing nations and emerging markets. The heightening of
general education and reduction of illiteracy makes the countries potential for growth
strong compared to many other nations. As well as maintaining strong growth of its
economy China has also managed to keep its currency relatively stable, and has kept it
at a very close and stable level with the dollar throughout recent years. This has served
to make China attract foreign investments and capital due to a level of stability not
58
offered by most other emerging markets and has made the country able to survive
turbulent crises such as the 1997-98 Asian economic crisis better than most of its
competitors (Nanto 1998).
11.2.3 Rural-urban wage gap
One of the potentially troublesome areas with regards to the rapid growth and expansion
of the Chinese economy is the rising gap between urban and rural areas in the country.
During the last thirty years where Chinese growth has been very high, the differences
between incomes for rural and urban citizens have increased to a point where rural
earnings are around five to six times lower than urban earnings. This makes for vast
differences in living standards between urban areas, especially the SEZs, and rural
areas, where the growing modernization and efficiency in the agricultural sector makes
large numbers of rural workers unemployed. This development has driven more people
to the cities and coastal areas. Both between and inside the regions in China the
differences in income are high and this could very well become a rising problem for
China‟s economic growth in the future if nothing is done. Although the possibility for
problems are present there are also benefits derived from this inequality in incomes, as
seen in the migration to the larger Chinese cities. This has in some way contributed to
the economic growth as additional personnel became available in the cities and more
consumers were created. The latter is because, to some degree, rural areas produce and
manufacture most of the consumption goods they need themselves and therefore do not
contribute as much to the state economy as urban areas (Economic Observer 2009). The
main hindrance for a larger scale population shift towards urban zones is the Chinese
Hukou system, which is a system of residency wherein every Chinese national is
classified as resident of a specific area. This is an old system, implemented at the time
where the Communist party took control over mainland China, and it were meant to
prevent residents from rural areas migrating to the cities and thereby depleting the
agricultural workforce. While the system is much less rigorously enforced presently, it
is still a major hindrance for free factor mobility in the form of labour in China, and
serves to maintain the big difference of income between regions. Under the system any
change in location, originally anything longer than a month, necessitates a change of
hukou to be able to work and relocate to the new region. This permit can only be
granted by the government with all the associated bureaucracy resulting in this being a
time consuming and expensive exercise (Candelaria et al 2009)
59
While the inequalities between regions can put both an economic and political strain on
the government and economy, there has been no real effort to lessen the problems
caused by them. Only in the latest 10 years or so, the problem has been recognized as
important to China, as it can be seen by the latest five-year plan put forth by the Chinese
government (Candelaria et al 2009).
11.2.4 Infrastructure
While China is a populous country it is also defined by the great distances and area it
covers. This poses some challenges for most companies when entering China as there
are vast differences between different regions as to what opportunities and challenges
that must be faced. As previously mentioned, the coastal regions and larger coastal
cities remain the drivers behind the Chinese economic growth while most of the rural
areas show a more modest development. There are huge differences in buying power
and habits between regions in the country and in conjunction with the vast distances in
China, this makes local production and distribution much more manageable for most
companies.
Transportation system. The Chinese infrastructure in the form of roads is relatively
well developed in the more urban areas of the country and especially along the coastal
regions. The road network in the country as a whole, measured in total length of the
road network, is in a much less developed state however and is vastly inferior to other
emerging economies like India and Brazil (CIA 2009). As mentioned in the segment on
India‟s infrastructure, China is nevertheless quite well equipped in terms of
expressways as the country has in excess of 41,000 kilometres of these compared with
just a few hundred in India. With regard to rail transport on the other hand, China is in a
comparable state to India as the Chinese rail system is also used for bulk shipments;
primarily for transporting coal from the inner regions of the country to the more
populous and productive coastal regions.
In addition to the road and rail network, the Yangtze River, Huang River and a number
of other rivers and waterways are an important part of the Chinese transportation
system. China thus has the world‟s longest network of navigable waterways at 110,000
kilometres, slightly ahead of Russia (CIA 2009). The length of the Chinese waterways
is more than twice the total for the entire European Union and they are able to offer
60
inexpensive and easy access to some areas of the country which would otherwise be
relatively isolated due to the shortcomings of other areas of the transportation system.
More remote areas of China thus still suffer from an underdeveloped transportation
system. This, combined with considerable distances between regions, provide a solid
incentive to localize production and manufacturing of goods for FMCG companies both
foreign and domestic, since logistics could otherwise prove prohibitively expensive and
time consuming.
Seaports, power and water supply. With regard to seaports, China is among the best
equipped in the world. It has been necessary for China to invest heavily in seaport
capacity due to their export driven economy, especially within shipment of containers,
and for that reason eight of the world‟s 30 biggest container ports are located in China
(Swedish Trade Council 2008). All in all, China has the world‟s largest port capacity
which helps to offset that these are somewhat inefficient (US Army Corps of Engineers
2006).
The Chinese supply of electric power has been increased tremendously in recent years
and as opposed to India, China seems to be able to meet the rapidly increasing demand.
This does however come at considerable cost to the environment as a significant part of
the Chinese power comes from fossil fuels; primarily coal. The supply of water
however may be the biggest challenge of all for China as the country only has a
naturally available annual water flow of 2,114 cubic meters per capita. This may sound
like a lot, but it is only a third of the world average and the water is very unevenly
spread across the country as the northern part of the country has only one sixth of the
water available to the southern part. This means, that the entire northern part of China –
home to 680 million people – suffers from water scarcity, which is defined as receiving
less than 1,000 cubic meters of water per capita annually. This means that more than
400 out of Chinas 600 cities are believed to be short of water and it has caused
previously arable lands to yield no output as well as to over-extraction of underground
water (Yusuf 2008). Sourcing freshwater of adequate quality can thus be challenging for
FMCG firms in China, as well as it is likely to become in India in the not so distant
future. Therefore, securing a reliable water supply will in many cases need to be
included in the analysis when deciding on a market entry in China.
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11.2.5 Chinese business culture and the importance of guanxi
As China continues its rapid economic growth, the many foreign companies wishing to
enter the Chinese market and those who are already there, must take into consideration
the unique Chinese characteristics that influence and determine whether a firm is
successful or not. More than most other cultures, the Chinese encourages the personal
relationship and it is almost a prerequisite for newly started enterprises in mainland
China to employ someone with a deep knowledge of the local area and customs. The
relationship network, termed guanxi, can be described as a personal connection between
two people and it carries great weight in the Chinese way of doing business, and many
foreign companies has learned to put great weight on this fact. This personal
relationship when viewed through an organizational optic takes the form of a continual
exchange of favours between individuals and can be applied in most levels of a
company. This is significant in that a highly placed representative of a foreign company
can significantly ease the entry into a Chinese market if he or she can establish the right
relationships with partners and officials in the area of interest. The guanxi network of a
company tends to be most important in the start-up or beginning phase of an enterprise
(Jiang 2003) but even though the vital significance diminishes over time a good
personal network is viewed as a key aspect of a successful venture in China by many
established companies. This can often lead to foreign companies to employing
managers that has previous experience with China or Chinese nationals themselves in
order to obtain this important network for the enterprise.
One of the reasons why a good guanxi network is of great importance when doing
business in China is the country‟s bureaucratic system. In Chinese culture, it is highly
important not to lose face as this will bring about the contempt of society. You lose face
for instance, if you make a costly mistake which you alone are accountable for. This has
great influence on the work of Chinese officials as their main priority is not to lose face,
which means that they will generally avoid making decisions if possible as these
decisions could lead to costly mistakes. For this reason, officials will in most cases
leave decision making to executives or better yet, a group of executives, which will then
reach a decision through negotiation and compromise and thus share responsibility for
the decision (Zinzius 2004). As decisions can be pushed upwards in the bureaucracy a
number of times, it can be valuable for a foreign company to have good contacts in the
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very top of the decision making pyramid in order to attempt to speed the decision
making process.
11.2.6 Chinese retail
While the Indian retail market is dominated by small family owned businesses, the
Chinese is in a much more modern state. While multinational retailers such as WalMart, Carrefour, Metro and Auchan have been excluded from the Indian market by not
allowing FDI from multi-brand retailers, the Chinese market has been open to these
companies since the 1990s (Wang 2009). In 1992 the first foreign retailers were allowed
to enter as an experiment in selected cities in eastern China, but the first stores did not
open until 1995 when restrictions were eased. The number of foreign retail stores
increased gradually in the authorized areas until 2001 when China entered the WTO
which opened the doors for FDI completely causing the number of foreign stores to
increase sharply. Foreign retailers are however still more established in Eastern than in
Western China.
Besides the above mentioned retailers from western countries, China has also attracted
retailers from Japan as well as from Southeast Asian countries. In 2005, the largest
foreign retailers in China were Carrefour and Wal-Mart as well as the Taiwanese
companies RT-Mart and Trust-Mart (Wang 2009). The western MNEs are still
primarily in the eastern part of the country which is most densely populated while
domestic firms still dominate in Western China. Domestic conglomerates such as China
Resources, Shanghai Brilliance Group and Lianhua supermarkets are thus also
significant players in the market (Barboza 2007).
