Foreign Market Entry and Diversification

Assignment #3 Foreign Market Entry and Diversification Daniel S. Carrera Dr. Kimberly Anthony Strategic Management – BUS 599 Strayer University – Newport News 4 August 2011 Abstract This paper will identify and discuss the trends in global beer markets. It will discuss how Modelo’s International expansion was made possible through strategic partnerships with experienced distributors in local markets. The paper will focus on how Modelo should enter in the foreign market and what is the best strategy. We will discuss various challenges Modelo will face from his competitors and whether he should diversify his business to promote growth.

During the past five years, on a pure alcohol-equivalent basis, beer has increased its share of total alcohol consumption by more than 200 basis points (bps) to 41. 1% (Kaplan, 2003). In 2008 the trend slowed somewhat and beer’s year-on-year share of total alcohol consumption remained flat. In emerging markets, beer has generally shown higher growth than other alcohol categories as consumers gradually switch from local, generally high-alcohol, subsistence products towards attractively packaged, higher-quality, commercially produced beer.

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In South and Central America, beer’s share of total alcohol consumption is now 51. 5% with increases in Colombia partly offset by recent declines in Mexico and Brazil (Karrenbrock, 1990). In Eastern Europe, beer has been gaining share from spirits for some time and now accounts for 48. 0% of alcohol consumption. The past five years have also seen consistent gains in Africa and Asia where beer’s share of commercially produced alcohol now stands at 49. 0% and 32. 8% respectively – thanks, partly, to a greater emphasis on quality and accessibility (Karrenbrock, 1990).

In more mature markets, a wider variety of alcohol products compete in a sophisticated marketing and retail environment. In North America, beer has been losing share as spirits have benefited from more extensive marketing and greater availability in certain states that said, beer’s share stabilized at 56. 3% during 2008 as the economy slowed and brewers introduced innovative products, new packs and marketing initiatives (Berndt, 1996). In Western Europe, where beer now claims 36. 8%, the wine category has increased its share as lower-cost offerings have become more widely available.

Over the past five years, the beer category has maintained a Compound Annual Growth Rate (CAGR) of 4. 8% globally (Narver, 1990). During this period, Eastern Europe saw a high single-digit CAGR as personal disposable incomes increased (Czinkota, 1997). In Western Europe, the prevalence of competitive categories and a shift in beer consumption away from on-premise outlets meant that CAGR was negative. Recently, consumer spending in Eastern Europe has also slowed – an indication, along with already high per capita consumption, that the beer category is maturing.

Central and South Africa grew at a CAGR of 6. 3% over the period while North America had modest growth at a 0. 5% CAGR. Africa shows strong levels of growth with a five-year CAGR of 6. 4%. Asia’s growth in beer over the past five years remains the highest of any region, averaging 8. 4%. China in particular has seen growth in beer averaging 10. 7% per year, fuelled by the growing economy and the increasing availability of beer. Looking forward, there is a significant opportunity for the beer category to grow at the expense of non-commercial forms of alcohol, particularly in Latin America, Africa and Asia.

In Africa, per capita levels are still relatively low but accelerating, and local players are expanding their portfolios in all segments. Asia, in general, is seeing rising incomes and higher levels of beer consumption. In parts of Latin America, efforts by brewers to transform the beer category should boost per capita consumption. Over the past five years, the beer industry has seen a trend towards consumers trading up to more expensive beers. As a result, premium beer has gained more than 40 bps and now constitutes 17. 9% of total beer sales.

For mainstream beer consumers, particularly in emerging markets, the most common trade-up proposition is to attractive, local, premium brands. In markets such as North America and Western Europe, premium beer’s share of total sales is already well above the global average. On the other hand, premium’s share of 10. 1% in Central and South Africa and 3. 0% in Africa shows the significant opportunity that still exists for premium beer sales in these regions. There is sizeable potential in Colombia and Brazil where premium beers respectively claim 3. 7% and 5. % of total sales (Karrenbrock, 1990). The trend towards premium beer consumption has slowed somewhat in the recent economic downturn; however, down-trading is limited and there are notable instances of consumers continuing to trade up, both into beer and, within the category, into premium products. Over the past decade, the beer industry has seen significant consolidation and this trend continued during 2008. On a pro forma basis, beer sales by the top 10 players now total approximately 65% of total global sales compared to less than 40% at the start of the century.

In recent major developments, the division of Scottish and Newcastle’s business between Carlsberg and Heineken was completed during the first half of 2008 while InBev acquired Anheuser-Busch in November 2008. The International Vice-presidency coordinates efforts to increase global sales and consolidate the company? s presence worldwide. Through offices located around the world we cover several markets in order to rapidly respond to importers, distributors and clients, as well as to position the Modelo products strategically. The international expansion of Modelo? products began in the south and southwest of the United States, where Mexican beer was widely accepted. Popularized with the slogan “Change your whole lattitude”, in the eighties Corona Extra became the imported beer with the largest growth in the history of the United States. Through the middle of the decade the business world noted the “Corona Phenomenon”. Later Corona Light started production and exportation exclusively for the US market. In 1985, Grupo Modelo started exploring other markets, first Canada and Japan, and later on Australia and New Zealand.

In 1989, they entered Europe when an office in Brussels was opened, later Russia, Africa and Latin America. Today, the Modelo brands are present in 159 countries. Corona Extra is currently the number one imported premium beer in the US, Modelo Especial is the third, Corona Light the sixth, Pacifico the fifteenth and Negra Modelo the nineteenth. In early 2006, Grupo Modelo unveiled the first Corona Extra and Corona Light billboard in Times Square in New York City, the world-known plaza where people from all over the world pass by.

