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- 1. INTERNATIONAL BUSINESS MANAGEMENT 2ND YEAR|1ST SEMESTER Fundamentalsof Marketing and International Marketing Professor João Pedro Almendra Xavier Teixeira Case CARREFOUR: ENTRY INTO INDIA|3rd Case study Pascoal Matiue and Saira Khalil Bragança, 2015
- 2. 2 | Pa g e INDEX 1. What lessons should Carrefour India learn from the Japanese and Chinese markets?.............................................................................................................................. 3 Chinese market: Key success factors................................................................................ 3 I. Knowledge about what customers want:................................................................. 3 II. Localization:............................................................................................................ 3 III. Strong bargaining power: .................................................................................... 3 IV. Government marketing:....................................................................................... 3 Japanese market: Key failure factors................................................................................. 3 I. Ignorance of Japanese retail culture: ...................................................................... 3 II. Its inability to expand business:............................................................................... 4 III. The lack of consumer trust: ................................................................................. 4 2. Is it the right time to enter the Indian retail market? If so, what is the best entry mode?.................................................................................................................................. 4 I. Export......................................................................................................................... 4 II. Licensing.................................................................................................................... 4 III. Wholly owned subsidiaries...................................................................................... 4 IV. Joint venture ........................................................................................................... 5 V. Franchising................................................................................................................. 5 3. Due to the cultural diversity in India, how should Carrefour segment the market and cater to customer needs? ........................................................................................... 6 Types of market segmentation .......................................................................................... 6 I. Demographic segmentation .................................................................................... 6 II. Behavioural segmentation....................................................................................... 7 III. Psychographic segmentation............................................................................... 7 IV. Geographic segmentation ................................................................................... 7 4. How can Carrefour improve and make use of the current infrastructure in India?. 8 The current infrastructure in India...................................................................................... 8 How can Carrefour improve?............................................................................................. 8
- 3. 3 | Pa g e 1. What lessons should Carrefour India learn from the Japanese and Chinese markets? Chinese market: Key success factors I. Knowledge about what customers want: It is believed that Chinese people most want familiarity, friendliness and satisfaction of local tastes. By using appropriate name which was derived from the translation of its English pronunciation with three commonly used Chinese characters and the combination implies that this supermarket can provide happiness and pleasure, Carrefour can state its mission ad show the companies´ respect for local culture. II. Localization: To fit the Chinese price conscious consumers, Carrefour offers discounts which is being the most important offering. The company offers its merchandise in a traditional Chinese fashion. It has employed a large number of locals and has created greater local career- development opportunities. The stores rely on locally purchased goods in order to ensure product freshness. III. Strong bargaining power: Carrefour´s strong bargaining power with suppliers helps guarantee its price advantage and the price advantage ensures rapid turnover in goods, reducing the cost of capital. However because the company not only has strict price control but also charges a number of fees to suppliers, and justifiable charges forced on suppliers became an issue presently. IV. Government marketing: The Chinese government has offered preferential tax rate to attract overseas investment and the local government provides protection for the enterprise especially aimed at adverse regulations. Carrefour tried to establish good relationships with the government by leading economic development and increasing employment, however government´s overprotection may have negative consequences in the long term for a short time gain. Japanese market: Key failure factors I. Ignorance of Japanese retail culture: Carrefour failed to meet the needs of Japanese retail consumers with its existing competencies. Japanese consumers are very “trend sensitive” and due to lack of storage space they prefer to purchase small amounts more frequently. Aside from the fact that sales trends typically don’t last long, Carrefour also had to deal with regional differences in Japan and their effects on local culture.
