Bicker AG: New Market Entry

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Here is the URL that can be used to see the images that has been used for the presentation

www.dropbox.com/sh/rona6abnyfvebhb/AACbgXH9mFhSFmDlv42bODI7a?dl=0

Background – Business Issue and Assumptions

Bicker AG is a European grocery retailer operating mainly in Netherland (headquarters), UK and Germany, with recent expansion into eastern European countries of Czech Republic, Hungary and Poland. With the Eurozone showing no strong signs of economic improvement, Bicker AG is exploring options of expanding into markets outside Europe. Specifically, seven countries in Central and South America (Brazil, Mexico, Uruguay, Colombia, Ecuador, Argentina, Venezuela) have already been identified; however we felt it would also be beneficial to consider another market in Asia – India, due to the recent political developments (allowing FDI in retail) and the size of the market and its future prospects.

To analyse the best three options for Bicker AG’s market entry, out of the eight countries based on the risks involved, we used the Zurich Risk Room extensively, studying each of these 8 countries’ risks in terms of Political risks and Business & Economic Risks.

To analyse the options, we made certain key assumptions - We made 2 assumptions about the way Bicker AG would operate in terms of its market entry.

1)Bicker AG will launch as a retailer in the major metropolitan cities initially, before expanding into the more rural areas.

2)As we are operating in grocery, with local market tastes and preferences, Bicker AG will aim to sell locally sourced and produced products, and focus on domestic consumption, rather than production and export.

In doing so, it enabled us to downgrade the risk factors that were specifically in the context of our market entry strategy for grocery retail. For example, by locally sourcing and producing, the burden of custom procedures becomes less important.

Secondly, as the large majority of grocery products and not taxed and the only other major tax factor to consider is corporate tax – we have downgraded its importance when concerning the consumer.

Analysis

We looked at the data from the Risk Room and analysed the relative position of the countries relative to each of the risk factors and then gave ranking to the countries. The ranking table has been colour coded to represent the relative risk profile. Green represents low risk and red represents high risk (relative to the other countries in consideration).

The next step was to identify the specific risks that impact the Grocery industry the most.  We identified following risks specific to grocery sector, under the Business & Economic and Political risks as follows:

Business and Economic Risks

  • Rising Food price
  • Inflation
  • Efficacy of Enforcing Contracts
  • Extent of Market Domination
  • Employing Workers

Political Risks

  • Exchange Rate Fluctuation
  • Corruption
  • State Failure
  • Political Violence
  • Income Inequality

The next step was to analyse the last seven years risk trend and then adjust the ranking. We categorised the trends are as follows:

  • Risk Declined
  • Risk remained Stable
  • Risk was Volatile
  • Risk Increased

Based on the above analysis, the ranks of the countries were adjusted to arrive at our top 3 countries which are:

  • Uruguay
  • India
  • Brazil

Even with the above detailed analysis, we believe there are further factors which should be considered to make an informed decision. The following are the three new factors which are:

  • Market Size
  • Growth Prospect
  • Customer Segments

Table below summarises these three additional factors:

Factors

Brazil

Uruguay

India

Mexico

Market Size

$  72.7Bn

$  7.1Bn

$  285.6Bn

$  100.1Bn

Growth prospects

4%

2%

3%

2%

Modern Retailers

51%

32%

2%

55%

 

  • Uruguay has a relatively small market size of $7.1Bn compared to Mexico’s market size, $100.1Bn. Furthermore, the modern retailers have wider reach in Mexico compared to Uruguay.
  • Hence Mexico which was initially ranked 4th, moved up the order and entered in the list of our final top 3 countries.

Risks Mitigation and Impact

Business and Economic Risks

Most of the risks’ mitigation measures are common to the three countries; however the mitigation measures for ‘Extent of market domination’ will be different and specific for each of the three countries we have considered.

Below are the mitigation measures and respective impact of mitigating these risks:

Common mitigation measures

Risks

How to mitigate

Impact of mitigation

Rising Food Prices

- Target urban population (discount and own brand)

- Education on food spend through bundle marketing

- Limiting the potential market size by targeting only the urban population

- Upside is access to better infrastructure in cities compared to rural areas

Inflation

- Focus on discount stores and promotion

- Running a lean operation

- Explore online retailing (if possible) to reduce costs

- Internet sales could result in lower sales in store and higher sales online.

- Lower margins

 

Efficacy of Enforcing Contracts

- Careful initial selection of partners with thorough due diligence and tender processes

- Relationship orientated negotiating to increase trust

 

- Higher costs and time to conduct due diligence and procedures;

- upside will be improved brand image

 

Employing Workers

 

- HR policies to comply with local labour laws

- Payment of minimum wages

 

- Relatively lower labour expenses

- Low employee turnover if providing at least minimum wage

 

Mitigation measures for ‘Extent of Market Domination’ which will be country specific

Countries

How to mitigate

Impact of mitigation

Brazil

- Acquisition of controlling stake in one of the local players to gain synergy of local market expertise

- take lessons learnt from Carrefour in Brazil

- Could be a costly strategy but a relatively easy and quick access to market

Mexico

- Acquire several fragmented local players and consolidate, to gain synergy of local market expertise

 

- Cost of acquisition and consolidation

- Cost and time for due diligence to select the right targets (based on geography)

India

- Create JVs, to gain local consumer knowledge

- Go online to leverage India’s increasing online retail prospects

- Showcase the local origin of products to consumers (‘Made in India’ trend)

Downside of sharing profits with JV partner but the upside is potential of failure is reduced

 

Political Risks

Below are the political risks that we identified to be significant and common for the selected top three emerging markets, suggestions of how they could be mitigated and the analysis of impact of mitigation.

Risk

How to mitigate

Impact

Exchange rate fluctuations

- Focus on purchasing from local suppliers & hedge the currency risk.

- Limit on imported goods and increased cost of hedging the currency risk.

Corruption

- Set anti-corruption policies; Tailor the code of conduct to local regulations and enforce them strictly; Also bring in good practice from Europe on anti-corruption and educate all the stakeholders; Set the limit for gifts and approval system for meetings with local authorities; maintain meeting minutes; have regular internal audits

- Time and costs to set up and monitor the policies compliance regularly;

- However the payoff is higher due to brand reputation maintenance, which can be attractive to local suppliers.

State Failure

Not applicable for the investment period considered.

N/A

Political Violence

- Insurance for assets and inventory and disruption to commerce.

Added costs for insurance.

Income Inequality

- Focus only on cities;

- diversify the types of store formats.

- Catering only to a segment,

- however, as the cities are reasonably large in the top three countries, this should not cause an issue of the market scalability.

 

Conclusion:

In conclusion, after our detailed analysis of the various risk factors we arrived at India, Brazil and Mexico as the best three options for Bicker AG to consider for potential market entry.

While we have done a risk analysis based on the detailed information provided by Risk Room and the other additional general risk factors we highlighted, it is imperative to do more detailed due diligence to arrive a well informed decision. Our suggestions for further due diligence will be:

  • Financial
  • Costs related to barriers to entry
  • ROI Calculation – including break-even period
  • Volatility of the commercial real estate price - as the company is operating in the retail sector the real estate for the store and merchandise is crucial
  • Critical success factors
  • Past entrants or existing players (to learn from the mistakes of the other players)
  • Technology risks
  • Changing landscape of technology use
  • Disruption

Finally, we would also suggest to Bicker AG to consider whether it is more beneficial to invest into technology advancement/innovation in the existing European market and gain the traction or to enter the emerging markets and expand leveraging the European technology and operational expertise there.