A a r h u s S c h o o l o f

B u s i n e s s 2 0 0 9

Mark Sorgenfrey

Lasse Munch

M.Sc. Strategy, Organisation and

Leadership

Academic advisor:

Mai Skjtt Linneberg

STRATEGIES FOR MARKET ENTRY: Fast Moving Consumer Goods Companies in Emerging Markets

I

Abstract

Multinational enterprises (MNEs) are increasing their presence in the lives of more and

more consumers as companies seek to expand and promote their products to a still

wider range of markets globally. As markets change and develop, so does the strategy

used to enter them, and companies must be able to choose the correct way to enter

markets in order to remain competitive.

This thesis takes a look at how MNEs in the FMCG industry enters new markets, more

specifically emerging markets. In order to gain an understanding of this we look at three

specific markets, namely Russia, India and China. We attempt to answer if the way

MNEs enter emerging markets is in keeping with what would be expected from the OLI

framework (Dunning 2000) as well as the work done by Buckley and Casson (1998).

Additionally we try to gain an understanding of why any discrepancies exist and

whether they can be explained by the nature of emerging markets as well as the

characteristics of the FMCG industry.

An ability to adapt and tailor specific strategies to individual markets gains more

importance, especially with regard to emerging markets, as the difficulties and obstacles

presented when entering these markets often proves both new and unique. In many

cases there are difficulties in underdeveloped markets, specifically concerning consumer

spending power and brand awareness, as well as logistics and infrastructural

inadequacies compared to western markets which serves to make the correct approach

to entering emerging markets of high importance. The methods first employed when

entering emerging markets are often unsuccessful and needs to be modified as market

knowledge is gathered and opportunities present themselves. In the three markets

analysed in the thesis to illustrate emerging markets, Carlsberg is used as an example of

a company present on all three markets. Examples of entry strategies followed by

Carlsberg in the three markets are analysed and the reasons for their success or failure

as well as the lessons learned are discussed in relation to the individual markets. In

importance, this thesis contributes to the understanding of how MNEs enter emerging

markets as well as to which challenges they face.

II

Contents

1 Introduction ............................................................................................................... 1

2 Problem statement .................................................................................................... 2

3 Objectives and research method ................................................................................ 2

3.1 Selection of cases for analysis .............................................................................. 3

4 Market entry modes for FMCG firms .......................................................................... 6

5 Reasons for conducting foreign direct investment ..................................................... 7

6 Internalization level and form of market entry ........................................................... 8

6.1 Transaction cost theory ....................................................................................... 8

6.2 The Resource Based View and internalization .................................................... 10

6.2.1 The Resource Based View and mergers and acquisitions ............................. 12

6.3 The OLI framework ............................................................................................ 13

6.4 Model of foreign market entry........................................................................... 21

7 Fast moving consumer goods ................................................................................... 24

7.1 Choice of the supplier side of the FMCG industry .............................................. 26

8 Emerging markets .................................................................................................... 27

8.1 Circumventing infrastructure problems in emerging markets ............................ 29

9 Market analysis of the FMCG industry ...................................................................... 30

9.1 Threat of new entrants ...................................................................................... 30

9.2 Rivalry among existing competitors ................................................................... 31

9.3 Bargaining power of suppliers............................................................................ 32

9.4 Bargaining power of buyers ............................................................................... 32

9.5 Threat of substitute products ............................................................................ 33

10 Carlsberg Breweries A/S ......................................................................................... 33

11 Markets .................................................................................................................. 35

11.1 India ................................................................................................................ 35

11.1.1 Infrastructure ............................................................................................ 37

11.1.2 Indian retail and the Indian consumer ....................................................... 40

11.1.3 Five forces analysis of the Indian FMCG industry ....................................... 43

11.1.4 The Indian beer market ............................................................................. 46

11.1.5 Carlsberg India .......................................................................................... 47

11.1.6 OLI framework .......................................................................................... 49

11.1.7 Discussion ................................................................................................. 55

11.2 China ............................................................................................................... 56

11.2.1 Special economic zones and growth .......................................................... 56

III

11.2.2 Current state of the Chinese economy ...................................................... 57

11.2.3 Rural-urban wage gap ............................................................................... 59

11.2.4 Infrastructure ............................................................................................ 60

11.2.5 Chinese business culture and the importance of guanxi ............................ 62

11.2.6 Chinese retail ............................................................................................ 63

11.2.7 Chinese consumers ................................................................................... 64

11.2.8 Five forces analysis of the Chinese FMCG industry .................................... 66

11.2.9 OLI framework .......................................................................................... 68

11.2.10 Discussion for China ................................................................................ 71

11.3 Russia .............................................................................................................. 73

11.3.1 Market analysis for Russia ......................................................................... 76

11.3.2 The Russian beer market ........................................................................... 80

11.3.3 Carlsberg on the Russian market ............................................................... 82

11.3.4 OLI framework .......................................................................................... 83

12 Discussion and findings .......................................................................................... 87

13 Conclusion ............................................................................................................. 95

Appendix

Appendix 1 FMCG retail markets and supplier industries

IV

Figures and tables

Table 3.1 GDP per capita and growth rate for emerging countries.

