Richemonts Entry in Indian Market - Case Study Example

Richemont’s entry in Indian market – Country & Market Analysis Table of contents Part A – Company and Industry Analysis 3 Part B - Market specific Issues, Challenges and risks 6 Part C - Political & Economic Analysis 8 Part D - Entry Strategy Plan 11 Part E - Conclusions and Recommendations 14 References 15 Part A – Company and Industry Analysis Richemont is one of the most popular luxury goods retailers worldwide. The group has in its portfolio many well known brands, including ‘jewellers Cartier and Van Cleef & Arpels’ (The Financial Express 2014, par.1). Richemont was established in 1988 in Switzerland (Geneva); at that period the company owned shares in popular tobacco brands, such as Rothman’s International and Dunhill but also in a popular luxury brand, the Montblanc (Richemont 2014, History). Through the decades the firm managed to expand its activities worldwide. Currently, the firm’s highest share, about 38%, is located in Europe while the Asian Pacific region is the second most profitable area for the company, since the region represents the 37% of the company’s profits, i.e. an amount of €2,569 million (Richemont 2014, Geographical Dispersion). The Figure 1 below shows the profits of the group by region for the 2013. Figure 1 – Sales of Richemont worldwide, by region (source: 2013 Annual Report, p.36) The performance of the Group up to now can be characterized as quite satisfactory. Indeed, in 2013 the Group reached a level of sales of €10,150m, while in 2012 the relevant figure was significantly lower, at €8,868m and in 2011 it was € 6,892m (Richemont 2014, Investor Relations, Five Year History). In 2008 the firm had to develop an extensive re-organization so that its competitiveness is kept at high levels. Figure 2 – Share price of Richemont from 1989 to 2013 (source: 2013 Annual Report, p.6) This initiative did not particular affect the company’s profitability, as proved through the graph in Figure 2 above, where the changes of the firm’s share price between 1989 and 2013 are presented. Figure 3 – Profits/ share of each of the firm’s sectors (source: 2013 Annual Report 1) Emphasis should be also given to the following fact: the business is divided into four, major, departments, as presented in the graph in Figure 3. The performance of each department is differentiated; jewellery represents the firm’s most important sectors with a percentage of 51% in the firm’s profits (Figure 3). Richemont has decided to enter the Indian market the soonest possible. Recently, a proposal has been submitted to the Indian authorities for the acquisition by the group of ‘a permission for one brand’ (The Financial Express 2014, par.4). The relevant investment is estimated to $5 million and it is expected to be paid back quite soon (The Financial Express 2014, par.4). It should be noted that the current size of luxury retail sector in India is not characterized by high profits but the prospects for future growth are significant, since the number of people buying luxury products in India tends to be continuously increased (The Financial Express 2014, par.2). Richemont has chosen the ‘single brand sector of India’ (Kumar and WendLandt 2014, par.6) since in this sector it is allowed by the government for the FDI to reach a level of 100% under the condition that at least ‘one third of the materials used will be retrieved by sources located in India’ (Kumar and WendLandt 2014, par.6). India, as a country, is characterized by a significant contradiction: about 41.6% of local people have to leave with just a dollar per day; on the other hand, the rate of increase of the country’s millionaires has been estimated to 20.8%, the highest level worldwide (Fitch 2011, par.2). Moreover, the luxury market of India is not highly developed; in 2009 the profits of the sector were estimated to just $4.8b but for the future the prospects are significant: by 2015 the luxury goods sector of India is expected to lead to profits of about $14.7b (Fitch 2011, par.4). In other words, the luxury goods sector in India is not highly developed but its prospects for high profits in the future are significant (Fitch 2011, The Financial Express 2014). Part B - Market specific Issues, Challenges and risks Despite its importance as an emerging economy, India seems to be rather hostile to foreign investment, a view which is based on the comparison of the country’s ‘product market regulation’ (Conway and Herd 2009, p.4). In fact, if compared to the relevant frameworks of other countries worldwide, the legal framework of India related to products seems to discourage foreign firms from entering the country (Figure 4). According to the data presented in the table in Figure 4 a foreign firm would not be particularly benefited from entering India and could choose instead one of the other countries of the specific table. Figure 4 – Legal framework of India in regard to product regulation, as compared to that of other countries (source: Conway and Herd 2009, p.4) In addition, the Indian market has loss part of its strength; this fact is reflected in the decrease of the market’s growth for 2013 at about ‘4%, compared to 10.5% for 2010’ (Vollmer 2014, par.1). Still, the Indian market remains quite attractive for multinational businesses mostly because of its competitive workforce, constituted from highly qualified professionals, and for its low wages (Vollmer 2014, par.2). The high demand for products/ services of various