Laima AS - Potential expansion into Germany or UK

Editor's Notes

1. Latvia Is a High Income Country, with 4.0–5.9 Growth in GDP Per Capita (The World Bank 2017). A Developed Economy (United Nations 2017) and a Member of the World Trade Organisation since 1999 (World Trade Organisation 2017). Latvia has a population of 1,9 million people (United Nations 2017), out of which 67.3% are economically active. The country has the fifth highest employment rate in Eastern Europe (Euromonitor International 2017a)
2. According to the FMCG Index (Euromonitor International 2017b) the confectionery industry in Latvia is the second largest industry followed by the soft drinks.
3. Company of choice - Laima Laima was found in 1870 and is Latvia’s largest confectionary manufacturer. Their product range includes basic and premium chocolate, jelly-based candies and caramel deserts. They have an import and an export portfolio. (Laima AS 2018)
4. Brands under Laima include: Riga, Prozit, Serenade, Krejuma, Rigonda, and Iriss. (Laima AS 2018)
5. Within the domestic market of Latvia, Laima holds the largest market share equivalent to 30% (Euromonitor International 2017b). In comparison, its closest rival, Haribo only has half of that market share, or 15% (Euromonitor International 2017b). The present forecasts for the next four years are looking at continual growth of sales of sugar confectionery within the Latvian market, which means the company would be able to rely on healthy profits, assuming there are not changes in taste and preferences among consumers (Euromonitor International 2017b).
6. SWOT Analysis for Laima
7. Strengths Customer loyalty 1/3 of total market share (Euromonitor International 2017b) Product differentiation over 172 confectionary goods (Laima AS 2018), ranging from basic to premium quality, including both chocolate and jelly-based goods Size advantage Oligopolistic power with 30% share of internal market (Euromonitor International 2017b) Government funded As part of the food industry, Laima receives government financial subsidies. (BMI Research 2018) Their position as market leaders offers them the pricing power and creates an opportunity for economies of scale.
8. Weaknesses Health concerns: 4.2% decline in sales (BMI Research 2018) directly linked related to diabetes, high blood pressure and obesity affecting sales (Business Insider 2016) Latvian market size of just 1.5 million people. The sector is constrained by a ‘small and declining population with limited spending power compared to Western European Markets’ (BMI Research 2018)
9. Opportunities Acquisition strategies, acquiring direct competitors Felix Abba (6.7%) and Leaf Suomi (4.8%) could increase the market share from 30.1% to 41.6% (Euromonitor International 2017b). International expansion, trading in new markets. In 2015, Laima entered the US and earned additional 1 Million Euros in revenue (BNN 2015). Further international expansion could promote growth for the Latvian manufacturer
10. Threats Foreign government interventions, in 2013, Latvian industries including food manufacturers were sanctioned 25 billion euros by Russian authorities (OECD 2013) Political instability holds a threat of similar sanctions in the future Supply related issues demand for chocolate goods is expected to increase by 30% by 2020 (Beg et al. 2017) and there is fear that supply will not be able to meet the demand for cocoa In decline growth “Chocolate confectionery in Western Europe is a mature market where the rate of growth is in slow decline” (Eagle and Ambler 2002) Intense competition, from both local and foreign competitors that are part of or entering the market. Currently there are 16 direct competitors within the market, closest rival Haribo holding 14.8% of the market share. (Euromonitor International 2017b)
11. A profile of the company’s consumers on its domestic market. The confectionary manufacturer offers variety of products that accommodate for variety of customers, from low-income earners to consumers with high disposable income looking to purchase a premium quality product. Age groups are not restrictive as all generations are able to enjoy confectionary goods.
12. Section B aims to provide an overview of the of the two potential markets through critically evaluating their macro environmental factors.
13. In terms of market potential, both the United Kingdom and Germany are classed as Developed Economies (United Nations 2017) with High Income Growth per capita (The World Bank 2017) and both have been members of the WTO since 1995 (World Trade Organisation 2017). In terms of population, Germany has 20 million more inhabitants than the UK’s (World Bank 2016a). UK has seen a decline GDP per capita whilst Germans have seen an increase (World Bank 2016b). These strong economic indicators place both economies in strong position, outlining the fact that there is a financial prosperity.   When considering market potential, we must also evaluate access to internet as digital presence/ecommerce would be a potential entry strategy for section C of this presentation. According to the World Bank (2016c), UK 94% of the UK Population is using internet in comparison to Germany’s 89% (World Bank 2016c). When it comes to online shopping, 10% of total sales of British retailers are done online, whilst German sales account for 6% (Tyco Retail Solutions 2016). The data indicates stronger ecommerce presence within the UK.   Potential for growth related to purchasing power of the consumer is optimistic for both economies, whilst digital entry through online platform may would seem more suitable for the British market.
