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ECONOMICS ASSIGNMENT
(PROJECT REPORT)
SUBJECT : New Market Entry in Russia (tea Industry)
Group Member :
1. Varun Agarwal2. Ankur patel3. Prateek Gupta4. Neha shymal5. Rashi Goyal
WARREN TEA LTD (India).
Company information
Date of Establishment : 1977
Revenue : 44.4407 ( USD in Millions )
Market Cap : 1671.426588 ( Rs. in Millions )
Corporate Address : Deohall Tea Estate,P O Hoogrijan, Tinsukia Dist-786601, Assam
Management Details : Chairperson - A K Ruia MD - S K GhoshDirectors - A K Ruia, G Bhalla, N Dutta, N Musry, P K Bose, R Magotra, S Bhoopal, S K Ghosh, S Sarma, Siddhartha Roy, U C Arora, U C Sarmah, Vinay K Goenka, Vivek Goenka
Business Operation : Tea/Coffee
Background : Warren Tea Limited was incorporated on May 31, 1977 in the state of Assam. The company obtained the certificate for commencement of Business on June 30,1977. Warren Tea Limited is the flagship of the Warrens group. Being one of the largest bulk tea producers in India and in the world, Warren Tea Limited produces 16 million kgs. of tea annually. With its renowned 14 Tea Estates in Upper Assam spread over Mo
Financials : Total Income - Rs. 2026.827 Million ( year ending Mar 2010) Net Profit - Rs. 222.747 Million ( year ending Mar 2010)
Company Secretary : Siddhartha Roy Auditors : Price Waterhouse & Co.
The regular export markets include quality tea drinking nations like UK, Ireland, Germany, the UAE, USA, Iran and Pakistan.
The quality produced at Warrens has not only stood the test of time and palate, but matured and improved with its passage of time. In the great tradition of its founders, the Company believes that the world is its “cuppa” and tries its best to see that the cup “brimmeth over with joy and good cheer and satisfaction”.
The company exports its products to the United Kingdom, Germany, Ireland, North America, Pakistan, Iran, and the Middle East.
Project Objectives and Approach
Objectives:
1) Market Entry Evaluation2) Russian Market Analysis
Russian business environment Opportunities Challenges
3) Strategic Entry Recommendation
Approach:
Develop best entry strategy based on tea companies’ priorities and future plans
Consider the opportunities and challenges of the Russian business environment
Examine and incorporate best practices derived from practical experiences of other firms and industry experts.
Why go global?
To increase sales, revenues, and profits
1. Limited or declining home market2. Excess capacity3. Competitive advantages in new markets:
Russia: top location for global retail. 70% of Russians' income is disposable vs. around 40% in
the West Lower costs and higher prices - opportunities for profit Global consumers' tastes are converging. Easier to offer a
globally standardized product.
To grow the company’s global market share
To achieve greater economies of scale
To reduce costs
Fixed costs vs. variable costs Labor-related vs. non-labor-related costs Competitive advantage
To reduce risk
To establish a foothold in a promising market
To learn from a leading market
Participate in highly-competitive markets to improve products and marketing. EX.: Koc in Germany, the world's leading market for dishwashers, refrigerators, freezers and washing machines.
To build a global brand
To respond to competitors
Domestic competition entering international markets. “Competitive response.” Eg: Tata Tea’s entry in to the U.S., China, and other global markets; J.V. Gokal’s entry in to the Russian market.
Competition coming from international players.
To receive investment from VCs
Prerequisite for venture funding: very large market. Global firms received more than twice as much funding from VCs.
Global Outlook for Tea (2009)
Market size in terms of retail value: $23,323 millions
Market size in terms of retail volume: 1,765 million kg
Growth rate in terms of retail value (2008-09): 4.5%
Growth rate in terms of retail volume (2008-09): 3.5%
Per capita consumption: 0.3 kg
Average retail price: $13.2 per kg
Growth in retail price: 0.9%
Major producers of tea: China, India, Kenya, and Sri Lanka
Major importers of tea: Russia, U.K., U.S., Pakistan and Japan
Current Statistics and Trends in the Tea Industry
Tight supply due to a projected decrease in Kenyan tea production. Continuation of upward trend in world tea prices. (FAO report)
FAO composite price, (a world indicator price for commodities) has increased 6.5% to US$1.95 per kg in 2007.
For the next 10 years to 2017 World black tea production is expected to grow at 1.9% annually
to reach 3 million tons World green tea production is expected to grow at 4.5% annually
to reach 1.6 million tons (FAO projections).