There are disagreements about the sales growth numbers in the Chinese retail sector as
government sources claims growth was in excess of 20% in the later part of 2008 while
private sources estimates growth around 10% in the same period (Fong 2009). There is
however no doubt that the Chinese retail market is growing at considerable pace
compared to the global average and this is likely to continue for years to come due to
the strong growth in the Chinese GDP per capita. For this reason, the foreign MNEs
continue to expand in the country at considerable pace and some have even increased
the pace of opening new stores as the current economic crisis has caused a price drop
for attractive retail locations. Thus companies like Carrefour and Wal-Mart expect
double digit numbers of new store openings in 2009. In most cases, it takes around 3-5
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years for stores to become profitable (Fong 2009). The majority of new stores are
hypermarkets as this form of store outperforms other formats in the Chinese market by
far. For this reason, the majority of western retail stores in the country are in the
hypermarket format (Wang 2009).
While foreign retailers have opened a substantial number of stores across China, the
stores are confined to major cities and satellites around these and often with just one
store in each city. Given the considerable geographic size of the country, this means that
there are considerable distances between individual stores. This leads to difficulties with
regard to distribution as retailers have been unable to replicate the efficient distribution
systems used in more developed and concentrated markets (Wang 2009). The large
distances between stores mean that it is difficult to supply them from central distribution
centres, especially due to poor infrastructure in rural areas, and this often leads to
vendors supplying stores individually thus adding additional cost. In order not to be
affected by these extra costs, retailers have often pressured suppliers to bear the brunt of
these (Wang 2009)
In order to minimize the supply chain costs, it is relevant for retailers to increase the
number of stores and decrease the distances between stores. This can of course be
accomplished through opening new stores, but since the retail market is saturated in
many parts of China already (Wang 2009), this will in many cases not be a costeffective solution. Acquisitions and mergers are on the other hand attractive as this does
not add additional capacity. A wave of M&A activity is therefore expected in the
coming years and has already been kicked off by Wal-Mart as they started a stepwise
acquisition of the above mentioned Trust-Mart in 2007 (Barboza 2007). Other Southeast
Asian retailers may also take part in the consolidation of the retail business in the future
as many have partnered with western retailers in order to become more competitive. In
time they are likely to be taken over completely. Western retailers have in general been
most competitive compared to other foreign retailers as they have greater financial
strength, more advanced information technology as well as retail formats better suited
Chinese tastes (Wang 2009).
11.2.7 Chinese consumers
As discussed in a previous segment in this chapter, there is a considerable and
increasing wage gap between urban and rural consumers in China. This gap, as well as
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the increasing difference between urban and rural consumers, is illustrated in the table
below.
Table 11.3 Chinese urban and rural per capita income 2000-2008 (Chinese yuan)
2000
Ratio
3,146
1
Rural income
1.36
Urban income 4,288
Sources: Wang 2009; Chen 2009
2004
4,039
10,128
Ratio
1
2.51
2008
4,728
15,828
Ratio
1
3.35
The rural-urban wage gap has increased considerably since 2000 where the difference
was limited until now when urban Chinese on average earn more than three times as
much as rural Chinese. The Chinese government has taken initiatives to lessen the gap
but it is unlikely to have any significant effect yet.
A large rural-urban income difference is as mentioned earlier also an issue in India and
the Chinese and Indian market thus have this issue in common. Since the Chinese rural
infrastructure is also significantly inferior to that of urban areas, the Chinese market can
be segmented into rural areas with low income and poor infrastructure as well as urban
areas with high income and adequate infrastructure. As it is the case with the Indian
market, this division between rural and urban areas necessitates different strategies for
each market segment. If a company were to choose a specific segment to focus on, it
would also impact the geographic area of interest as Eastern China is considerably more
urbanized than the western part.
When the Chinese government opened up for foreign investment, the majority of
foreign companies in the market targeted Eastern China with high-quality products in
the small but growing premium segment (Gadiesh et al 2007). Therefore, the eastern
market is likely to be significantly more competitive than the western market where
fewer foreign companies have entered. This could make it interesting for FMCG
companies to enter Western China targeting the rural population. This may be especially
interesting currently as a significant part of the Chinese government‟s stimulus package
to boost the economy has been earmarked rural development. At the same time, rural
consumers spend 47% of their income on groceries while urban consumers spend 38%
(Wang 2009). As groceries to a high extent can be considered equivalent to FMCG, this
means that the rural population use a higher percentage of their income on FMCG
compared to urban Chinese.
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11.2.8 Five forces analysis of the Chinese FMCG industry
Threat of new entrants. With a population in excess of 1.3 billion people and a very
high level of economic growth, China must as a consequence be on the agenda for a
large number of major multinational FMCG firms. The threat of new entrants must in
this respect be quite considerable although many of these firms are already present in
the market. The fact that many multinational FMCG firms are already active in China,
due to the high attractiveness of the market, must however also deter other firms from
entering. As previously discussed, this is especially the case in the eastern part of the
country while the less urbanized inland regions are generally less competitive. While
the FMCG industry has significant fixed costs associated with start up, the nature of the
Chinese market, with rapid growth and possibilities serves to lessen this obstacle.
Additionally the relative ease, with which China has passed through the economic
crisis, has left the financial sector in the country able to provide loans and credit to a
degree where it is actually easier in some cases to obtain them than before the crisis.
This makes the entry barriers lower in China than most other countries in the world with
regards to access to capital. Another factor influencing the threat from entrants is that
the Chinese government are actively encouraging companies to expand to China making
the threat from foreign companies greater than would be expected.
Rivalry among existing competitors. FMCG producers face tough competition in
eastern regions while competition is lower in inland regions. This general difference is
pervasive in most Chinese markets and the rapid development experienced in SEZ and
rapid growth regions serves to create a very competitive market in certain areas of
China, while other areas exhibit lower competition. Even though the competition must
be said to be high, the fact that the Chinese market is growing fast makes the
competition less than would otherwise be the case. Market penetration for many areas of
the Chinese markets are not high compared to more mature markets, and while the
FMCG industry is usually defined as being a very competitive industry, this is slightly
less pronounced in China, especially the western markets.
As mentioned, the Chinese economy has suffered comparatively less than most other
markets in the world and as a result the growth and potential on the Chinese markets are
still high. This means that while the income and spending power of the consumer
continues to rise, and the potential for growth exists, FMCG companies will be attracted
66
to the Chinese market and this will serve to heighten competition in the industry. As has
been seen in other more developed economies, the industry will eventually become
more consolidated and the concentration ratio will rise, meaning larger and fewer
competitors as both the supplier companies as well as the retailers merge or leave the
market. But as of yet there are still room for expansion on the Chinese markets.
Bargaining power of suppliers. As is the case with FMCG markets generally the
suppliers in the Chinese market suffer from the fact that the wide availability of their
products as well as the relatively common nature of them gives them little power over
their customers. China offers a wide range of agricultural products due to the sheer size
and different climates which serve to make inputs demanded of the FMCG industry
commonly available. Coupled with the few scarce resources and the comparatively few
essential inputs required this diminishes supplier power. Additionally the demands of
the different segments in the industry, such as dairy suppliers or paper products does not
overlap with regards to input making the competition for supplies smaller but giving
suppliers comparatively greater size compared to their market. However, the Chinese
market is more restricted than most other markets, meaning that firms who produce
locally gain somewhat more supplier power compared to more open markets. But to all
intents and purposes the suppliers to the FMCG industry on the Chinese market are still
lacking in bargaining power.
Due to size, MNEs operating on the Chinese market gain some advantages compared to
the smaller local companies since they are able to use more resources to acquire
supplies. At the same time the inherent disadvantage non-Chinese companies
experience on the Chinese market serves to lessen the bargaining power they have due
to cultural factors that have to be learned in order to successfully operate on the Chinese
market. The cultural aspect on the Chinese market serves to encourage strong ties
between people and companies doing business together, partly due to the concept of
guanxi which makes personal bonds that tend to be very important for the individual
Chinese. This makes contractual and legal commitment between suppliers and
companies in the FMCG industry stronger than could be expected by looking at Chinese
business structure and legislation, often giving suppliers additional power through this
tight bond.
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Bargaining power of buyers. The vast majority of FMCG products are bought by
retailers. As discussed above, the Chinese retail sector is currently being consolidated
through acquisitions and increasing cooperation between the major retail chains, both
foreign and domestic. As the market concentration in the retail sector increases, the
negotiating power of retailers will increase. This is especially the fact if the dominant
future players turn out to be major international retailers such as Wal-Mart and
Carrefour. Such global giants will in many cases be able to use their global market
power as leverage when dealing with FMCG producers in the Chinese market.
