There are many reasons businesses look to international expansion: greater profits, lower costs, the acquisition of new skills and technologies and the diversification of cost and profit bases amongst them. Before undertaking an expansion strategy, gaining an understanding of the company’s readiness to expand is crucial. What are the motivations? Are the processes to cope with expansion in place? What is the end goal? Once these questions are answered, research is needed to create a comprehensive market entry strategy.
Market selection: First and foremost
Market selection is the first and most important step to successfully launch a product or service overseas. This may seem obvious, but too many companies fail to do their due diligence regarding pre-market entry and then pay the price in poor sales and unforeseen complications and costs.
Beyond obvious research on the market – size, growth, competitor analysis, new product developments, it’s important not to underestimate demographic, business environment, economic and consumer-related factors that can impact market potential. Seemingly similar countries can present stark differences in these indicators which can lead to sharply divergent market prospects.
A systematic and logical approach to analysing the characteristics which inform market selection is a good starting point. Euromonitor International’s four-pillar model for market selection was designed with emerging markets in mind but is equally valid for developed economies.
Factors Affecting Market Selection
Market Entry: Control vs. Investment
Choosing the right market boils down to issues over control, resources, appetite for risk and familiarity with the market. Other factors include legal restrictions, or the availability of distributors and partners. Exporting and licensing involve the least investment, but also offer the least control of the business. Joint venture and 100% ownership are more intensive managerially in terms of both time and money but offer more control. It usually makes sense to employ different methods for different markets. One-size will not fit all. In addition, the nature of the product is also key – one requiring a significant after-sales service, or a substantial amount of interaction with the consumer, might not be suitable for anything other than direct ownership for example. Much depends on the market potential; is the potential prize worth the heavy investment?
Five Key Market Entry Methods
Exports include direct selling to end consumers, and also indirect exports, where goods are sold through an intermediary such as an agent or distributor. The latter allows the company to take advantage of local knowledge, whilst the former enables the company to retain a close relationship with the consumer. E-commerce is an important form of direct exporting. Disadvantages include trade barriers and tariffs, transport costs and vulnerability to exchange rate fluctuations. On the whole, exporting offers the least risk but is also the least financially rewarding method of market entry.
Whereby the company allows a second-party company in another country to use its intellectual property in return for royalties. This is normally done by granting a second-party the right to use the company’s name and manufacture or sell its products. Franchising is one form of licensing. It allows a company a new revenue stream and a foothold in a market with little time or money invested. But without tight control over the licensee, it does leave the company exposed to risk of brand image and potentially creating a future competitor.
Case study: Starbucks Coffee Company and AmRest Holdings SE
Licensed outlets make up the majority of Starbucks outlets in overseas markets. In the 2015 financial year, Starbucks opened 1,354 licensed and 731 company-owned outlets. AmRest Holdings SE holds the license to operate Starbucks in the Czech Republic, Hungary, Poland, Romania, Bulgaria and Slovakia. In 2016, it purchased the license to run the 144 Starbucks-owned stores in Germany. Starbucks believes this will enable them to expand more rapidly in the country. AmRest Holdings SE has a huge amount of expertise in the region and in the restaurant industry. It is the largest independent chain restaurant operator in Central and Eastern Europe, managing other global brands including KFC, Pizza Hut and Burger King.
Source: Global Company Profile, Euromonitor International
3. Joint Venture
Creating a third company with another partner is often the preferred market entry method, especially in emerging markets. A joint venture means that the company can take advantage of the partner’s infrastructure, local knowledge and reputation. It allows for closer control of the business compared to licensing and can allow for rapid expansion. One challenge is to ensure that both companies’ strategic goals are in alignment. A joint venture enables the risks and costs – as well as the rewards – of the business to be shared. It can be the only method of entry in some markets.
Case study: Danone and China Mengniu Dairy
In 2013, Danone entered into a joint venture with China Mengniu Dairy in order to target the country’s expanding yoghurt market. The deal helps Danone to overcome distribution challenges, cater for local tastes in terms of flavour and consistency and overcome strong local competition; all of which have been major obstacles for foreign brands in China. This deal follows a spectacularly unsuccessful joint venture with Wahaha in 2009 and a false start with Mengniu in 2007. Its tenacity illustrates the value Danone places on joint ventures in a country where dairy consumption is not embedded in the culture. China Mengniu Dairy had 25.6% share of retail value sales of yoghurt in China in 2016 with the overall yoghurt market growing by 16.3% in volume terms.
Real Growth in Retail Sales of Yoghurt in China: 2010-2016
4. Merger & Acquisition
Mergers and Acquisitions allows the same advantages as a joint venture but offers more control over the market. It provides instant access to the target company’s networks with no fear of conflict of interests or misaligned strategic objectives, and it can offer a speedy route to market. However, it can be costly and leaves the business open to more risk than a joint venture.
Case Study: The Coca-Cola Company and AdeS
In 2016, Coca-Cola acquired AdeS, the soy-based fruit beverages business of Unilever Group in Latin America. This enabled Coca-Cola to instantly gain a 54.4% market share in value sales of soy drinks in the region and diversify away from carbonates, which accounted for an estimated 84% of Coca-Cola’s retail value sales in Latin America in 2015.
Coca-Cola Retail Value Sales by Top Categories and by Top Latin American Markets: 2015
5. Greenfield investment
Setting up a wholly-owned local subsidiary provides the parent company with complete control over sales. It requires a significant amount of investment – in both time and money – and is a riskier proposition. Greenfield investment is a long game with many challenges including recruitment, meeting regulations, understanding the nuances of the market and gaining local knowledge. However, it is also a method which provides for complete control of the brand and the highest potential returns.
Often business don’t just choose and follow one particular method, but employ an incremental approach, deciding on a starting point and increasing the business’ involvement in the market gradually over time.
Strategy: Questions to Answer
For a successful market entry strategy, there is a whole range of questions to be answered around the product, the marketing, the location and timing. These questions include:
Does the product need to be localised? In other words, must it be changed to meet local tastes and conditions? Are entirely new products needed? Or is it simply a case of selling the exact same product in new markets?
How much awareness is there of the product, the brand and even the category?
Do consumers need to be educated on how to use it?
Where will the gateway into the country be? Do major cities offer the best starting point? Or would one region work best? Or is a nationwide strategy more workable? Should there be a test phase in a few locations? Or a blanket entry?
First-mover advantage allows the company to set the rules of the market and build brand loyalty. Yet it can be a high cost, high-risk strategy. Entering the market later can allow the company to imitate and improve on incumbents, gain a better understanding of the market and find a niche.
Knowledge is crucial for success
Market entry requires a thorough analysis of the market, the goals of the company and its attitude to risk. Any strategy has to be clear and well-thought out, with partners chosen wisely. Once in the market, this research needs to be continuously renewed. Realities on the ground change quickly and for an international business to stay ahead of the local and global competition, knowledge is power.
Euromonitor International provides insights and analysis on more than 80 countries and 27 industries globally. We provide the strategic insights needed to enter a developed or emerging market. To learn more about how we can help you grow, contact us.