Table 4.1 Market entry modes

Table 11.1 Market segments in the Indian market

Table 11.2 Carlsberg Indias facilities

Table 11.3 Chinese urban and rural per capita income 2000-2008 (Chinese yuan)

1

1 Introduction

This text is the final chapter of our education at the Aarhus School of Business,

University of Aarhus. As M.Sc. students within strategy, organization and leadership,

we have spent a considerable amount of time for the past two years learning about and

working with the concept of strategy. The vast majority of this time has been focused on

strategy regarding the choice of which product markets to be in as well as how to

develop these markets not concerning which geographical markets would be worth

while pursuing and how best to enter these markets. As we find the geographical aspect

just as interesting as the product market aspect however, we decided to spend our final

semester delving into the topic of market entry strategies.

That market entry strategies should be the main topic of our thesis was not our first

thought though as we discussed the first ideas for the thesis in the autumn of 2008. We

settled relatively quickly on the idea of involving the major Danish brewer, Carlsberg,

in the thesis however. Carlsberg had at that time only just completed the joint

acquisition of Scottish & Newcastle together with Dutch rival Heineken in the biggest

foreign acquisition by a Danish firm ever made. This deal reinforced Carlsbergs

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 Carlsbergs annual general meeting in Copenhagen in March of 2009.

In importance, this thesis contributes to the understanding of the challenges faced by

MNEs in emerging markets. Additionally, it adds to the knowledge on how MNEs enter

emerging markets and on the conceivable reasons behind choosing the respective modes

of entry in different emerging markets. This is relevant due to the increasing

globalization of markets as especially western MNEs look to emerging markets for

growth as they face stagnant growth in their core markets in the west.

2

2 Problem statement

A great deal has been written about strategies for market entry and we will present some

of the more important contributions in this thesis in order to offer the reader an

overview of relevant theories. When it comes to entry strategies in emerging markets

the amount of literature is limited however and is often confined to investigating single

economies. This study will therefore contain a comprehensive analysis of a small

number of emerging markets in order to offer a better indication of the challenges firms

face when entering emerging markets in general.

The objective of the thesis will be to make a contribution to the understanding of the

challenges and problems associated with entering emerging markets, and why these

strategies are implemented and carried out in the way they are. The main focus will be

on the differences between what are to be expected based on theoretical approaches and

what is actually observed. In order to shed light on this subject, the thesis will analyze

three cases covering Carlsbergs strategy on the Russian, Chinese and Indian markets

respectively. The main question which this thesis will seek to answer is the following:

Can the choice of market entry strategies for FMCG producers in emerging markets be

explained through the OLI framework (Dunning 2000)?

Secondary question:

If differences between actual and expected market entry strategies exist, how are these

explained by the special characteristics of emerging markets and/or the FMCG

industry?

3 Objectives and research method

The primary objective of this thesis is thus to determine whether firms within the

FMCG industry follow the theories on market entry in emerging markets. That is, can

the market entries of FMCG firms in emerging markets be explained through the

theories presented in this thesis; transaction cost theory (Coase 1937, Williamson 1975;

1985), the resource based view (Wernerfelt 1984, Peteraf 1993), the eclectic paradigm

(Dunning 2000) as well as the model on foreign market entry developed by Buckley &

Casson (1998). Providing this is not the case, the secondary objective of the thesis is to

determine whether FMCG firms follow a different pattern in market entries compared to

non-FMCG firms due to the characteristics of their particular industry or alternatively;

3

can the differences be explained based on the differences between established and

emerging markets. In order to answer these questions, we have chosen to analyse a total

of three cases of market entry by the Danish multinational FMCG firm, Carlsberg A/S.

3.1 Selection of cases for analysis

When the numbers of emergent markets are so large and diverse the question becomes

what markets are worth taking a closer look at in order to define the problems and

challenges facing FMCG manufacturers and to test their adherence to the theories on

market entry. In this thesis we have taken the approach of looking at the three largest

emerging economies, namely Russia, China and India, who amongst them represents a

significant percentage of the world population as well as the world market. We believe

that these countries will provide an interesting view of emerging markets. In our view

their size make them more interesting than smaller markets which has less influence on

the world, since these three countries could very well be the engines that drive the

economy of tomorrow. Additionally, the three markets shows themselves to be

interesting in the context that they, despite their large size, shows significant differences

in their market structure as well as the challenges entrants and domestic companies face.

This means, that these markets will give a fairly representative picture of the numerous

challenges faced by the companies operating in emerging markets.