The end customer for FMCG producers, that is the Chinese consumers, generally has
limited negotiating power and in most cases only has the choice between buying and not
buying the products of a particular producer. In most case they will not be able to
replace a FMCG product with a substitute but will have to buy a similar product from
another FMCG producer.
Threat of substitute products. While generally not an industry plagued by substitute
products, China nonetheless offers more in this regard than most other markets. The
widespread use of copying products gives the many brand names a greater degree of
competition than in most other markets. Even though this heightens the competitiveness
in the industry, there are, as mentioned in the general section on the FMCG industry,
really no substitutable products, except within the industry itself. While the competition
is very high in general the threat of substitutable products seems only marginally higher
in China than in most other markets.
11.2.9 OLI framework
Ownership. As is the case on most of the markets in which they operate, Carlsberg‟s
main advantage when entering new markets is their knowledge and experience with
marketing and producing beer. The close contact with consumers and general high level
of logistical ability makes for additional advantages when considering competitors and
especially smaller, more local competitors as is the case in the western Chinese markets.
With the more efficient brewing methods utilized by Carlsberg, they will be able to
make local breweries more effective and produce higher quality products compared to
their competitors.
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Additionally the knowledge of when a venture becomes a liability and needs to be sold
off seems an important aspect on the Chinese market, as Carlsberg demonstrated with
their Shanghai plant and their realization that selling it would be for the best.
The effectiveness of foreign sales and marketing methods are hindered to some extend
in China as consumers are very price sensitive and not generally willing to pay more for
higher quality products. This makes any form of competition not centred on price harder
compared to other emerging economies as more often than not the local consumers must
gradually be accustomed to new, higher quality and more expensive products. Carlsberg
possesses some experience with developing local markets, garnered from entry into
other markets where beer was not previously sold in large quantities. An example of this
is the Russian market. In this regard, Carlsberg and most other foreign entrants have a
need to advertise for their products to a larger extend than local companies, but then
they also have both previous experience and financial strength to do so.
Location attractiveness. As is the case with many large countries, the sheer size of the
Chinese market is perhaps the greatest proponent of moving production facilities to the
country. The weak infrastructure coupled with great distances makes local production a
significant advantage compared to bringing products into the Chinese markets. One of
the characteristics of China is the fact that it is difficult to think of the country as one
market. Rather, the Chinese market are fragmented to a large degree into smaller
geographically defined markets, and locating production facilities in the areas where the
beer is sold would prove much less costly than attempting to export to the areas.
The very low cost of labour as well as other important factor inputs is also an important
factor when considering China. It also holds an abundance of low-cost labour and raw
materials that serves as a powerful attraction when deciding whether to produce in
China. The low labour cost is partly offset by the fact that while the lowest wages are
paid in western China the workforce are comparatively poorer educated, making the
investment in labour higher in industries where other than unskilled labour are required.
A disadvantage when compared to other emerging markets are the fact that the Chinese
government requires that foreign companies transfers state of the art technology and
resources in order to be allowed to merge or make a JV with Chinese companies (Meyer
2001). This can hinder FMCG companies due to the fact that they have to spend more
money on technology transfer than strictly necessary in order to be able to obtain a local
69
partner. While this strengthens the Chinese economy it also serves as a dampener for
industries where modern technology or machineries are not needed in order to compete
on the market. This is partly the case in the beer industry in china, specifically in the
western markets, where the standardization and high quality attributed to high quality
beer, specifically in the premium segment, are not in that high a demand. Mostly the
Chinese consumers prefer their local, low-cost beer and transferring state-of-the-art
brewing technology as well as facilities in order to acquire a local partner may in some
cases be surplus to requirements.
Internalization. As it is the case in most markets for beer, the Chinese exhibit strong
brand loyalty, specifically to their local beers, which are mostly brewed by local
breweries. In order to enter the market successfully foreign companies will often have to
partner or acquire a local brand so as to have a starting base for its own brands. This
makes licensing a poor choice for foreign brewers entering China as the prospects for
sales are low without significant effort to develop the market and promote the foreign
brand. As with most other emerging markets, the breweries in China are not that up to
date with production techniques and quality, and this fact could prove detrimental to
foreign brands, especially where they are more expensive than the local brands.
Investing directly makes Carlsberg‟s advantages of marketing and production applicable
for their Chinese operation, in a way that simply would not be possible if they were
licensing their brand, or to some extend an alliance with a Chinese partner would make
possible. Many Chinese companies would not possess the necessary technology or
know-how to produce the kind of quality that foreign companies achieve, and this
would seriously hamper the possibility of licensing products to them. Similarly, unless
some sort of control or influence can be acquired, usually through a JV or merger, the
incumbent has little incentive to uphold the standards and quality associated with
foreign brands and products. This would be detrimental to both brand name and
reputation.
One of the strong reasons for entering the Chinese market through FDI is the strong
brand loyalty exhibited by the Chinese consumer. By acquiring a local brand name and
company, either wholly or as a partner, MNEs significantly eases the access to local
markets in China and paves the way for development of the local markets to higher
quality products and foreign brands. As an added factor speaking in favour of choices
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offering most possible control in conjunction with a local partner, is the often difficult
nature of navigating the legal system in China as well as the changing government
policies, which makes local knowledge and the use of guanxi trough Chinese partners,
an efficient way of doing business.
11.2.10 Discussion for China
Carlsberg‟s initial entry into the Chinese market was characterised by small investment
in Hong Kong leading to export of beer to the Chinese market since Hong Kong was not
a part of China at that point. Originally the brewery was licensed to sell Carlsberg, but
was eventually taken over completely. When this brewery was closed and moved to
mainland China in the Guandong province, where the Chinese economic boom was
most notable due to the SEZ in the vicinity, Carlsberg more substantially entered the
market. By eventually acquiring a majority equity stake in the company the brewery
have followed a standard pattern for Carlsberg of gradually increasing the commitment
level in their markets to a total, or near as possible, ownership of their interests. By
2006 the Huizhou brewery has become the main presence on the eastern Chinese
markets as well as the distributor of Carlsberg brand products in China (Carlsberg
Group 2006).
While this seems as a traditional entry mode for Carlsberg, the company also engaged in
a green field investment with an $80 million new brewery built near Shanghai in 1998,
breaking with their development of the Chinese market. With a new brewery mainly
geared for production of premium segment beer on the eastern Chinese markets,
Carlsberg hoped to capitalize on expected growth in this part of the market. The
advantages with this expansion is that having total ownership of the new brewery
Carlsberg would be able to transfer technology and expertise freely without risk of
exposure to rivals or the danger of losing control of their company specific resources. In
this regard the development in the strategy pursued seems as could be expected by
Carlsberg, as the company from a comparatively small investment and low level of
commitment became more confident in the market and raised their commitment level
accordingly with a new brewery. Carlsberg no doubt overestimated the development of
the premium segment of the Chinese markets as well as the ease with which they could
introduce their products in a continuously more competitive eastern Chinese market.
This ultimately led them to sell their high-tech brewery to the major Chinese competitor
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Tsingdao. This to some extend seems like a serious miscalculation by Carlsberg but it
was a mistake share by a number of their biggest competitors and they are likely to have
learned from the experience. With the sale however, Carlsberg were suddenly in a
relatively weak position compared to their most significant competitors in the Chinese
market and the eastern Chinese markets consolidated quickly. The Huizhou brewery had
only a strong presence on the local market and this seems at odds with Carlsberg‟s
general position of aiming for being one of the two-three biggest players on their
markets. Selling their Shanghai brewery after several years of continuous loss thus
marked the end of Carlsberg as a major player on the eastern Chinese markets and by
2003 the new strategy in China became to focus on developing the western Chinese
markets.
While Carlsberg has been present in the Chinese market for many years, the shift to the
western part of the country represents a virtually new entry since the markets are so
different from the eastern markets. The western markets are mainly characterized by the
much lower concentration of other MNEs and global brands, lower levels of income as
well as logistical challenges and different consumption habits concerning beer.
Since the Chinese market is so huge compared to most other markets, it naturally
becomes more fragmented than smaller markets, and this enables Carlsberg to shift
focus to the western markets without running into the problems they had experienced in
eastern China. The ownership advantages of the firms in western China were close to
insurmountable, mainly because of local breweries enjoying near monopoly status in
their respective markets with strong local brands. For Carlsberg this was making most
forms of entry without a local partner difficult. Realising this, Carlsberg in 2003 started
acquiring equity stakes in multiple breweries on different markets in western China.
This also makes sense when considering the location part of the OLI framework as the
benefits gained from being located in these relatively remote and undeveloped markets
both with regards to infrastructure and beer consumption outweighs the drawbacks. The
choice of entering by establishing JVs with local partners or acquiring equity stakes in
them, has led to Carlsberg having an increasingly strong position in the markets as they
often are the only significant entrant and establishes themselves by alliances or takeovers of the strongest incumbents.