14. Looking into the future changes, the Brits are welcoming foreign investment, especially following the BREXIT vote politicians are looking to encourage FDI as much as possible (Driffield and Karoglou 2016). However long-term trade barriers are uncertain because of BREXIT (EEF The Manufacturers' Organisation 2018). The German political situation differs, according to Jenmen and Buergin (2018) “Some foreign investors are more welcomed than others”. As a member of the European union, relations between Germany and other EU members is more open than non-EU countries (Barca and Becht 2001). For Laima, this would be an advantage as Laima is based in the Latvia thereby trade barriers would be minimal. Both countries pride themselves on low corruption levels. Scoring 82 and 81 scores in the International Transparency report (Transparency International 2017).   Socially, Laima’s Products will be compatible with both cultures (Eagle and Ambler 2002) as the two share a cosmopolitan attitude towards foreign goods (Czinkota et al. 2009). Both countries have above 64% age distribution of people aged 15 to 64 (World Bank 2016d) inclining consumers are likely to be economically active. In terms of demographic, British consumers consume 16.3 pounds per capita of chocolate a year, whilst German consumers eat 17.4 pounds per capita (Nag 2017). Based on these figures, it appears that Germany would be more favourable market because of the higher consumption per capita and strong relations with the European union, allowing for trade opportunities.
15. When it comes to level of competition, the two markets differ. UK has four major players (Cadbury, Mondeles, Mars and Ferrerro) (IBIS World 2018) collectively holding 69.1% of the market (Euromonitor International 2017d), very oligopolistic market. Whilst Germany only has three (Fererro, Mondelez and Lindt) collectively holding 43.8% of the market (Euromonitor International 2017e), multiple small players and less saturation than UK. When it comes to foreign firms, the market share of foreign firms in comparison to local firms is 50/50 per cent in the UK (Euromonitor International 2017d), whilst German market share ratio is 40/60 per cent (Euromonitor International 2017e), inclining German consumers prefer foreign brands.
16. Country of choice Germany, because political pressures are less likely to influence the investment that Laima will make into the economy. In terms of market saturation, Germany is more likely to present opportunities for new competitor, Laima, to enter the confectionary market as the market saturation is not so strong and no single company holds above 20% of the total market share. This would allow for fair competition. German consumers consume high volume of confectionary goods, thereby there would be sufficient demand for Laima’s products, making it the ideal country of choice for Laima’s new foreign ventures.
17. Strategy selection When discussing market entry strategies into a foreign country, early research done by Johanson and Vahlne (1977), the Uppsala Model describes internationalisation as an incremental process. The model’s relevance in present day has been supported by academics Isa Hadjikhani et al. (2012) who argued “the importance of reducing uncertainty in the market and increasing their commitments incrementally”.
18. For Laima there are two suitable entry strategies. They could enter Germany through adopting an investment-based entry strategy (Cavusgil et al. 2013) in the form of Greenfield strategy (Harzing 2002). Alternatively, a non-equity based strategy focusing on indirect export (Doole et al. 2017). From a producer point of view, an indirect export strategy would allow for incremental growth (Uppsala Model) and would be more suitable for Laima’ entry into the German market. Laima is owned by the Norwegian company, Orkla (Orkla 2014). Thereby, expansion budget of the brand will be limited. Indirect exporting would require fewer resources when it comes to exporting than direct exporting. This would in turn, reduce both the costs and the risks of internationalisation. The ‘piggybacking’ (Terpstra and Yu 1990) process is done through export houses and trading companies, thereby risks is spread across multiple parties. Other perks of the process include an opportunity to acquire both knowledge and skills within the new market. In direct comparison, the alternative greenfield market entry strategy would involve direct investment (Harzing 2002). Whilst the method is not as cost-efficient, the strategy offers higher influence and control of foreign activities. Risks are not to be ignored, both in terms of cultural clash and loss of capital. When comparing both investment-based entry strategies, indirect exporting seems more suitable for the size and the capital of Laima thereby this will be the approach used.