- 4. 4 | Pa g e II. Its inability to expand business: Carrefour failed to expand its business in Japan because it didn’t choose a local partner. Since Carrefour decided to invest without a partner, it faced several problems including finding real estate with enough space to build its huge stores. III. The lack of consumer trust: Trust became an issue in 2004, when the company got caught mislabelling standard Japanese pork as higher quality American produced. 2. Is it the right time to enter the Indian retail market? If so, what is the best entry mode? Any firm contemplating entering a different national market must determine the best mode of vehicle for such entry. There are five primary choices of entry mode and each mode has its advantages and disadvantages and managers must weigh this carefully when deciding which mode to use: I. Export Most manufacturing companies begin their global expansion as exporters and only later switch to one of the other modes for serving a foreign market. Exporting distinct advantages: it avoids the cost of establishing manufacturing operations in those countries, which are often substantial, and it may be consistent with scale economies and location economies. II. Licensing International licensing is an arrangement whereby a foreign licensee purchases the rights to produce the company´s product in the licensee´s country for a negotiated fee (normally royalty payment on the number of units sold). The licensee then provides most of the capital necessary to open the overseas operation. The advantage of licensing is that the company does not have to bear the development costs and risks associated with opening up a foreign market. A licensing therefore can be a very attractive option for companies that lack the capital to develop operations overseas. III. Wholly owned subsidiaries A wholly owned subsidiary is one in which the parent owns 100% of the subsidiary´s stock. To establish a wholly owned subsidiary in a foreign market, a company can either set up a completely new operation in that country or acquire an established host country company and use it to promote its products in the host market.
- 5. 5 | Pa g e IV. Joint venture It is business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenue expenses and assets. There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favourable when: The partners' strategic goals converge while their competitive goals diverge The partners' size, market power, and resources are small compared to the Industry leaders Partners are able to learn from one another while limiting access to their own proprietary skills The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include: Conflict over asymmetric new investments Mistrust over proprietary knowledge Performance ambiguity - how to split the pie Lack of parent firm support Cultural clashes If, how, and when to terminate the relationship Joint ventures have conflicting pressures to cooperate and compete: Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position. The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources. The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control. V. Franchising It is an arrangement where one party grants another party the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. It seems to be the right time to enter the Indian retail market because the company has the potential to expand in different markets. And also it is developer-friendly from governmental laws. On one hand, among these five choices of entry mode, joint venture best suits the situation. India is an emerging economy which is attractive and promising for retail. The country recently allowed foreign retail chains to invest in existing Indian retail stores provided they do not flout the FDI (foreign direct investment) rules that allow up to 51% foreign holding in any multi-brand venture.
- 6. 6 | Pa g e Therefore, partner with experience in the host country will help Carrefour not only in its integration since there is high cultural distance between the host country market and the rest of the world, but also in business control as the level of risk is slightly high for the entrants. A big retail company like Carrefour will always intend to increase its market share and both wholly owned subsidiary and joint venture would be wise choices, but the second one seems to be best because the company will take a while to assess all market aspects in such a large country as India. With wholly owned subsidiary, Carrefour would not get much help from local investors since it would not have any kind of partnership. So starting off with a cash-and-carry business gives them the opportunity to get a first-hand feel of the Indian market and allows them to build a brand name. On the other hand, once the company is established, it will be able to fully control its business as it has enough experience in the country’s market, for that, it will then shift to wholly owned subsidiary. 3. Due to the cultural diversity in India, how should Carrefour segment the market and cater to customer needs? Types of market segmentation There are three ways to classify what the customer wants. It is known as needs, wants and demands. However, to decide the needs, wants and demands, you need to carry out segmentation first. And in segmentation, the first step is to define your target audience. Who would want your product and whether it falls in the needs segment, the wants segment or the demands segment. Once you decide the product you are going to make, then you decide on the market segmentation. There are 4 different types of market segmentation and all of them vary in their implementation in the real world. Let us discuss each of them in detail. I. Demographic segmentation Demographic segmentation is one of the simplest and widest type of market segmentation used. Most companies use it to get the right population in using their products. Segmentation generally divides a population based on variables. Thus demographic segmentation too has its own variables such as Age, gender, family size, income, occupation, religion, race and nationality.