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The drawback of JVs and similar modes of entry in this case, is that Carlsberg
relinquishes some control in order to easily enter markets, and thereby lowers the
advantage they gain from their ownership and to some extend internalization
advantages. With one of Carlsberg‟s main advantages being its technology as well as
experience, the transfer of which should not be undue influenced by lack of control, the
problem nonetheless exists for the company to be giving away some of its advantages
to only partly owned foreign companies.
With the overall strategy being one of gradual acquisition of its partners in China, as
well as the multi-tier strategy generally followed by Carlsberg, their conduct in entering
the Chinese markets seems conducive to attaining a very strong position in their chosen
markets. This is because they can capitalize on both local brands as well as local
distribution networks, and can introduce their own international brands. The fact that
Carlsberg can sell both local and international brands means they can compete in all
segments of the beer industry, and gives the basis for a very strong position in the
market.
The case of Carlsberg on the Chinese market serves to underline the importance of
adaptability when entering foreign markets. The fact that Carlsberg initially entered the
market in one way and later changed their strategy markedly with an ultimate move to
the western markets in order to avoid competing in unfavourable conditions on the
eastern markets, shows that in order to be competitive a company needs to be able to
adjust their strategy continuously. Access to distribution networks and local brands are
of significant importance in the beer industry, and the advantages gained by choosing
the correct entry strategy can be of great importance with regards to the development
and sustainability of the enterprise in new markets.
11.3 Russia
The market development in Russia has progressed rapidly in later years both with
regard to a fast growing middle class, with the resulting increase in demand for goods
and services to accommodate the increase in available spending, as well as a vast need
for infrastructure and physical facilities in the country as a whole. In the last 10 years up
until 2008, where growth in GDP was 6%, the Russian economy has averaged around
7% in annual GDP growth (CIA 2009b), making the Russian market one of the fastest
growing economies in the world as a whole.
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The recent economic crisis that have had wide ranging implications all over the world
have dealt a severe blow to the Russian economy resulting in an expected budget deficit
of around 5% and no discernable growth in the GDP for the first time in more than 5
years. As the Russian economy as a whole have been driven by the availability of cheap
loans as well as foreign direct investment, the current economic landscape offers no
immediate prospects of a resumption of the growth in Russia that has been the trend
these last years. As with most developed countries in the world the Russian corporate
system faces the reality of no immediate available credit, and certainly not the cheap
loans usually attainable before the economic downturn. Also the creditors are
demanding payment of outstanding loans in much greater numbers, as they try to
salvage their own situation and avoid defaulters. Lastly falling commodity prices has
lowered the earnings of the Russian economy as a whole, in large part because of the
dependency of selling their abundant natural resources as a driving mechanism for the
economy. Especially the fact that Russia has been dependent on their natural resources
to a degree that makes the falling commodity prices have such a large influence on the
economy makes the importance of a quick recovery all the more important. This is
especially true given that the Russian situation largely resembles the world and other
emerging economies as a whole with the problems and concerns being very similar.
In the case of Russia, the counter-cyclical forces mentioned above, which often leads to
an emerging economy being in a more favourable position than more mature economies
during economic and financial crises, has a somewhat lesser impact. This is due to the
fact that even though the country has the world‟s third largest reserves measured at
approximately 475 billion dollars its debt is even higher than this, giving Russia a rather
heavy debt burden to overcome (The Economist 2008b). Additionally the inflation in
Russia (IMF rapport 2009) which in 2008 was at 13.3% according to the Russia‟s state
statistic service, is not expected to change markedly and may even rise as high as 14%
in 2009. This has mostly been attributed to the devaluation of the Russian rouble which
have lost nearly one third of its value during the months of late 2008 and early 2009.
As so many other nations have done, Russia has cut their interest rates several times and
used several billion dollars to try to stem the depreciation of the rouble as well as used
trillions of roubles on trying to stimulate the Russian economy. It is estimated that up to
3 trillion roubles have been used by Russia for the anti-crisis measures, and of these 1.4
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trillion ($46.7 billion) have come from the Russian oil-funds (Yu & Zhao 2009). It is
estimated that the rising oil prices coupled with the money funnelled into the Russian
economy by the government will help the Russian economy rebound in the foreseeable
future. Russia‟s current budget is based on oil prices of 41 dollars per barrel, but already
the prices of crude oil have passed this point and if the trend continues this will bring
additional strength to the Russian economy as oil is as important for the Russian
economy as it is. The factors that mainly detract from the Russian situation as opposed
to most other countries, are the rather underdeveloped market and financial systems as
well as the still rising inflation in the country.
One of the main problems for the Russian market development, as well as a concern for
any entry into this market, is the huge geographical area covered by the country. More
than 17 million square miles and covering 11 time zones this poses a significant
obstacle for any overall analysis of the market, since the differences can be vast
between areas of the country. Mainly the economic activity are focused around the
western areas of the country, centred around Moscow and Saint Petersburg, as well as
areas bordering the Black sea according to the Russian statistics bureau GKS, but even
in these locations the infrastructure (Encyclopedia of the Nations) are characterized by
being somewhat underdeveloped compared to European markets. The question of
infrastructure should be considered a concern by any company willing to compete in
Russia, and even established companies will be constrained by lack of developed
infrastructure compared to more mature economies. Compared to other emerging
economies Russia do have a fairly substantial advantage in that, even though the
country suffers from underdevelopment and huge distances and rough environment at
some locations, Russia are considered ahead of other resource rich economies and many
other emerging markets. This can partly be explain by a tradition of education, science
and industry in Russia as well as determined effort to exploit its natural advantages such
as location and easy access to markets for its products and resources.
Oil, timber, coal and natural gas constitutes more than 80% of Russian exports, and
Russia is currently the world‟s second largest oil exporter (Ögütcü 2002), but the
number is steadily decreasing, and even though the resources mentioned represents such
a large percentage of exports, oil and gas only contributed around 5.7% of Russia‟s
GDP before the economic crisis when energy prices were high, and were expected to
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decrease even further in the future. This is of course the expected development if one
were to disregard the effects of the current economic crisis, but even with this in mind,
the share of GDP from these natural resources are going to be less as the Russian
economy as a whole strengthens again. One of the reasons for this is the falling
commodity prices experienced worldwide, and the relatively large impact this has an
markets such as the Russian, that to a large extend depends on its abundant natural
resources to drive the economy. Specifically oil and the rising oil prices have given
Russia a resilience not enjoyed by many countries as the money from the oil funds and
rising prises have been utilized to combat the economic crisis.
Another important driver for the Russian economy are the FDI that for some time has
been pouring into the country, as investors and companies from abroad seeks to benefit
from the growth and opportunities represented in the Russian markets. The FDI
investments have fallen drastically in the first quarter of 2009 to around $3.182 billion
(Russia-media 2009) and this represents a significant point of concern for the economy
as a whole considering the importance these investments constitutes.
11.3.1 Market analysis for Russia
Threat of new entrants. As economies of scale have a significant influence on FMCG
companies‟ ability to effectively compete and even though the Russian market is
classified as emerging it is still a factor that needs to be taken into consideration by
entrant companies. This suggests that at most a handful of companies in each segment
of the FMCG industry will ultimately be able to successfully operate on the Russian
market. Given that the Russian market generally is in growth the constraints put upon
entrants will be lesser than expected, as there are room to expand and the demands for
economies of scale are not that difficult to realize.
Foreign investors are welcome in Russia and, as mentioned earlier, FDI are a rapidly
growing part of the Russian economic growth. As investments and specifically foreign
investments have such a large part in the Russian economy, you find advantages such as
tax concessions for investors in several regions. The 1991 investment code secures
foreign investors the same rights as domestic investors in most industries, with a few
notable exceptions such as oil and gas production, and the 1999 Law on Foreign
Investment confirms this trend (LeBoeuf et al 1999). Unfortunately this seems likely to
be changing as the Strategic Sectors law of 2008 limits the allowed foreign investments
76
in 42 sectors deemed strategic and only allows more than a set limit on investments in
these sectors after a review by a special commission, chaired by the prime minister
himself. Fortunately this doesn‟t seem to apply to the FMCG industry and this makes it
somewhat easier to enter the Russian market as a foreign owned company in said
industry. Especially in the FMCG industry where certain minimum requirements for
production, needs to be fulfilled in order to be competitive this attitude can be construed
as a policy of minimal interference by government, making this an insignificant barrier
to entry.
Unfortunately one of the barriers that has to be overcome for entry into the Russian
market are widespread corruption that can be a severe hindrance to most companies
seeking to enter the Russian market. This corruption, seen in conjunction with the
cumbersome bureaucracy associated with dispute resolution and administrative
problems, tends to significantly hinder foreign owned investors in the FMCG industry,
as local knowledge and connections play a substantial part in a successful entry into the
market. Often contracts and other agreements must seek to limit foreign investors‟
exposure to an ever changing legislative landscape, often exemplified by more than
usual focus on conforming to the often very complicated Russian laws and codes. This
focus is both with regard to existing as well as coming laws. Many branches and offices
of the government show little consistency in enforcing an applying regulations and laws
which adds further difficulty to operating in the Russian FMCG industry. While this
applies both to incumbent firms as well as foreign entrants this mostly affects new
ventures as they will be most exposed in their start up phase.