Possibility of an oversupply of black tea in the coming years in the global tea market (FAO)
A growing health and wellness trend boosting the sales of specialty tea varieties such as fruit/herbal tea, green tea, and other tea
Higher disposable incomes in many developing economies such as China, India, and Russia prompting a shift from unpackaged to branded and specialty tea varieties
Why Russia
1. Surging Economy
Real GDP Growth ↑ 8.1% to $1.3 trillion The fastest growing economy in the G8 group of industrialized
nations Investors pouring money into improved storage facilities,
infrastructure, and logistics Improving financial services, rule of law, and banking
infrastructure FDI into Russia to reach $58 billion in 2008, an increase of about
16% compared to the value in 2007
“Even as the financial crisis shows no signs of abating and deleveraging continues, Russian economy will remain strong because of very low levels of public debt.”
2. Government
Government seeking to streamline customs and taxation regimes to attract more FDI
Supporting the E-Russia program, designed to stimulate growth of e-commerce, including B2B ecommerce
New reforms targeting bureaucracy and corruption Government focus on expanding manufacturing base and
improving infrastructure development
3. Deals in Russia 2006 – 2007
Measured by dollar volume, M&A activity in 2007 in Russia rose 61% in 2006, registering an estimated $179 billion.
M&A activity equaled a robust 14% of GDP and contributed to Russia’s continued strong economic growth
2,151 M&A deals in 2006 – 2007; 146 in the food & beverage industry
249 JVs formed in 2006 – 2007; less than 10 in the food & beverage industry
Increasing middle class demanding more premium products.
4. Private consumption and GDP
Distribution in Russia
• Limited geographic coverage
• Well-organized: Western Russia – Moscow, St. Petersburg (large scale retail stores, shopping malls)
• Rapidly developing: Southern Russia – the Volga region, Urals, Siberia, Russian Far East
• Direct Marketing is very effective outside of developed distribution regions
• Multiple channel options:
a) Agents – not common practice
b) Distributors –variety but not suitable for advertising and promotion (products from multiple suppliers)
c) Branch/Representative Offices – direct contact with end-users and control over promotion and distribution
d) Foreign Subsidiaries – full control of supplier over distribution
Reasons for Indian companies to enter Russian Market
Grow revenues Lower fixed costs per unit Higher prices + lower costs = greater margins Mature home market and/or excess capacity Global competition Gain access to a distribution network Broaden existing products portfolio Global branding, exposure, and geographic reach Diversify business risks
Opportunities for Indian Tea Companies in the Russian Tea Market
CATEGORIES GLOBAL INDIA RUSSIA
Market size in terms of retail value 23,323 876.4 3,266Market size in terms of retail volume 1,765 226.04 161.44Growth rate in terms of retail value (08-09)
4.50% 3.50% 12%
Growth rate in terms of retail volume (08-09)
3.50% 2.60% 2.30%
Per capita consumption (per kg) 0.3 0.7 1.3Average retail price ((in US$ per kg) $13.20 $3.90 $20.20Growth rate in retail price (2008-09)
0.90% 0.90% 9.50%
Opportunities for Indian Tea Companies inthe Russian Tea Market
Largest importer of tea in the world. The total value of Russian tea imports in 2009 was $308.97 million, which is nearly 14% of the global market.
Retail volume growth rates of 15% and 12% in black standard tea bags and black specialty tea bags respectively, in 2009.
Forecast of Tea Volumes by Sub-sectors: 2007-2012
Tonnes 2007 2008 2009 2010 2011 2012
Tea 226,045 231,273 235,790 239,745 243,099 245,822
Black Tea
222,724 227,769 232,111 235,900 239,101 241,683
Green Tea
3,321 3,504 3,679 3,845 3,999 4,139
Cost Benefit Analysis of the Different Sales Channels
Auction Export Local sale to retailer
Sale to Russian distributor
Sale to Russian retailer
cost (E) $1.25
cost (E) $1.25
cost (E) $1.25
cost (E) $1.25 cost $1.25
revenue $1.62
revenue $2.45
revenues (E) $2.90
revenues (E) $7
revenue (E) $10.5
marketing (E) $0.25
trade promotions(E) $0.25
other
import duty $1
shipping charges $0.01
middlemen
import duty $1
shipping charges $0.01
middlemen
profit $0.37
profit $0.95
promotions(E) $0.25
profit $1.15
expenses (E) $1
trade promotions (E) $0.25
profit $3.49
expenses (E) $1
trade promotions (E) $0.25
profit $6.74
Estimatefrom Russian tea customsfrom freight carriers
Entry mode - Joint Venture
Advantages of a Joint Venture
o Provides access to government contacts and existing distribution network
o Provides local help minimizing problems associated with bureaucracy and corruption
o Sharing of profits and riskso Pooling of resourceso Time-to-market advantages
Joint Venture Best Practices
o Establishing a JV in Russia demands meticulous planning and sustained commitment
o Thoroughly explore whether a potential partner shares your priorities and expectations
o Conduct due diligence as much as possible on partner before committing
o Spend time and get to know the partner
Conclusion
The time for cooperation between India and Russia has never been better
Plenty of resources on both sides to be taken advantage of Have a clear strategy and an end result in mind Know the process and requirements for getting to that end result Rely on experts who can “bridge” the needs and wants of all
parties internationally.