categories is another important advantage of the Indian market (Vollmer 2014, par.2); this advantage could be considered as expected if taking into account the country’s population. However, problems have not been avoided, especially in regard to the following areas (Vollmer 2014): a) the taxation is rather high, especially for the foreign firms, b) the control of the state on business activities is high, meaning that Indian authorities tend to intervene continuously and at high level on business decisions/ operations, a fact that discourages foreign investors from investing in India,; at the same time corruption both at state and at organizational level is developed, a phenomenon that can be confronted only through the introduction of strict laws; c) the country’s existing infrastructure, especially its transportation system, is at quite low level; extensive investment is required by the state so that an environment friendly to foreign investment is created (Vollmer 2014, par.2). At the next level, foreign businesses that aim to enter the Indian market need to be aware of the following market’s trend: e-commerce in India is highly supported and the responses of people towards firms that use the specific business framework are positive (Subbu 2014). According to the general manager of E-bay India, the development of e-commerce in Indian market within a quite short period of time has been impressive (Subbu 2014, par.3). Indeed, E-bay entered India just before nine years and within this period its growth has been at levels similar to that of the US market, where E-bay exists for quite longer (Subbu 2014, par.5). This fact leads to the following assumptions: a) the Indian market is a dynamic market, with rapid responses to technology and to innovative ideas, b) the foreign firms that operate in the Indian market have an important supportive tool for securing their growth: the e-commerce, a framework that it is highly appreciated by local consumers. On the other hand, being an emerging country can be considered as a major advantage for India. Indeed, the economies of emerging markets have not suffered important losses from the recession of 2007. This phenomenon is related to the fact that these markets are highly based on ‘rapid industrialization’ (Francis 2012, par.3) Still, risks in regard to these markets can always exist; for example, it is difficult to arrange the entry of a new product/ service in these countries unless a representative who has experience in such tasks is involved. Towards this direction, when having to enter an emerging market, investors should avoid the direct placement of capital and should rather prefer to enter through a multinational, i.e. through a strategic alliance or a JV, so that the cases for losses are minimized (Francis 2012, par.13). Bose (2012) noted that India is a country which can offer a series of opportunities to foreign investors. Currently, India is not highly popular as an investment destination but it can secure profits almost at all industrial sectors, a term that is not met by countries that are preferred by foreign investors, such as China and South Korea (Bose 2012). If the characteristics of India, as a destination for FDI are reviewed, then the following assumptions could be made: a) India offers the benefit of an extended market, due to its high population, b) a high range of resources can be identified locally and c) public infrastructure is continuously improved; conducting business in India has become easier, compared to the past; d) the extended cultural diversity in India creates difficulties in identifying consumer preferences and e) bureaucracy is still high (Bose 2012, p.169). Part C - Political & Economic Analysis The political environment of Indian can be characterized as stable. In April and May 2014 general elections are held across the country; the prospects for a government that will be more friendly to foreign investments have benefited the country’s exchange market (Rao 2014). However, the economic environment of India is not stabilized, a problem related to most markets worldwide (Goyal 2014). The problem seems to be higher for emerging economies, like India, where exchange pressures have become quite strong (Goyal 2014). This trend can highly affect the economy of India which is, currently, in a state of recovery; in the period between July and September 2013 the economy of India achieved a growth of 4.8% (BBC News 2013, par.2), which has been higher from the performance ‘of the previous quarter’ (BBC News 2013, par.2). The pressures that the Indian economy has faced in the previous year have been the result of rather low foreign investment and decrease in the performance of key industries, such as ‘manufacturing and mining’ (BBC News 2013, par.4 & 8). Due to the above pressures, the inflation in India has reached high levels, a fact that led the country’s central bank to proceed to the introduction of limits in regard to borrowing (BBC News 2013). Concerns have been developed by economists worldwide in regard to the potentials of India to stabilize its economic growth. According to a report published in the Economist (2014) the key reason for the severe pressures against Indian economy is the lack of effective leadership; it is explained that no measures, at least no effective ones, have been introduced so far in India for supporting growth, a practice that has led to the reduction of the country’s rate of growth ‘to 5% from 8.5% during the last