In addition to the above mentioned reasons for our case selection, we have further

justification for our choices. Looking at the cases in a more scientific view, we consider

the Russian, Chinese and Indian markets to be diverse cases with regard to wealth

(Gerring 2007 p. 97), which is evident by the differences in GDP per capita in the three

countries. As can be seen from table 3.1 below, the Russian GDP per capita was

estimated at $15,800 in 2008, the Chinese $6,000 and the Indian $2,800 (CIA 2009).

Russia is thus among the wealthiest third on FTSEs list of emerging countries (FTSE

2009) and given the markets size and Carlsberg heavy involvement in the country, it is

as a result a logical case to include in our analysis. At the same time, Russia has shown

considerable growth in recent years and is part of the upper third of the emerging

countries in terms of growth.

China is on the other hand part of the lowest third of emerging countries when it comes

to GDP per capita. China is however likely to advance on the list in the coming years as

it has the highest GDP growth rate of all the emerging countries, and has sustained this

4

growth rate for a number for years. For this reason, we consider it fair to use China as

our median case, also because Turkey is the only market among the middle third where

Carlsberg is active and we do not consider Turkey particularly interesting compared to

China. This is primarily due to its more limited size, GDP growth and market potential

compared to China.

As stated, our final case is the Indian market. India is like Russia and China among the

upper third of the emerging countries in terms of growth, but it is however also the one

with the second lowest GDP per capita, only slightly superior to Pakistan. These facts

combined with a population in excess of 1.1 billion people and a very low consumption

of beer makes India an intriguing case for analysis.

Table 3.1 GDP per capita and growth rate for emerging countries.

Rank Country GDP per capita Country GDP growth rate

1 Taiwan $31.900 China 9,8%

2 Czech Republic $26.100 Peru 9,2%

3 South Korea $26.000 Argentina 7,1%

4 Hungary $19.800 Egypt 6,9%

5 Poland $17.300 India 6,6%

6 Russia $15.800 Indonesia 6,1%

7 Malaysia $15.300 Russia 6,0%

8 Chile $14.900 Morocco 5,9%

9 Mexico $14.200 Pakistan 5,8%

10 Argentina $14.200 Brazil 5,2%

11 Turkey $12.000 Malaysia 5,1%

12 Brazil $10.100 Poland 4,8%

13 South Africa $10.000 Philippines 4,6%

14 Colombia $8.900 Chile 4,0%

15 Thailand $8.500 Czech Republic 3,9%

16 Peru $8.400 Thailand 3,6%

17 China $6.000 Colombia 3,5%

18 Egypt $5.400 South Africa 2,8%

19 Morocco $4.000 South Korea 2,5%

20 Indonesia $3.900 Taiwan 1,9%

21 Philippines $3.300 Turkey 1,5%

22 India $2.800 Mexico 1,4%

23 Pakistan $2.600 Hungary -1,5%

Countries in italic type are Advanced Emerging Countries

Source: CIA 2009 and www.ftse.com

5

When using the diverse case selection method, the chosen cases should in combination

be somewhat representative of the population due to the selection of high, low and

median value cases. It is should therefore also be fair to say that diverse case selection is

often more representative than other forms of case selection as it encompasses a greater

range of variation (Gerring 2007 p. 101). This requires however, that GDP per capita

values are fairly evenly distributed between high and low values. When this is the case,

it should be representative of the population to pick one low, one median and one high.

If the majority of the population had a low GDP per capita however, that is if there were

more low than high cases, it would perhaps be more representative to add an

additional low score case (Gerring 2007 p. 101). Since the GDP per capita values seems

to be somewhat evenly distributed between the high and low values in the population of

emerging countries, it should be fair to select one high, one median, and one low case.

6

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

Export 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 firms product(s) in the markets agreed upon. The

agreement thus allows the incumbent to use the foreign firms 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 incumbents

knowledge on the foreign market. A major advantage to a wholly owned

subsidiary is that the entrant will retain full control of the venture.

Increa

sing co

ntro

l as w

ell as co

mm

itmen

t an

d in

vestm

ent

7

5 Reasons for conducting foreign direct investment

In general, doing business in a companys 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 companys 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 companys

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).

8

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

competitors 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 Xs 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

9

costs is still highly relevant today and is used within the field of industrial organization

where Coases 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. Coases 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 Coases 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

10

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. Dunnings

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 firms 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 views

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

11

considerations with regard to sustaining and expanding the firms 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 Porters (1980) barriers to entry,

although Porters 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.

12

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 firms 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

13

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):

14

- 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

15

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 companys 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

16

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.

17

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

18

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 level

4 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).

19

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 arms 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

20

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 companys 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 arms 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

21

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 Dunnings

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 firms 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 & Cassons 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

22

- 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 firms 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 (Mller 2007 p. 98).

The assumptions stated in Buckley & Cassons 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 & Cassons 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

23

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

24

relatively more attractive. Since this option leaves the incumbent in a position to

compete, as the incumbents 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 & Cassons 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 & Cassons 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

25

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 sales5. 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.

26

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

27

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 1980s, but came into common usage

around the 90s 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

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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

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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

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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 the