Ukraine Business Environment: Assessment of Market Potential for Today's Foods Manufacturers - Case Study Example

REPORT The Ukraine Business Environment: Assessment of Market Potential for Todays Foods Manufacturers By YOU Your Academic Organisation Appropriate Date Here 1.0 Executive Summary Todays Ukrainian business environment is one that is wrought with significant challenges, both for foreign-owned companies searching for expansion opportunities and for its domestic consumers and leadership alike. Domestic food production continues to decline in this developing nation, providing ample opportunities for importation of food products or an environment whereby foreign-owned manufacturing facilities can provide a better quality of life for many struggling consumers. In addition, problems ranging from the high cost of energy consumption to inadequate governmental responses create an environment where business activities are costly and often interrupted by routine domestic inspections. Despite these problems, the Ukraine is experiencing large strides in improving vague legal expectations and moving toward taking its place in the global trade community. Further, more industrially-advanced nations, such as the United Kingdom and the United States (and many others), continue to provide professional advice, economic assistance and professional training so as to create a more skilled labour force and improve the economic stability of this region. However, the Ukraine, by its own merits, is creating a stronger consumer-based system of democracy and is providing competent social and environmental policies which provide the nation with ever-increasing stability. As a nation that experienced large-scale difficulties in its pursuit for independence from Russia, the Ukraine is beginning to experience positive changes in infrastructure and internal development. In most respects, this country appears willing and ready to establish a name for itself as a competent contributor to the global trade community and is working quite diligently at providing its people with an enhanced system of freedom and equality, which creates a stable operating environment for foreign-owned foods producers. This report will identify areas of potential success for todays foods producers searching for a viable export market and further describes the challenges facing foreign-owned foods manufacturers in this relatively new market environment. 2.0 Consumer Profile The Ukraine is the largest country in Europe, covering 603,700 square kilometres (Ernst & Young, 2007). The country maintains an approximate population of 49.1 million, with 82.2 percent of the population consisting of individuals 16 years of age and over (Women Russia, 2006), representing a sizeable consumer market available for industries looking for a viable business opportunity. There are approximately 18.7 million households in the Ukraine (Women Russia). For industries searching for a sustainable exportation opportunity, the Ukraine has witnessed a significant increase in consumer spending on food, vaulting from 1.4 billion US dollars to 3.2 billion US dollars between 2003 and 2007 (Euromonitor International, 2007). This represents a significant shift toward positive consumer spending on food products, despite a notable decrease in domestic food production. This suggests a consumer market that is willing and able to purchase meat and agricultural products regardless of the point of origin for the foreign food imports. Concurrently, consumer adoption of new technologies has created a more Internet-savvy consumer, with the Ukraine witnessing an increase in Internet usage from 2.5 million to 11.8 million from 2003 to 2007 (Euromonitor International). With todays growth of Internet-based marketing, this increase in consumer Internet-usage represents a substantial opportunity to reach a broader target market and further increase profitability through various web-based marketing efforts. 3.0 Industry Profile Since declaring its independence from Russia, significant decreases in exportation have been witnessed in the Ukraine in the 21st Century. Specifically noticeable are declines in domestically-produced wheat, vegetables and meat. Domestic levels of livestock dropped approximately 42.4 percent in the 1990s, with no measurable increases from this level by 2007 (Rapawy, 1996). Further, The World Bank reports that civilian consumption of meat and dairy products has diminished by roughly one-third; a substantial margin each year: A direct result of lowered food production from domestic cattle and agricultural activities (Rapawy). As a result, Ukrainian consumers have turned toward a diet largely consisting of starchy food products, including potatoes, bread, and vegetables (Rapawy). This represents a significant opportunity for foreign exportation of food products, specifically in relation to agricultural products and meat as a viable market opportunity for aggressive, Westernised producers. Anwar, Bujold & Kelina (2005) offer a picture of the modern Ukrainian consumer as one who aggressively values becoming part of the global community, valuing relationships with other nations in relation to import/export relationships, democracy and product consumption. The authors indicate a growing recognition of their place in a rapidly-evolving Ukrainian business environment, valuing growth in terms of labour-relations and career-related aspirations. Potentially, this acknowledgement of contemporary consumer attitudes represents a shift from strong domestic patriotism to that of progressive citizens willing to embrace the values of Westernised nations; including acceptance of product-related advertising and various forms of product marketing. 