decade’ (The Economist 2014, par.6). Figure 5 – GDP changes in India and Guajarat (source: The Economist 2014) The limitation of the economic prospects of India can be made clear through the graph in Figure 5 above. In the particular graph the changes in the GDP of India, as compared to one of its states, Guajarat, in 10 years, i.e. from 2002 to 2012 are presented. The political and economic environments of India are reflected in the country’s last budget, which was published in February of 2014 (Luthra 2013). In that budget particular provisions are included for those included in India’s ‘less advantaged classes, such as the Scheduled Castes’ (Luthra 2013, par.4). For the specific part of the population the government has announced the increase of monetary support at a level of 12.5%, aiming to show the government’s concern over the challenges that local people have to face on a daily basis (Luthra 2013). In general, the specific initiative can be considered as an effort for improving the political climate in India in favour of the government, a target that is difficult to be achieved (Luthra 2013). Antao (2013) supported that Indian market is still a risky destination for new businesses, a problem related to the country’s high inflation and taxation. However, it is noted that the changes in the country’s political environment, as in progress, could benefit the business sector allowing the increase of foreign direct investment (FDI), a target that could be achieved though only if the existing framework for the taxation of foreign businesses in India is updated (Antao 2013). In February of 2014 a report of IMF was published in regard to the performance of Indian economy: emphasis is given to the measures taken by the Indian government for controlling ‘fiscal imbalances and for introducing a robust monetary policy’ (IMF 2014, par.2). Moreover, the efforts of the Indian government to promote major reforms in the structure and the rules of the economy have been effective: the Indian economy has become stronger towards market shocks (IMF 2014, par.2). Still, high inflation remains a key problem of the Indian market (IMF 2014, par.1). In January 2014 the Indian government introduced a series of measures for reducing its costs, for promoting the restructuring of its operations and the reform of existing laws and for making the Indian market more attractive to foreign investors (Presse 2014, par.4). The above measures have led to the improvement of the country’s political and economic environment, a fact that would highly enhance economic growth (Presse 2014). In other words, in India economy, as also in all countries, economy is closely related to politics; this means that the current stability of the country’s economic performance cannot be faced without promoting schemes for increasing transparency in regard to agreements developed in the public sector and without changing existing practices related to taxation and FDI. Part D - Entry Strategy Plan When having to decide on the entry strategy used by a company for entering a new market emphasis should be given to specific issues, such as the company’s availability of resources, especially of those resources that are necessary for supporting the expansion in the foreign market, and the conditions in the business environment, meaning both the internal and the external environment of the organization (Meyer et al. 2009, p.62). Three are the most common entry strategies used by firms for entering a foreign market: ‘a) Greenfield, b) Acquisition and c) Joint Venture (JV)’ (Meyer et al. 2009, p.5). Additional entry modes in the context of the internationalization of firms are also available, such as: ‘a) Export and b) Alliance’ (Johnson and Tellis 2008, p.2). Each firm that is interested in entering a foreign market chooses the entry mode which best suits to its resources and its environment, as explained above. Moreover, there are certain criteria that can indicate the potential success of a firm in a foreign market (Johnson and Tellis 2008). These criteria, entitled as ‘drivers of entry success’ (Johnson and Tellis 2008, p.2), include: a) the choice of the appropriate entry strategy, b) the identification of the right time for entering the foreign market, c) the differences of the economic climate between the country of origin and the country of destination, d) the differences of the cultural characteristics between the countries involved in the particular plan, e) the level of risk to which the foreign firm is exposed if entering the foreign market; this risk depends on the political/ economic and financial characteristics of the target market and f) the size of the firm that aims to enter a foreign market (Johnson and Tellis 2008). At the same time, Simonet (2012) notes that a key issue that should be taken into consideration when planning the internationalization strategy of a firm is the following: should the firm allow ‘asset specificity’ (Simonet 2012, p.15) in regard to its products? Or barriers should be set in regard to a firm’s cooperation with its alliances, without affecting, though, the ‘capability matching’ (Simonet 2012, p.15) potentials of the organization? In regard to the above the following facts should be explained: asset specificity refers to the level at which the product/ service of an organization ‘is copied by its alliance’ (Simonet 2012, p.16); this activity is not necessarily against the organizational interests. Instead, the manager could, under certain