When entering the Russian market there is of course the country‟s protection of
intellectual property rights and similar rights to consider, but even though this can be an
activity requiring some effort, the nature of FMCG goods limits this aspect somewhat,
making this a negligible obstacle to overcome compared to other barriers. Related to
this aspect is the fact that many companies entering the Russian market will be faced
with a rather high degree of product loyalty from the consumers. As a nation Russia
enjoys a fairly high amount of national patriotism which to some degree translates to
buying Russian products before foreign. While this can be overcome by some entry
strategies it will be a barrier to overcome for foreign companies aiming to sell their own
brands or new products on the market. This especially holds true for goods such as
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alcoholic beverages, where consumers tend to stick to what they know and buy from
producers from their own country.
Rivalry among existing competitors. There is no easily accessible and publicly
available source or register where companies can seek information about competitors in
Russia. Existing sources are out-dated, incomplete and overly formalized as to be
almost useless. Because of this it can be rather difficult to be able to obtain reliable
information about the Russian market concerning potential competitors. As mentioned
in the section about entry barriers, there usually needs to be obtained economies of scale
in order for a production company to be successful. This consequently means that in
most segments of the FMCG markets there are only a handful of large companies
present. While there is certainly room for localized or smaller producers, largely it is
these few big companies that supply the market.
Similarly to almost every country on the globe, Russia has suffered a slowdown of its
economy due to the ongoing financial and economic crisis. As such the potential in the
Russian market should be attractive to many FMCG suppliers as the economy starts to
turn around and become stable again. According to research from Nielsen, Russia was
posed to become the largest consumer market in Europe and the fourth largest in the
world by 2025 (Nielsen 2007). The forecast was of course made before the current crisis
and long range forecasts about FMCG are bound to be inaccurate due to the nature of
the industry, but there seems no reason to expect that the Russian development should
suffer any major changes because of this compared to the rest of the world. One of the
main reasons mentioned was the development of FMCG manufacturers and retailers in
Russia as well as a general growth of the consumers buying power. This has led to
increasing competition as both domestic and foreign FMCG companies seek to
capitalize on the expected boom in the market.
As retail concentration will almost invariably cascade into some degree of supplier
concentration at some point, the number of companies operating on the FMCG supplier
market will increasingly tend to become fewer and larger and thereby decrease
competition.
Bargaining power of suppliers. Since Russia exhibits no overwhelming differences
compared to most other countries when it comes to importing goods and services, there
exists no hindrances that will help suppliers to take advantage of shortcomings or
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beneficial circumstances to influence price and agreements between supplier and
producer. The more open the market is to competition the harder the suppliers will have
influencing price and gaining power through collusion and cartels. Since the legal and
judiciary system in Russia lacks somewhat compared to more mature economies, the
possibility of collusion and price agreements exist between suppliers in order to control
the market and prices. But since import is quite possible in order to avoid dependency
upon domestic suppliers and the diverse nature of the desired materials taken into
consideration this seems like a remote threat. The bargaining power of the suppliers will
remain relatively low.
There are some powers in the hands of the suppliers stemming from things such as
contracts and binding agreements that make switching suppliers higher, and in Russia it
is often encouraged to make contracts very specific and elaborate in order to avoid
misunderstandings. This means the cost of breaking contracts and agreements and
making new ones with other suppliers will be relatively steep (US Commercial Service
2009)
Bargaining power of buyers. The Supplier Industries in FMCG mainly sells their
products to retailers through intermediaries and direct distribution. In later years Russia
has experienced a development that has put pressure on the intermediaries, forcing them
to diversify in order to remain competitive and survive. Intermediaries have seen
increasing competition from brand owners and direct distributors something which
forces them to increasingly focus on logistic capabilities and changes their focus to
service providers (ATKearney 2005). As intermediaries become pressured by both ends
of their supply chain they lose significant influence and power over their own suppliers
which in this case are the supplier industries in the FMCG market, thereby decreasing
the bargaining power this industry segment has to deal with from their customers.
Mainly there has been an increase in bargaining power of retailers in Russia, both due to
retailers become larger, with national and regional chains dominating, and fewer due to
the same fact. This forces the supplier industry, especially branded goods
manufacturers, to develop in an environment where they are losing bargaining power to
their customers. While intermediaries and distribution providers represents the
immediate outlet for the products produced by the supplier industry, the retail segment
of the FMCG industry represents the more traditional customer, and as such have large
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influence and power in the industry. As such the customer bargaining power has
significantly increased following the greater concentration and size of the retailers.
Factors detracting from the bargaining power of the retailers are the fact that the
easiness of doing business with fewer customers and the perceived fact that the
suppliers yet retain some degree of power in the relationship (Peeters 2008). This is
however expected to change within few years as retail consolidation leads to an increase
in their power as customers.
It is highly unlikely that retailers and manufacturers in the FMCG industry in Russia
will integrate both due to size and very different core competencies among other factors,
but manufacturers will likely be tempted to integrate downstream in order to control the
faltering distribution companies. This can give them added bargaining power as they
acquire more of the supply chain and increase their size.
Threat of substitute products. The Russian market for FMCG‟s exhibits no signs of
being any different from other emerging markets with regards to substitute products,
and factors mentioned in the general section for FMCG apply to a large degree. This
means that the industry mostly faces the danger of substitute products from itself, and
while this is not a threat for the industry, the individual companies in the FMCG
industry faces significant pressure as many of the products and services can be
interchangeable, leading to strong degree of diversification with regards to brands as
well as competition on price. In Russia, where the economy has continued its growth
compared to most other non-emerging markets, and in later years has expanded the
middle class considerably, this results in a rising demand for premium brands and
quality products instead of low-cost products. Consequently a move from low-cost
goods to more individualized products have been taking place, reducing the threat from
directly substitutable products.
11.3.2 The Russian beer market
Russia has experienced growth of its economy and rising standards of living as well as
higher incomes for much of its population in recent years. This has given rise to a very
rapid expansion of its beer market, as consumers realise they can afford to be more
selective with what they buy and as the Russian culture are rather conducive to alcohol
consumption in general (www.beveragedaily.com 2004), even though vodka
consumption is still larger than beer consumption. The Russian consumption of beer has
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risen fast and steady and has risen from 33.5 litres per capita in 2000, to 60 litres per
capita in 2005 and is expected to rise to 85 litres per capita in 2010 (AB InBev 2009).
Combined with a big population and thereby consumer base and the fact that Russia is
the third largest beer market in the world (www.carlsberggroup.com) Russia is an
extremely attractive market to operate on for breweries that are able to compete
effectively.
Premiumisation is growing in the Russian market and the Russian consumers as a whole
has become more discriminating as to which type and brand of beer they are drinking.
The trend is towards consuming higher quality products and the premium segment of
the beer industry has experienced growth recently. A major reason for this shift towards
premium brands is the rising income and purchasing power available to more and more
Russian household. This has caused a shift in the demand as consumers can better
afford to purchase more expensive types of beer, which often are either imported beer or
domestically brewed premium brands.
Strong growth in the retail sector in the FMCG industry has eased the access of major
breweries to remote markets and customers as the supermarket and retail chains offer a
wide selection of beers and alcoholic beverages in general. Combined with this growing
ease of access to the products of major breweries in Russia as well as imported beer
brands, the customers have experienced beer of higher quality as well as a broader
selection of choices as compared to the often rather limited selection offered by single
store retailers or local groceries. These factors have made the premium segment of the
Russian beer market both lucrative and expanding, and several major breweries have
taken advantage of this fact to fulfil consumer demands. Amongst the major players in
the Russian market are Carlsberg and AB InBev, respectively the world‟s fourth largest
and largest producers of beer. Carlsberg has through its acquisition of the Scottish &
Newcastle brewery in cooperation with Heineken, gained control of the Russian
company Baltika Breweries, which currently has a market share of more than 38% and
is by far the largest company on the Russian beer market (www.carlsberggroup.com).
AB Inbev has through its Russian brewery, SUN InBev, a market share of around 19%
but are as of 2009 considering selling their Russian assets, in order to free up cash
(corporate financing week 2009) and because they are not interested in operating in a
market where they are not the market leader. Other major international breweries such
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as Heineken are also present on the market, although in a lesser degree than the two
market leaders.
11.3.3 Carlsberg on the Russian market
Carlsberg owns their Russian business through the company Baltic Beverages Holding
(BBH). Carlsberg acquired their initial 50% share in BBH in 2001 through their merger
with the Norwegian FMCG group Orkla, with whom they split in 2004 gaining full
control of Orkla‟s holdings in the brewing industry (Kronenberg 2007). As previously
mentioned Carlsberg gained full ownership of BBH through the joint acquisition of
Scottish & Newcastle in 2008 as they owned the remaining 50%.