3.1 External National Influences Both the United States and the United Kingdom continue to provide economic and governmental assistance to the Ukraine, in attempts to provide more competent economic reforms and advances in democracy, further enhancing the Ukrainian infrastructure in terms of strengthening distribution avenues and global trade. In fact, the United States reports a yearly budget of $174 million, allocated to various assistance programmes to build a stronger economic climate and trade potential for companies looking for expansion or foreign investment opportunities in the Ukraine (US Department of State, 2005). With continued foreign assistance, this country is experiencing continued growth, especially in relation to reducing poverty levels and enhancing the growth rate of the stable middle class; which represents the largest market opportunity for foreign-product importation and Western company profitability. The United States, specifically, has further implemented a training programme involving the exchange of Ukrainian business leaders, which has provided continued support to over 20,250 citizens in relation to teaching quality business-management practices (US Department of State). This ongoing programme strengthens the capabilities of the domestic labour pool, creating opportunities for skilled labour for foreign foods manufacturers in relation to sustaining a quality distribution channel in the country. 4.0 Regulatory Restrictions to Market Entry A recent survey conducted by the Ukraine SME Survey and Policy Development Project offers that governmental inspections of foreign-based businesses has been cited as the largest barrier in terms of regulation, with various governmentally-mandated permits being difficult to receive from domestic regulatory committees. In fact, the survey results report that many firms lose approximately 17 days of productivity due to constant government inspections (Ifc.org, 2003). This includes customs procedures and inspections related to foreign product importation, suggesting at least a measurable loss to profitability due to obligatory cooperation with the inspection processes. Though the Ukraine continues to struggle with import and trade reforms, the impact of domestic regulatory agencies has created diminished desire for foreign direct investment for foods producers in the Ukraine. In addition, poor governmental response to the needs of foreign-based businesses has been recognised as a significant barrier to operating in the Ukraine. Complicated diplomatic channels has made it difficult for businesses wishing to invest in this evolving business market, with many firms citing substantial delays from the Ukrainian government in terms of clarifying vague administrative policies and legalities (Financial Times, 2005). Poor public relations is often the outcome of inadequate governmental response to diplomatic relationships with many Ukrainian officials. As such, current foods importers face minimal governmental support in terms of identifying or securing potential joint venture opportunities or further expansion into less-urban communities, potentially leading to fines stemming from mis-communication and government inspections which identify non-compliance to Ukrainian law. Further, poor legislation exists in the Ukraine in terms of protecting the intellectual property of foreign investors (Global Technology Forum, 2007). However, issues of copyright and trademark infringement are being addressed rather aggressively through cooperative efforts between the Ukrainian government and nations in the World Trade Organisation (WTO), as the Ukraine struggles to create workable legislation complying with WTO regulations. As the country prepares itself for acceptance into the WTO, these issues are expected to receive continued scrutiny to improve the business environment for foreign firms (Radcliffe, 2006). This report was unable to locate any research information regarding the implementation of import quotas on food and agricultural products, suggesting a virtually limitless opportunity to flood the market with foreign food products without a current measurable risk of stern governmental intervention regarding foods imports to the Ukraine. 4.1 Fair Competition Policies Significant legal reforms have occurred in the Ukraine in relation to ensuring fair competition and to protect the interests of domestic foods producers in this country. These legalities include anti-monopoly laws and unfair pricing of products, often known as dumping in which the food importer sets prices far below that of domestically-produced agriculture. As with other Westernised nations, fair competition policies persist in the Ukraine, preventing foods manufacturers from cornering any specific market in this region. 4.2 Equal Employment Opportunities Significant, progressive changes in social equality are prevalent in todays Ukraine, promoting increases in the amount of female entrepreneurs and skilled female labourers, including government-sponsored training and consulting (International Labour Organisation, 2007). This shift in social policy toward equal employment creates a more diverse, competent Ukrainian labour pool, potentially avoiding the necessity to plant foreign management teams within businesses in the Ukraine, diminishing the costs associated with maintaining a high volume of expatriate salaries for foods importers or producers. This creates a significant potential for increased profitability for foreign businesses desiring to enter this market. 5.0 Minimising Costs of Importation Global marketing initiatives, especially in relation to foods manufacturers which face continued regulation and inspection in the Ukraine, are monumentally important to identifying with the consumer population in this country. Because consumerism is a relatively new concept in this recently-converted democratic society, familiarising consumers with various brand names and Western products is a significant undertaking in this developing nation. Multi-national companies, such as Unilever and Sara Lee, have scored significant achievements in creating the perception of quality food products in the Ukraine, with Unilever identifying a 6.7 percent growth rate in sales in this region from 2003 to 2005. (Anwar & Blackstone, 2006). However, due to the difficulties associated with the under-developed distribution infrastructure in the Ukraine, transportation and packaging costs continue to plague many foods importers in this nation. To combat this issue, a handful of current foods importers are working with regional Ukrainian officials to secure viable warehousing and transportation facilities for the purpose of sustaining global trade initiatives and minimise the costs of distributing products (Anwar & Blackstone). Though a well-crafted distribution infrastructure unavailability persists, the actions of current foods producers is currently paving the way for a more streamlined method of moving products to its desired market, thereby reducing these costs for future importers. However, it is clear that the costs associated with transporting imported products across the Ukraine will continue to be one of the highest disadvantages to higher profitability for foods producers today. 