Team Keiretsu - Rotterdam School of Management

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Cristian Enache's picture
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Hello,

We are team Keiretsu from the Rotterdam School of management. My name is Cristian and I am the team captain. I come from Romania and I have a background in banking/product management. Next to me is Josefa, who comes from an IT company and worked in sales, marketing and startup companies.

Then we have Ricardo from Peru with vast experience in commercial banking, fx and derivatives trading. Finally in our team we have Madona from Georgia, our Financial Audit expert.

 

Together we are excited to use the Risk Room to tackle the Zurich challenge. We chose the Bicker AG case which as you know is a multinational retailer looking to expand into Latin America.

 

The first question is: where to expand? There are seven available options, and we began by comparing them first amongst each other and also with the well developed markets and newly added. General view of the situation in the Risk Room allows us to see that two countries should be immediately discarded for their high risk.  First is Venezuela in the Armageddon quadrant, being the riskiest country in the world. Then we have Argentina, which even though is not the riskiest political option is one of the top 8 countries with the highest business and economic risk.

 

Consequently, we must now choose between the remaining 5 countries, which we will now explore in more detail. Using these tables and the evolution of the specific KPIs contained on both Political and BE risk our team selected  Columbia, Mexico and Uruguay. As for Uruguay, we see that it has comparable BE risk with the existing markets and newly entered markets. Even though the political risk is higher, this is due to KPIs which are not necessarily linked to retail market.

 

Now, although the small population of the country may raise concerns is highly urbanized territory which means that with little investment, Bicker AG may reach most of the Uruguayan market.  This makes it the ideal tester country to explore the expansion plan. Risk room shows reassuring stability both economically and politically. Indeed even though there have been fluctuations, Uruguay remained in the same risk region. Additionally it appears to have a business friendly environment for foreign investments as shown by the economic risk KPIs. Our research also shows that the country has experienced constant growth in the last 12 years and it has one of the highest GDP per capita in the region. It is also ranked 3rd in the global retail development index. (GRDI)

 

Our next choice is Mexico. Characterized by a large market with 119 million inhabitants. Looking in the Risk Room we see that it has a below average exchange rate fluctuation, and low risk of inflation, which is good for international capital. We also believe that the proximity with the US market could eventually become a plus for Bicker AG.

 

 Moving on we have to decide between three remaining countries. Ecuador Columbia Brazil. The first one was discarded because of the alarming level of political risk. Indeed, currency inconvertibility and exchange rate fluctuation could severely damage the profits and general functional performance of Bicker, in case of it investing there. As for Colombia and Brazil, they are similarly ranked, but we decided to go for Colombia because of Brazil’s issue with governmental red tape. The burden of government regulation, custom procedures and extent and effect of taxation would take up too much time and resources to cover them.

 

Colombia then. This country was selected as it’s in the same risk region as Brazil, but has a lower B&E risk. In fact, out of  the 7 proposed countries, it has the lowest. Not to mention that it is a leader in terms of Investor Protection measures in Latin America. And it has access to both Atlantic and Pacific Ocean which lower costs and simplify supply chain management.

 

Now, how do these three countries compare with current markets? First they appear to be more politically unstable. But they are similar in terms of Business and Economic risks. Also the higher growth rate of emerging markets means that smaller initial investments are needed and that the environment is investor friendly. It is important to note that there is no high risk that the European crisis will greatly affect Latin America which is important for a company which recently invested in Hungary Poland and Czech Republic.

 

Moving on to question 2, risk mitigation. Mexico and Colombia have high government regulations and taxation effect risks. Which can be mitigated by employing local law firms that will take care of incorporation and taxation strategy. This entails a high initial cost of operation but also a safe course of business. Colombia is also characterized by high fluctuations of exchange rate.

Hedging helps amortize this risk but it should be complemented by sharing risk effect with counterparties. For example if denominating in another currency pricing can be padded to include a margin for protection against currency risk.

Therefore lost is limited to a certain level but this kind of negotiation can be time consuming.

 

Mexico and Colombia also show high rates of crime, organized crime and income inequality. However since these are highly localized they can be mitigated by a careful selection of locations. The crime related KPIs can be avoided by using professional security services. These will improve the security of employers, customers and property but it means incurring  marginally higher costs.

Now although the employment regulation risk in Mexico appears to be high, decreasing labor cost create a more competitive factor market therefore improving the hiring process. Development banks can also be used to obtain benefits in countries looking to incentivize foreign investments. We suggest that the penetration of new markets be done through the acquisition of local chains so that bureaucratic processes can be reduced and knowledge of the local markets easily accessed.

 

There are some additional things that Bicker Ag should take into consideration. First the population access to internet and television for marketing and online sales purposes. Secondly the global retail development index provides useful insight into the potential of each market. One of the important things it takes into consideration is local shopping habits. Do citizens buy in local family owned cornershops or in bigger supermarkets? It is also important to observe competition and saturation of markets. If big retailers with a better knowledge of the country and big market shares are already well established within the population, it might be better to take a risk in less ideal but also less aggressive markets. Urbanization is also a key factor, as it defines the potential profit and reach of investing in setting up a store. Last but not least, purchase power is crucial for pricing strategies and to determine the potential profits of this kind of venture.

 

We would also like to suggest that Bicker AG consider the possibility of other markets, such as Chile, different countries in eastern Europe, and Asian locations.

 

Thank you for your time, we hope to get the opportunity to meet you in phase two!