The BBH JV included Baltika Breweries, a Russian brewer established in 1990 and
privatised in a joint shareholder company in 1992 (Baltika 2009). Developing rapidly,
Baltika soon became the leading company on the Russian market, and was since its
founding envisioned as specializing mainly in high quality products and beer
comparable to other top European brands. In 2006 the brewery merged with three other
breweries; Vena, Pikra and Yarpivo, who were themselves part of the BBH, before
finally in April 2008 becoming fully owned by Carlsberg. The beers brewed by Baltika
is by Carlsberg described as the only national beer brand in Russia, and the large market
share enjoyed by the company certainly seems to underline this statement (Carlsberg
annual report 2008). Baltika is today the biggest European beer brand measured by sales
volume as well as Russia‟s biggest FMCG manufacturer (Baltika 2009).
Through Baltika, Carlsberg includes beers from all four beer segments in its production
and marketing, the four being discount, mainstream, premium and super premium. This
has led to the company being able to profit by the growth of the entire market, as
opposed to only some of the segments as its competitors have. Mainly it is the premium
segment that is growing rapidly, and it is also in this segment that Carlsberg chooses to
focus most of their efforts in order to develop its market share through both volume and
value growth. One of the tools Carlsberg utilizes in their efforts to increase their market
leadership is the rollout of their excellence program in Russia, including best-practise
programs from their North- and Western-European markets (Carlsberg annual report
2008). This rollout is being done in conjunction with a strengthening and development
of existing and new markets in the region.
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As of 2009 Carlsberg has 12,266 employees in Russia, making the Russian market by
far the largest part of Carlsberg group in terms of employees as well as the second
largest in number of breweries. Although China has 19 breweries as compared to
Russia‟s 12, the Chinese produces and sells smaller volumes. As well as breweries
Carlsberg also owns two malt houses in Russia, which makes the access to malt much
easier and more controllable for the company, which is important since large quantities
is required for beer production, and obtaining it on the market could well be both more
expensive and expose the company to greater risk. The Russian market is the most
important of Carlsberg‟s new markets and is responsible for the majority of Carlsberg
profits in the last year, as well as most of the company‟s growth (Carlsberg annual
report 2008).
11.3.4 OLI framework
Ownership. As previously mentioned, Carlsberg‟s prime assets with regards to the
company‟s core competencies are without a doubt its significant experience with both
producing and marketing beer. This is specifically important in the context that
Carlsberg can export their knowledge to other markets and thereby gain advantages on
new markets that local breweries cannot easily duplicate. In the Russian market
Carlsberg has evolved into the dominate market leader with regards to market share as
Baltika Breweries holds a dominant position with more than twice the size of its closest
competitors. Baltika has a wide product range and competes in all the segments of the
beer market, and this is mostly done by competing on quality and the brand names of
both their own and licensed beers.
With the acquisition of Baltika Carlsberg also obtained what they themselves call
Russia‟s only national beer. This gives another advantage if they are able to brand their
products as such, because this will by definition be very hard, if not impossible for other
companies to copy. Baltika will thus have a lasting competitive advantage as long as
their beers are perceived as Russian by the Russian consumers.
Another of the ownership advantages for Carlsberg in the Russian market are in the fact
that as the company follows a strategy of market leadership and expansion, the brewery
continuously takes over or joins with other companies on the market as well as invests
in new facilities and technologies. Most recently the breweries Vena, Pikra and Yarpivo
became part of Baltika breweries in 2006-07. This fact gives Carlsberg an advantage in
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most markets, specifically compared to incumbent companies, as Carlsberg brings with
it a large sum of knowledge as well as experience with mergers and acquisitions in
many markets, and the managers and executives the company has in Russia can draw on
this knowledge when expanding. In Russia the specific challenges are more unique than
in many other emerging or smaller markets, in the regard that Baltika, and through them
Carlsberg, has such a dominant position on the market. This makes the market to some
extend more like Carlsberg‟s more mature markets, in that they are able and willing to
buy smaller companies and more extensively acquire support facilities such as logistics
capabilities and malt houses, simply because the operation on the Russian market is so
large. This also gives Carlsberg an advantage over most, if not all the local breweries, as
they have limited or no possibility to copy or emulate Carlsberg‟s experience on other
markets or its ability to finance and spend money based on its size. While this is an
advantage over local companies, the advantage doesn‟t translate into a specific
Carlsberg asset with regards to the other large breweries present in the Russian market,
such as AB InBev through its company SUN InBev, because they have similar
capabilities.
Generally not trying to compete on its prices or follow a low cost strategy, Carlsberg
mainly competes on quality and brand name. In Russia, Carlsberg does not rely on their
internationally recognized brand names such as Tuborg and Carlsberg. As mentioned
earlier, Carlsberg has move away from the strategy of promoting its own main brands to
a more locally targeted brand strategy in a number of markets. In Russia, they focus on
Baltika beers in most segments instead. Even though the local brands make up the
majority of the sales in Russia for Carlsberg, the licensing segment are increasing
rapidly as for example the sales of Tuborg increased by 43% last year compared to the
year before.
In Russia, Carlsberg has acquired a large part of the market very quickly, even
considering the takeover of Baltika gave it a large market share as it entered the market
and this gives Carlsberg economies of scale as well as the ability to realise synergies in
their new breweries. The market leadership enjoyed by Baltika in the Russian market
are important in the regard that it forces competitors that generally seeks to be the
biggest company on their markets, to consider leaving the market since it becomes more
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and more obvious that Baltika will continue to hold the largest market share in the near
future.
Location attractiveness. The location of the production facility is important, that for
Carlsberg to be able to justify producing in Russia, the benefits of locating the facilities
in Russia must outweigh the cost associated with foreign production. Additionally the
benefits must be great enough that it is not more profitable to simply produce in already
existing facilities or new domestically located facilities and then export the products to
Russia. As is the case in most emerging markets, the cost of labour in Russia is lower
than in more mature economies, making the attractiveness of moving production
facilities to the country higher. However, while comparable to average labour cost in
most of Eastern Europe, the labour cost in Russia are higher than can be found in other
parts of the world such as India and China. This means that MNEs from more mature
markets are likely to have higher cost of labour in their home market compared to in
Russia but they should also be able to take advantage of lower cost labour in markets
less develop than the Russian. However, Russia becomes more attractive with regard to
labour when the availability of a well educated workforce is taken into consideration.
This is a factor which serves to distinguish the economy from other emerging
economies and makes it attractive for a company like Carlsberg to produce in the
country.
Another important factor, speaking in favour of producing in Russia, is the fact that the
geographical area of the country makes distribution and logistics in general, a
significant cost. Russia covers more square kilometres than any other country in the
world by a significant margin, and the sheer size makes placing production facilities in
the country a necessity for companies producing some products. In the case of FMCG
the high level of saturation desired by suppliers as well as the potentially perishable
nature of the goods make distribution highly important. While exporting to the Russian
market is possible, in most cases the distances makes locating production plants near the
markets a less costly alternative. This makes the transportation a significant factor in
deciding whether or not to export to a country or produce there. Carlsberg uses around
15% of its total costs on logistics and its latest excellence program focuses specifically
on logistics. Because of its great importance for Carlsberg it serves to underline the
significance of this factor in choosing whether or not to export to a country or produce
85
there. In addition, Russia is rich on natural resources and the ability to acquire the
necessary inputs in close proximity to a plant or production facility makes the location
advantage strong as is the case with Carlsberg. The required factor inputs such as
adequate quality water, barley and hobs are all available locally in Russia, more so since
Carlsberg owns its own two malt houses there, and this serves to make the disadvantage
concerning locating production in the country small with regards to this.
For Carlsberg, market access seems the prime motivator with regards to Russia and the
lower production costs are of less importance for the company. Considering all location
aspects however, it is clear that the only feasible route to a substantial market share in
the Russian market is through local production.
Internalization. As earlier established, Carlsberg‟s core competencies are marketing
and producing beer, as well as the extensive experience the company has gained with
entering and developing new markets. This gives Carlsberg an advantage in the Russian
market, and this advantage would be diluted and ultimately threatened if Carlsberg did
not internalize BBH as they have done. While the advantages of having strategic
partners in new markets can be and has been significant and necessary in Russia, some
of Carlsberg‟s advantages would be diminished by sharing them with partners over
whom they have no control.
Looking back, producing on license in Russia in cooperation with an incumbent is
unlikely to have been a feasible solution for Carlsberg. Carlsberg produces high quality
beer using standards and practices developed over years on many markets. The local
Russian breweries, with the exception of Baltika, have in no way been distinguished
with regards to quality and high standards, and while Carlsberg could transfer the
required know-how and technology to a partner in order to achieve a higher quality of
beer, the less control Carlsberg have over their partner the less incentive the partner
would have to maintain the Carlsberg brand. This could very well harm Carlsberg‟s
reputation and brand, not only on the Russian market, but also on other markets.