19. Segmentation, Targeting & Positioning
20. Segmentation Laima’s product range includes both basic and premium range confectionary, thereby their segmentation would be similar to their competitor Mondelez who import variety differently priced chocolate goods.
21. Targeting As a confectionary producer, Laima would be focused on mass targeting. As discussed in section B, German consumers eat 17.4 pounds of chocolate per capita (Nag 2017) thereby there would be sufficient demand for confectionary goods.
22. Positioning The product will be positioned as a delicious import alternative to existing confectionary products that has a differentiating taste and quality and equally offers a good value for money.
23. Marketing Mix In terms of marketing mix we must consider the following factors: 4Ps (McCarthy 1960):
24. Product The existing product range would be adapted to suit the German market in terms of packaging for aspects such as translating the product specification into German. When it comes to packaging regulations, Latvia and Germany share European laws and regulations (Euromonitor International 2017b, Euromonitor International 2017e), hence there would be no need to make significant packaging modification.
25. Promotion In terms of promotion, existing techniques would be sustained in attempt to make the product unique. Equally, the product promotion would be adapted to the German speaking audience by translating promotional material. In terms of new promotion, Laima would develop promotional materials that outline the similarities in taste between Latvian and German consumers in order to make the product more relatable. Traditional channels such as television and billboards will be used to target the mass audience as well as paid social media posts. This would establish the brand into the market.
26. Pricing Price of products will be increased by 5% above current prices in order to cover exporting costs. This would allow Laima to position itself across the confectionary market without making a profit loss. As the company produces both basic and premium goods, their products would be competitive on both fronts.
27. Place As a joint venture, the product will still be produced in Latvia, however the partner company would be importing the goods into Germany and placing them in supermarkets and retail stores. This would reduce the involvement of Laima and allow them to focus their efforts on production and equally understanding the new market of entry.
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(2002) "Acquisitions Versus Greenfield Investments: International Strategy And Management Of Entry Modes". Strategic Management Journal 23 (3), 211-227 IBISWorld (2018) Chocolate & Confectionery Production In The UK [online] Industry Report C10.820. available from <http://clients1.ibisworld.co.uk/reports/uk/industry/default.aspx?entid=605> [1 March 2018] Isa Hadjikhani, A., Pajuvirta, A. and Thilenius, P. (2012) "Internationalization Of Swedish Banks In Russia And The Impact Of Political Environment". Business, Society And Politics 173-193 Jennen, M. and Buergin, M. (2018) For Merkel, Some China Investments Are More Welcome Than Others [online] available from <https://www.bloomberg.com/news/articles/2018-02-27/merkel-fixes-sights-on-china-as-chinese-investors-target-germany> [1 March 2018] Johanson, J. and Vahlne, J. (1977) "The Internationalization Process Of The Firm—A Model Of Knowledge Development And Increasing Foreign Market Commitments". 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29. Further reading Destatis (2018) Germany's Population By 2050 [online] destatis.de. available from <https://www.destatis.de/EN/Publications/Specialized/Population/GermanyPopulation2050.pdf?__blob=publicationFile> [1 March 2018] Greenaway, D. and Kneller, R. (2007) "Firm Heterogeneity, Exporting And Foreign Direct Investment". The Economic Journal 117 (517), F134-F161 IMF (2018) World Economic Outlook Update, January 2018: Brighter Prospects, Optimistic Markets, Challenges Ahead [online] available from <https://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018> [11 February 2018] Mintel (2018) Sugar And Gum Confectionary UK, January 2018 [online] Mintel. available from <http://academic.mintel.com/download/image/item/794393/InfographicImage/> [1 February 2018] National Literacy Trust (2017) State Of The Nation And Impact Report 2016/2017 [online] Literacy25. National Literacy Trust. available from <https://cdn.literacytrust.org.uk/media/documents/Impact_Report_FINAL_web-compressed.pdf> [3 March 2018] Reuters (2014) Latvia Calls For EU Compensation If Sanctions Rebound [online] available from <https://uk.reuters.com/article/uk-ukraine-crisis-latvia/latvia-calls-for-eu-compensation-if-sanctions-rebound-idUKBREA2G17U20140317> [12 February 2018] The Economist (2015) Why Negative Interest Rates Have Arrived—And Why They Won’T Save The Global Economy [online] available from <https://www.economist.com/blogs/economist-explains/2015/02/economist-explains-15> [13 February 2018]