terms, allow the asset specificity depending on the reasons for which this activity is enhanced (Simonet 2012). For example, if copying the plan of his firm’s production process an employee can cause severe harm to his organization. However, if this plan is given to a supplier for copying it and for developing products of specific characteristics, then the legitimacy of this activity is verified. In any case, firms that aim to enter an emerging market should check the terms of cooperation that would be most beneficial for their interests; for example, a firm should check whether it could be benefited from the transfer of part of its technology know-how to another firm, located in the target market, or not (Bhaumik and Gelb 2003). It should be noted that before entering the Indian market Richemont should review the performance of foreign firms that are already established in the particular market; in this way, gaps and problems will be identified and measures can be taken for avoiding similar failures. For example, at the time that McDonald’s entered India, in 1996, five years had already passed from the firm’s application in the country’s relevant authorities; in this way, all phases of the relevant procedure had been fully completed when the firm finally entered India (Taneja et al. 2012). McDonald’s chose Joint Venture as its entry mode in the Indian market (Taneja et al. 2012). LG had tried in the beginning of 1990s to enter India but it chose a wrong entry mode: in the case of LG the JV had led to the change of the firm’s brand name in India, a fact that led to quite low profits; after establishing a subsidiary, in 1997, LG managed to secure its success in India (Taneja et al. 2012). Both the cases, of McDonalds and LG in India, verify the importance of careful choice of the strategy used for entering a foreign market. Mann and Byun (2011) have tried to identify the competitive forces that foreign retailers are likely to face if entering the Indian market. Their study led to the following finding: the Indian market can offer to foreign retailers important prospects for high profits, mostly due to the continuous expansion of shopping malls across the country and the increase of the average income of people (Mann and Buyn 2011, p.1). Still, the market’s challenges are also many; the high availability of substitute products is a major problem of the Indian market at the level that these products are available at quite low prices and are likely to attract many consumers (Mann and Buyn 2011, p.1). According to the above the entry strategy plan of Richemont in India should be based on JV, a scheme that minimizes entry risks, as explained above. The plan would include a series of phases such as: a) Review of local market trends in regard to the luxury goods sector, b) Check the performance of foreign firms that have entered the Indian market recently, c) Identifying alliances that could help to develop a proactive relationship with local authorities, d) Checking costs at all levels of the project and e) establishing a mechanism for controlling the entry strategy in all its phases. After the completion of the above phases, the firm should begin negotiations with major local retailers but also with the managers of shopping malls, in order to decide the terms of the JV, both of its initial phase and of its later phases. Part E - Conclusions and Recommendations The entry of Richemont in the Indian market could highly benefit the organization. However, the relevant benefits could take a bit of time to appear. Indeed, as noted above India can offer important prospects to foreign firms for future growth but only under the terms that measures are taken by foreign investors to control relevant risks. The review of the literature related to the entry of firms in a foreign market revealed that Joint Venture (JV) would be the most appropriate mode of entry for Richemont, at least for an initial period; then, the update/ transformation of the firm’s strategy in India could be decided depending on current performance and the conditions in the Indian market; reference is made in particular to the political and economic climate of Indian market as this climate can highly affect business growth, in the terms explained above. The review of the findings of studies developed in this field has revealed that entering a foreign market can be a risky activity having the power to threaten the survival of a firm no matter its size. In this context, it is suggested for Richemont to introduce certain practices for securing the success of its entry in India or, at least, for minimizing the risks of the particular plan: a) the investment made on the JV established in India should be kept at high levels; if severe failures appear then the losses from initiating this project would be low; b) highly experienced staff should be involved in the process; seminars could be arranged for ensuring the potentials of the staff to respond to the needs of all the processes involved in this structural change of the organization’s services; c) JV should be of a limited period of time; preferably no more than a year. In this way, in the case of failure the firm would not be prohibited from exiting the agreement before the end of a particular period of time; d) cultural differences between Richemont and its potential cooperator should be addressed so that the resistance to the firm’s plan to enter India is minimized. 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