Alliances often reflects the foreign companies attempt and desire to maintain as strong a
degree of control over their assets as possible, especially when the internalization
advantage is high which is definitely the case for Carlsberg. Sometimes legislative or
government interference with regards to foreign owned companies on its markets are
what keep entrants from owning companies in the country. In Russia this has some
86
merit, but while the legislative aspect seems difficult to understand, as well as often
changing, thus making entry into the market difficult, the Russian government have
generally allowed foreign companies to acquire ownership of domestic firms.
Additionally, meticulous planning is necessary for JVs (US Commercial Service 2009)
in Russia, and in most cases retaining managerial control is preferable for foreign
companies. Carlsberg has complete ownership of its interests in Russia through BBH
making their legal status better as compared to an alliance or JV with a Russian partner
where minority interests usually suffers in Russian courts. The cost associated with
monitoring a licensing agreement as well as the difficulty in setting up such a venture
seems disproportionate to the benefits given the relatively small size of the premium
segment the Carlsberg brand would sell in, as well as the above mentioned factors
involving quality control and management.
12 Discussion and findings
With regards to Carlsberg as an example of a FMCG company, the fact that it operates
in the beer industry makes certain facts about the company and the way it does business
and enters markets different than other segments of the FMCG industry. Specifically,
the beer industry is a very brand conscious and dependent industry, and often the need
for local partners and brands are greater than in other industries. Thus, foreign
companies and their brands do not necessarily enjoy the competitive advantage as could
have been expected based on their superior knowledge and technology. In relation to
this and as previously discussed, the fact that technology and knowledge is not as easily
distributable in the beer industry as compared to other FMCG sub-industries should
favour green field entry ahead of other entry modes in the beer industry. With the beer
industry‟s brand consciousness in mind however, the advantages of green field entry
may be completely offset by the inability to take advantage of strong local brands with
this entry mode.
As can be seen from the thesis, the choice of entry strategy facing a company in
emerging markets varies significantly between different locations. Following specific
set strategies often engenders difficulties, and the need for adapting in individual
markets remains of high significance to achieve success for any company. With regards
to Carlsberg this has been specifically acknowledged by Jørgen Buhl Rasmussen, CEO
87
of Carlsberg, at the company‟s recent annual general meeting as he stressed the
importance of adapting strategies to individual markets (Carlsberg annual general
meeting 2009). In the FMCG industry specifically, the difficulties in emerging markets,
markets often characterised by a lacking infrastructure and general lack of development,
makes the need for specific entry strategies even more important. This makes the
distribution and logistics capabilities of the companies very significant, especially when
the markets for the produced goods are particularly large as it is the case with the
economies analysed in this thesis. As can be seen from the case of Carlsberg on all the
markets that are analysed in the thesis, the design of their entry strategy are tailored
specifically to the individual markets, especially in the early starting phase, but
ultimately aims at acquiring total control over the companies‟ interests and facilities in
the given market. Carlsberg‟s objective of acquiring dominant positions in foreign
markets and full control of foreign subsidiaries is especially evident in Russia from the
enormous investment made in order to reach full ownership and market leadership
there.
MNEs within the FMCG industry and brewers in particular need to achieve economies
of scale vis-à-vis competitors in order to be competitive on foreign markets. In the
FMCG industry, initial entry as well as the subsequent business development by MNEs
in foreign markets is mostly made with the intention of eventually obtaining a position
among the dominant players in the market. This is due to the relative importance of
economies of scale within the FMCG industry. Should the attempt to become among the
dominant players fail, MNEs will often choose to leave the market altogether. This is
also the reasoning behind Carlsberg‟s objective to become first or second in any market.
If this is not achievable, they will in many cases withdraw from the market and only
maintain a presence with products produced on license (www.carlsberggroup.com
2009).
The differences in the characteristics of markets of course play a part as to the size
necessary to operate efficiently. The Russian market with its relatively more developed
infrastructure makes the necessary size of companies operating in it greater than on the
more inaccessible Indian and western Chinese markets. In these markets cheaper factor
costs and the lesser developed nature of the markets, makes the size, necessary for a
firm to be competitive, comparatively smaller. The scale of production facilities needed
88
in order to be competitive also varies significantly between markets, and between
regions within market, and is influenced by the market conditions as well as the
competitors present. The case of Carlsberg in the Chinese market demonstrates that the
presence of bigger, entrenched competitors can force a large operation to close in the
east, while production facilities of smaller size can comfortably exist in less developed
inland regions where the conditions are different in terms of consumers and
competition. The most important factor in this case is the poorly developed
infrastructure and the strength of local brands.
Carlsberg generally follows a multi-tiered strategy on the three markets, which means
they seek to be present in all the segments on the beer market. Generally this is achieved
with local brands in the lower priced segments and licensed as well as local premium
brands covering the more lucrative premium segment on the markets. While focussing
on the entire market in this way gives a good platform for obtaining market leadership,
something Carlsberg states is their goal on all their markets, it also requires greater
commitment and level of resources from the company compared with single-tier. The
way Carlsberg enters markets with the intention of being among the dominant players
makes this focus on every segment of the market seem reasonable when coupled with
the intention of eventually obtaining full control over their assets in a given market. The
Russian market is the best example of this with Carlsberg‟s full ownership of Baltika
Breweries and their continuous acquisitions in the market. Carlsberg has full control
over its operation in the country and both India and China show signs that Carlsberg
aims to obtain full control of their partners and JVs.
Carlsberg‟s strategy and actions subsequent to their entry in the case markets to a large
extent seem less like planning than an emergent process (Mintzberg & Lampel 1999).
This especially holds true on the Chinese market where Carlsberg showed a willingness
to radically adapt their initial strategy on the market as knowledge of the market
increased in order to pursue their goal of becoming one of the market leaders. In the
Indian market, the overall plan of entering through green field facilities were
supplemented by both an acquisition and a JV as the opportunities presented
themselves.
Carlsberg‟s operations on the Chinese and Indian markets are thus still in the process of
adapting to the individual conditions on the two markets as well as accumulating market
89
knowledge, and have as of yet not achieved the size or scope to be expected from
looking at Carlsberg‟s other markets. This is mainly due to the comparatively
undeveloped markets for beer in the two nations as well as a smaller initial investment
compared to the massive investment made in the Russian market with the takeover of
Scottish & Newcastle. In this regard, Carlsberg to some extent follows the Scandinavian
stages model (Buckley & Casson 1998 p. 541), which proposes a progressive deepening
of the company‟s commitment levels as it enters new markets. The amount invested in
internalizing the Russian business far outweighs the amount used on any other market
and it can thus hardly be considered progressive deepening. The circumstances around
Carlsberg‟s entry into the Russian market is however very different than the entries on
the Chinese and Indian markets as their initial 50% share in BBH came from their
merger with Orkla. This necessitated special action in order to become sole owner of the
venture. The Russian entry thus seems more like an exception to the gradually
increasing level of commitment exhibited in the other markets.
Besides the three important factors inherent in the OLI framework there are certain
similar features displayed in the way markets are entered in the FMCG industry and by
Carlsberg specifically. Early market entry on emerging markets appears to be important
with regards to attaining market share and brand awareness thereby enabling companies
to achieve economies of scale as well as influence on the market. Especially on the
Indian, but to a smaller degree also on the Chinese market, the early entrant reaps
benefits compared to latecomers (Johnson & Tellis 2007). This is somewhat offset by
the difficulties experienced by being the first or earliest entrant and having to blaze the
way with government and customers in order to develop a market and avoid unforeseen
difficulties in a new market. Later entrants can capitalize on the more developed market
in India specifically with regards to beer, as the earlier entrant SABMiller as well as
Indian brewer United Breweries have spend years accustoming customers to drinking
beer instead of substitute products. This is also the case in other emerging markets
where early entry often means benefits as well as drawbacks not experienced by firms
entering later on. The opportunity of an early entry in a new market is only available in
a limited time period, that is, before one or more competitors build a strong presence in
the country. In Russia for instance, the window of opportunity came with the dissolution
of the Soviet Union in the early 1990s as the country opened up to foreign investment.
Carlsberg‟s involvement in the Russian market and BBH did not commence until their
90
merger with Orkla in 2001 however, so Carlsberg can thus not be considered an early
entrant. Orkla on the other hand was. In China however, Carlsberg was among the early
entrants in the mid-1990s as they invested in the brewery in Huizhou in 1995. As they
shared their early entry status with a large number of competitors, they nevertheless
reaped no benefits from it. Their re-entry in Western China was much more successful
on the other hand as they faced very limited competition from foreign competitors in
this part of the country. In India, Carlsberg did not enter the market until 2006 and are
therefore facing a well-established incumbent as well as the early entrant SABMiller.
Given the highly limited development of the Indian beer market however, Carlsberg
should still to some degree be considered an early entrant.