- 7. 7 | Pa g e II. Behavioural segmentation This type of market segmentation divides the population on the basis of their behaviour, usage and decision making pattern. For example – young people will always prefer Dove as a soap, whereas sports enthusiast will use Lifebuoy. This is an example of behaviour based segmentation. III. Psychographic segmentation Psychographic segmentation is one which uses peoples’ lifestyle, their activities, interests as well as opinions to define a market segment. Psychographic segmentation is quite similar to behavioural segmentation. But psychographic segmentation also takes the psychological aspects of consumer buying behaviour into accounts. Application of psychographic segmentation can be seen all across nowadays. For example – Zara markets itself on the basis of lifestyle, where customers who want the latest and differential clothing can visit the Zara stores. IV. Geographic segmentation This type of market segmentation divides people on the basis of geography. Your potential customers will have different needs based on the geography they are located in. Among these types of segmentations, demographic segmentation looks at factors such as age, gender, income and so on. So Carrefour should try to apply demographic segmentation in India. Given below is a brief description of those factors catered in demographic segmentation: Age – About 50% of population in India is under 25 and is more welcoming of large and modern shopping malls than the country´s traditional small stores. Gender – Women dominate as main shoppers and influencers in household purchased and primarily belong to the age range of 25 to 40 years. Income – The increase in disposable income as well as the country´s booming economy has caused Indian households to gradually increase consumption of durable goods. Social class – The term “middle class” suits only about 60 million of India´s population. In considering simple consumer-based criterion, the middle class makes up nearly 200 million persons. Religion – Food can be provided by religion preference by using demographic segmentation as India is a religiously diverse country.
- 8. 8 | Pa g e 4. How can Carrefour improve and make use of the current infrastructure in India? The current infrastructure in India Infrastructure development is a vital component in encouraging a country's economic growth. Developing infrastructure enhances a country's productivity, consequently making firms more competitive and boosting a region's economy. Not only does infrastructure in itself enhance the efficiency of production, transportation, and communication, but it also helps provide economic incentives to public and private sector participants. The accessibility and quality of infrastructure in a region help shape domestic firms' investment decisions and determines the region's attractiveness to foreign investors. A bumpy road toward prosperity. This relationship between infrastructure development and economic growth has not gone unnoticed by the world's two most populous countries, China and India, which have a combined population of almost 2.5 billion. The experience of these two rapidly growing nations illustrates how different the paths to growth can be. For the most part, India has forgone the typical manufacturing export–led path to development and instead focused on its service sector. Although India has been very successful in information technology services and business-processing exports, its inadequate and dilapidated infrastructure has held back growth in the manufacturing sector. India's government has recently acknowledged that its growth has been constrained by low levels of infrastructure development, and it is now looking to catch up with China. India's finance minister estimates that the country's inadequate infrastructure has restricted economic growth by 1.5 to 2 percent per year. India's central bank recently reported that "infrastructure bottlenecks are emerging as the single most important constraint on India's economy." The country's manufacturing sector is held back by relatively inefficient and high- cost infrastructure—roads, railways, airports, ports, and electricity. The lack of adequate infrastructure is constraining not only foreign trade but domestic trade as well. For example, with little refrigeration available, 40 percent of India's fruits and vegetables spoil before reaching markets. How can Carrefour improve? Carrefour can create a strong infrastructure and thousands of jobs in India and each store of 50000 to 60000 sq. ft. sales area could provide about 200 direct and 250 indirect jobs. As per Carrefour’s estimate, if it starts its retail operations in India, in about 10 years, it would provide direct and indirect employment opportunities to about 20000 people in the stores itself.
- 9. 9 | Pa g e Carrefour has plans to build appropriate back-end infrastructure to support retail operations: It includes contract farming, local sourcing, cold chains and other logistic supports. Improving supply chain and logistics will enable retailers to enhance overall competitiveness, decrease the prices offered to customers and reduce wastage. Once Carrefour sets up stores in India, it would look at establishing distribution centres in different cities and this would automatically lead to modernization of the agro-infrastructure in those areas. And this would put in place cold storage facilities and a cold chain transportation system.