6.0 Identifying with the Contemporary Ukrainian Consumer In a culture that is not sufficiently accustomed to consumerism, identifying with the consumer in relation to brand identity and familiarisation is a significant problem for todays foreign foods producers. To combat this problem, foreign licensing is a marketing method that has found continued success in this region. Ukrainian marketers, today, are becoming familiarised with contemporary marketing philosophies in which short-term contractual agreements are created with domestic marketers to utilise pre-existing marketing channels in the Ukraine to avoid legal barriers and build a quality partnership with marketing entities which consumers are already familiar with (Boone & Kurtz, 2006). These contractual agreements minimise the costs of advertising and can serve to quickly familiarise Ukrainian consumers with any variety of brand names. Unilever has reported substantial difficulty in creating brand recognition in this region, creating issues with connecting consumer perceptions of the food brand with reputation and quality (Anwar & Blackstone). Foreign licensing provides foods importers with a low-cost method of relating to Ukrainian consumers and builds long-term, quality partnerships with domestic marketers and foods producers, positively impacting diplomatic relations, PR, and total profitability associated with import products. Further, referring again to the shift in consumer preferences regarding an exchange of consumption in meat and dairy in favour of bread and vegetables, companies such as Unilever and Group Danone are actively working on a marketing strategy heralding the laurels of a diet rich in protein within the Ukraine (Anwar & Blackstone). As a method of securing recognition of brand names within the consumer mind-set, prior to the physical importation of meat and dairy products, this preliminary marketing campaign attempts to shift consumers away from purchasing domestic products in favour of foreign-made food products consisting of various meats and dairy ingredients. These tactics represent ongoing attempts to coerce a social shift in terms of dietary needs, which requires aggressive, preliminary marketing efforts to build consumer awareness of the Western values of a balanced diet. For any foods manufacturer specialising in dairy and meat-containing products, these advance marketing tactics may well be a necessity to identifying with the consumer and actually creating the demand for these products where little demand currently exists; a significant challenge for todays foods producers. 7.0 Energy and Natural Resource Concerns Again, problems associated with a relatively substandard infrastructure, particularly in relation to energy resources, are likely to increase as the Ukraine grows continuously more industrial. The Organisation for Economic Co-Operation and Development (OECD) reports that domestic product manufacturers in this country will continue to receive growing financial pressure stemming from rising energy costs, as industry begins to strain the oil, natural gas, and electricity resources in the country (OECD.org, 2007). For foods producers considering production of foreign-owned manufacturing facilities in the Ukraine, these problems present enormous cost increases, both current and future, related to energy consumption, likely making direct importation (despite the problems associated with the import project) a more feasible cost-reduction activity for future product distribution. The local government, along with members of the World Trade Organisation, continue to work to provide improvements in relation to oil consumption and energy resources. However, in relation to future energy cost projections, these problems are likely to persist well beyond the year 2015 in this market (Anwar & Blackstone). Further, with statistics showing a sizeable increase in the middle class population in the Ukraine, and increases in available housing, foreign investment into domestic manufacturing facilities will witness continued natural resource and energy strains as consumers create increased demand for these services. As part of any series of overhead costs (operating costs), this creates the opportunity for diminished profitability for food firms which reject direct importation as a viable business option in favour of foreign direct investment. 7.1 Economic Stability The current form of currency in the Ukraine, the hryvnia (UAH), reported in 2005, maintains an exchange rate of 5.05 per one US dollar, representing a significant economic disparity in relation to establishing a strong position of domestic currency in relation to other industrial nations across the globe (Institute for Competitive Society, 2005). Though this represents a significant opportunity for foods producers considering direct industrial investment in the Ukraine in relation to minimising costs associated with hiring domestic labourers, this disparity represents financial problems related to setting an appropriate product price without sacrificing company profitability. This over-500 percent difference against the US dollar (and other powerful international currencies), however, will continue to persist until domestic infrastructure, labour and domestic production levels increase in the Ukraine. For companies considering both direct importation of foods products or direct investment, this is a harsh reality in terms of pricing the products at a level where consumers will accept the established product price without impacting the companies expectations for profit. 