Based on Carlsberg‟s experiences, we find that they have benefitted from being an early
entrant in Western China but also in the Indian market where they have gained a
considerable market share in a limited time period. On the eastern Chinese market on
the other hand, the large number of competitors who entered simultaneously with
Carlsberg eliminated any chance of making a profit. In Russia, market leadership has
only been achieved through enormous investment which illustrates the cost of a
successful late entry.
Generally the market entries made by Carlsberg on the three markets under analysis
seem to conform to what would be expected by the OLI framework, although the broad
number of options available when entering a foreign emerging market makes some
adherence to theory probable. While the company is not necessarily thinking about it in
specific terms, Carlsberg nonetheless seems to take into consideration the various
aspects covered by the OLI framework when deciding how, when and where to enter
markets.
We have found that Carlsberg, and large MNEs within the FMCG industry in general,
enjoy ownership advantages in most emerging markets and this is also the case in the
Russian, Chinese and Indian markets. Producing locally would also seem to be an
advantage as factors such as low labour costs, tax and tariff advantages as well as
significant advantages in distribution would outweigh most disadvantages in this regard.
Consequently, Carlsberg and other large MNEs should be competitive in the case
markets and should choose to produce locally. Regarding the choice between FDI or
licensing, the initial expectation of market entries would be by means of green field
91
facilities or acquisition so as to achieve full control over operations and fully realise the
ownership advantages of MNEs compared with incumbents. In order to avoid problems
with governments and legislation, ease access to the local markets as well as
minimizing difficulties due to cultural difficulties, some sort of partnership with local
companies would in many cases be advantageous. This would also serve to decrease the
amount of capital needed by the MNE.
In Carlsberg‟s case, the fact is that the company has chosen to enter the markets with
localized production facilities, in all cases in cooperation with or through acquisition of
local companies, and in this way adheres nicely to what would be expected. The amount
of control gained by this entry mode is not as high as would be preferable in order to
take advantage of ownership advantages, but considering that the commitment level
should reflect the development of the local market conditions, this can be seen as an
attempt to commit in a way that will permit a gradual raise of the level of investment if
the market should prove profitable.
The three markets analysed in this thesis demonstrate, that the differences in factors
such as market development, infrastructure and openness to foreign investment, at least
to some degree influence the way MNEs enter emerging markets. With regard to the
way Carlsberg enters emerging markets, the characteristics of the individual markets
seems to be as determining a factor as following a set plan for entering markets. In our
cases, this has been especially evident in the Chinese and Indian markets.
Entry strategies which rely on partners and JVs, while advantageous in the context of
the individual markets, also serves to diminish the ability to transfer knowledge and
technology for MNEs in general. This of course this also applies to Carlsberg though to
a lesser degree than could be suspected. This is due to the fact that Carlsberg generally
strives to eventually obtain full control of foreign subsidiaries, thus lessening the chance
of losing company specific advantages. This means that even without controlling the
local partner at the point of entry, they will be able to take full advantage of the
company specific advantages in the foreign market by later acquiring this partner.
The ability to enter markets with relatively low commitment and then gradually
expanding it – like the Nordic/Scandinavian model suggests – is perhaps missing to
some degree from the OLI framework. In this way MNEs are to some degree able to
have one‟s cake and eat it too by gaining the benefits of a foreign partner initially and
92
then buying out the partner later on in order to gain the benefits of internalizing the
subsidiary. As the MNE in most cases will have ownership advantages superior to that
of the partners, the joint venture will be worth more to the MNE than to the foreign
partner. This should make it possible for the MNE to acquire the JV at a price lower
than the value it represents, as long as the partner acts rationally.
Mainly ownership advantages coming from the entrant itself are the same in all three
markets. The same advantages are relevant in all markets because they are all emerging
markets and thus have somewhat similar characteristics. The company specific
advantages utilized by Carlsberg, and by any other MNEs seeking to enter an emergent
market, are of course static in the short term. The amount of emphasis put upon them is
all that changes, as different markets demand different strengths. While the transfer of
knowledge and technology is easier on the Russian market, where Carlsberg owns and
fully controls Baltika, it is also to some extend of less importance there since the
facilities in Russia closer resembles the technology levels found in Carlsberg‟s more
mature markets. Conversely, the much less technologically developed facilities in
Western China could benefit much more from a technology and knowledge transfer than
Russian facilities. But in China, Carlsberg runs the risk of losing control of some of
their ownership-specific advantages since they do not fully control their partners in the
market. For instance, they run the risk of leaks when transferring intangible assets such
as production and marketing practices as well as know-how to the local partners.
Transferring state of the art technology is nevertheless demanded by the Chinese
government, but this in general only requires the transfer of production equipment – not
necessarily intangible assets. In emerging markets where there a no such rules on
technology transfer however, it must enter into considerations that if high quality
products are not of significant importance to consumers when considering which beer or
other product to buy, modern production techniques and technology may simply not be
necessary in order to compete effectively. For breweries, this may especially hold true
in China.
Concerning the framework laid out by Buckley & Casson (1998) in regards to entry
modes and strategies, the many assumptions in the model makes its application difficult
in the markets analysed. Mainly the theory seems to be suited for the Chinese market
where the change of strategy eventually led to a move from eastern to western China.
93
This almost constituted a whole new market entry in China since the predominantly
rural inland market is significantly different from the much more densely populated
eastern provinces. Buckley & Casson‟s model is mostly applicable in the western
Chinese market because some of the most important factors are similar. This market can
therefore to some degree be seen as what Gerring (2007 pp. 89-90) terms a crucial case
where Carlsberg‟s entry is most-likely to correspond with the recommendations of the
model. First of all, the model assumes that the entrant faces a monopolist in the target
market and this is in many instances the case in the provinces in Western China where
the local brewery in many cases enjoy a monopoly-like status. At the same time, like in
the model, Carlsberg had little to no experience in the inner Chinese market and thus
needed to acquire market knowledge in the most appropriate way (Buckley & Casson
1998 p. 544). Given these convergences, the western Chinese market thus roughly
resembles the model and it should thus be fair to compare the suggestions of the model
with Carlsberg‟s actual market entry.
As discussed in the segment on the Buckley & Casson model, licensing or green field
production combined with acquired or franchised distribution are the dominant
strategies. In Western China however, Carlsberg has used a number of different entry
modes ranging from purchasing minority and majority equity positions in local
breweries to investing in green field facilities with local partners. The common
denominator for these is that every entry in one way or the other involved a local
partner. Thus Carlsberg‟s entry on the western Chinese market does not follow the
recommendation of the model. The likely reason for this is first of all that the model
ignores the role of the government in China (Buckey & Casson 1998 p. 556), which is
very direct in many cases as a significant part of the breweries in Western China are
fully or partly state-owned enterprises. This can in many cases have prevented
Carlsberg from fully acquiring such breweries as the government is likely to prefer the
control retained in JVs. At the same time, the considerable cultural distance between
Denmark and China as well as the importance of guanxi in the Chinese market is likely
to decrease the attractiveness of green field entries in favour of JVs.
94
13 Conclusion
In the previous chapters we have given an overview of the entry strategy pursued by
Carlsberg as an example of a MNE entering emerging markets. The context specific
challenges encountered and ways these where met and overcome, gives an
understanding of the way entry strategies are created in a real world context compared
to the expected strategies from a theoretical perspective. The relevance of the thesis
exists in discovering where the MNEs utilize the strategy prescribed by literature and to
which degree they create, design and adapt their own when confronted with emerging
markets. Mainly, the findings were that the strategy used when entering emerging
markets are dependent upon the relevant factors in the specific market, and that even
though the literature and theories recommend one entry mode, the actual way entry is
made is often different. The adaptation and design of a unique strategy becomes much
more important than following a pre-described or even previously tested mode of entry
when determining the most effective way to successfully enter a new emerging market.
In the case of Carlsberg, as an example of a FMCG company entering three diverse
emerging markets, we found that even though the expected strategy for entry was clear,
the conditions and market-specific factors unique to the individual markets made choice
of entry strategy diverge from what would be expected. On the basis of predefined entry
strategies not being utilized in emerging markets, the thesis further finds that the
eclectic paradigm, and especially Buckley & Casson‟s framework, are too rigid and
focussed on discrete factors to adequately describe what FMCG companies choose as
entry strategies in emerging markets.
The thesis raises a number of questions that can become the focus of further analysis
and research. Mainly considering that the data and sources used primarily concern the
three markets as well as Carlsberg, a more quantitative approach to the subject covering
more companies or markets would add to the understanding of the theory concerning
entry modes and strategy in emerging markets. The challenges faced are also indicative
of as well the beer industry as the conditions of the chosen markets. Even though the
reasons and justifications for using the chosen markets in the thesis are relevant, the
challenges faced on other markets would by definition be different given the above
points, and thereby give additional insights into the problems and challenges faced by
MNEs and their chosen entry strategies.
95
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