8.0 Professional Forecasting of Ukranian Growth The Institute for Competitive Society offers the results of a recent survey targeted at a large sampling of business professionals (both domestic and foreign) with experience at operations in the Ukraine. The survey revealed that 65.2 percent of these professionals believed that the Ukraine will continue to achieve consistent growth, with another 16.6 percent of respondents indicating that considerable growth is likely in this region in the near future (Institute for Competitive Society). Though the results of this survey represented opinion, as opposed to more tangible environmental factors, this does tend to suggest that the majority of business professionals view a positive economic climate within the Ukraine in the years to come. With todays professional and educational emphasis on the importance of benchmarking the activities (and networking with) of other business entities in similar industries, such high levels of qualified opinion suggests a nation that is making rapid, positive steps toward joining the global community in terms of trade and economic development. 9.0 Recommendations for Todays Foods Manufacturers Having offered an understanding of the current growth rates of consumerism in the Ukraine and the civilian willingness to embrace a society built on product consumption and democracy, it is important to identify potential opportunities to improve the business environment in this country. Though several foods manufacturers have found significant success in preliminary marketing efforts designed to build brand awareness and various dietary acknowledgements in the market, additional tactics related to marketing can be offered. With such a significant portion of consumers adopting Internet technology, online advertising, promotional and public relations schemes appears to be one of the most viable methods to reaching a broader consumer target market. Despite the jump in the adoption of Internet technology, there have been no significant increases in consumption of consumer electronics in the Ukraine (Euromonitor International), suggesting that more traditional, Westernised advertising and promotional activities directed toward the television-viewing audience would not be as effective in building higher sales volumes of food products. It is the recommendation of this report that companies actively consider the enormous opportunities that web-based marketing can provide to this technologically-savvy consumer audience. Various promotions, including special coupon and savings incentives, is likely to reach a broader market and work positively as a short-term entry strategy to build consumer confidence and brand recognition. Further, though inconsistent and somewhat obtrusive inspection and the issuance of government-mandated permits continues to disrupt the business activities of firms in the Ukraine, it is recommended that todays foods manufacturers actively promote ongoing discussions and Ukrainian preparation for entry into the World Trade Organisation, thus eliminating issues with vague domestic legislation and import guidelines whilst reducing the necessity for repetitive domestic inspections pertaining to quality and internal operations. Having a relatively dynamic and skilled labour force, opportunities abound for foods producers that have rejected direct importation as a viable option in favour of establishing a domestic production facility in the Ukraine; in terms of establishing a network of subcontractors. Under a subcontractor agreement, local production facilities are granted contracts in which production of various food products is assigned to domestic facilities (Boone & Kurtz, 2007). These types of agreements accomplish two very specific objectives: To establish a stable position on foreign soil in relation to brand recognition and to avoid issues involving cultural misunderstandings with local society. The most notable outcomes of subcontracting in this scenario are establishing consumer perceptions of trust with the brand name and avoiding the fees associated with energy consumption and various taxation linked with constructing foreign-owned manufacturing facilities. Countertrade initiatives, involving the receipt of bartered goods in lieu of cash receipts for product trades (Boone & Kurtz, 2007), is another viable recommendation for foods producers looking for expansion into this complicated, underdeveloped environment. In lesser-developed nations where economic development is hindered, bartering as countertrade provides the domestic country (in this case the Ukraine) with much-needed products and grants the foreign entity with a less-complicated method of importing its goods; especially in relation to incurring tariffs or increased regulation. Once the receipt of the bartered exchange has occurred, the foreign party can freely distribute or market these bartered goods for profit, creating a presence in the Ukraine and avoiding excessive costs tied to distribution and importation. 10.0 Conclusion and Commentary Despite the difficulties associated with the current Ukrainian business environment, there are ample opportunities and methods available for aggressive foods manufacturers looking for a viable market opportunity. Consumers in the Ukraine are readily adapting to a consumerist nation, representing a positive step toward entering the global trade community and building long-lasting relationships with foreign foods producers. Further, various organisations and governmental leaders are actively working toward the development of a quality infrastructure and to provide increased protection of foreign intellectual property. Issues of higher energy demand and prices are being addressed, though it appears there is no short-term solution for this issue. However, with the support of more progressive and industrialised nations, the Ukraine, from virtually any perspective, appears to represent a significant business opportunity for foods producers. With the Ukrainian domestic production situation on a steady decline in terms of gross domestic product, accepting imported goods from other foreign nations appears to be a win-win scenario for all parties, including enhancing the dietary lifestyles of the Ukrainian consumer. With perseverance and determination, todays foods manufacturers can indeed find success and profitability in this developing nation. Bibliography Anwar, A. & Blackstone, S. (2006). Eurasia and the Multi-national Firm. Northfield Publishing: 56-59, 113. Boone, L. & Kurtz, D. (2006). Contemporary Marketing. 12th ed. Thomson South-Western. United Kingdom: 308. Boone, L. & Kurtz, D. (2007). 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