It is the first time in the history that a Latin American brand presents such a prominent billboard in Times Square. That same year, a joint venture was formed with Constellation Brands, an international leader in the wine and liquor industry, which distributes Modelo’s beers in the western part of the United States through its subsidiary, Barton Beers. This new alliance, based in Chicago, is called Crown Imports LLC and began operations on January 2, 2007. It was developed in order for Grupo Modelo has only one importer for the entire United States.

In the same way, an agreement was signed to import and distribute the Chinese beer Tsingtao and the Danish beer Carlsberg. Marketing strategy is recognized to play a central role in an enterprise as it creates value for a firm’s chosen customers. Therefore, marketing strategy is designed to serve a firm in meeting consumer preferences and satisfying consumer needs and wants through a bundle of specific offerings (Bradley, 2002). Thus, a company has to define itself by the consumer benefit provided and sustain the process of creating and capturing value over time.

While authors argue about the position of marketing strategy in an organization, it can be suggested that marketing strategy bridges the gap between customer preferences, needs and perceptions and the value that companies deliver to consumers thus placing the customer in the foreground, in order to facilitate the marketer’s efforts to satisfy the consumer’s own needs and wants (Svensson, 2001). Hence, the marketing strategy can be defined as the issues that guide decisions impacting either directly or indirectly the market scope and the competitive advantage of a company.

The market scope is characterized by the segments of consumers, customer needs, products produced and the marketing mix employed by a firm. Those are underpinned by a company’s competitive advantage based on the assets, skills and resources a firm possesses and the positional advantages enabling the firm to achieve a superior performance. International marketing strategy is crucial to company success because optimizing the interface between consumer preferences and marketing resources and capabilities in international markets can increase revenue and enlarge market share (Yip 2003).

The strategic development of a firm in international markets is based on the recognition of existing consumer needs in markets other than the home one, and the skills and capabilities of the firm to deliver sustained value to the consumers in such markets. This is done through transferring products and services, packages of tangible and intangible assets or resources across national borders (Bradley 2002). Thus, consumer needs and wants, products produced and the skills and resources of a company to internationalize existing or modified offerings lie in the core of the international marketing strategy.

Companies internationalize proactively or reactively responding to internal and external pressures. In saturated markets, such as the beer brewing industry, the most important pressures originate in the home country (Karrenbrock, 1990). In addition, firms may exploit the opportunities of introducing or acquiring new products, spreading risk across country markets and segments, lowering production costs lured by large and fast growing foreign markets, growth aspirations of the firm and industry consolidation. Companies diversify for a host of reasons. In some cases, it’s a survival strategy.

For instance, if your company makes the bulk of its sales at a particular time of year, it makes sense to consider diversification (Day, 1988). By extending your portfolio of products or services you can ensure a regular revenue stream from January through to December. In other words, the canny ice cream seller will turn purveyor of hot soup come winter. However, there are plenty of other good reasons for diversification, not least by extending your range of goods or services you can either sell more products to your existing customers or reach out to new markets. This can supercharge your growth prospects.

And perhaps the biggest reason for doing it is to extend a brand reputation into other markets, with the knowledge that one ‘winner’ could be the drop of snow that starts the avalanche, making your business bigger than you ever imagined. NAFTA has fostered a positive environment for agro-industrial and agricultural producers in North America. Market access has encouraged producers to become more competitive and efficient. Under NAFTA, all quantitative restrictions and tariffs on covered agricultural trade between Mexico and its trading partners were eliminated after the scheduled 15 year phase-out.

Today, Mexico enjoys free access to and better prices for agricultural crops and agro-industrial machinery from the United States and Canada—a combination that has made Mexico’s agricultural industry more competitive. Modelo has fully taken advantage of the opportunities afforded by NAFTA, a measure that has contributed to the company becoming a trusted and leading producer of Mexican premium beers around the world. Since 1925, Modelo has been earning a strong reputation as a quality beer producer in Mexico, and now has become a commanding force in the highly competitive global alcohol beverage market.

In the United States, Modelo’s Corona ranks first among imported beers. As a result of NAFTA, the Mexican beer producer is able to import barley duty-free from the U. S. and Canada, meeting the high-quality product standards that serve as a complement to our supply of barley, which is predominantly sourced domestically. In fact, because of growing beer exports, domestic barley production has also increased significantly since NAFTA was enacted (Marinov, 2001). Modelo has also invested in a state-of-the-art malt plant in Idaho.

This facility helps supply the company’s needs for malted barley, benefiting regional growers with long-term supply contracts to help meet the yearly demand for 6. 5 million bushels of barley (Marinov, 1999). The NAFTA partnership is strengthening the supply chain to and from Modelo’s seven brewing plants in Mexico, which have a total annual installed capacity of 60 million hectoliters, and is pushing growers and producers to meet the needs of an increasingly sophisticated world beer market. Modelo’s expansion plans across North America include joint business opportunities with other industry leaders.

Besides its partnership with Anheuser-Busch, which has created a mutually beneficial gateway to access markets in both the United States and Mexico, in 2007 Modelo entered into a joint venture with Constellation Brands, one of the world’s largest international wine and liquor companies, to handle imports into the United States (Kay, 1993). Likewise, Modelo signed an agreement with Canadian brewery Molson to improve distribution in that country, making Modelo’s beers more easily available in all Canadian provinces and territories. Likewise, Modelo imports the Anheuser-Busch brands as well as Carlsberg beer into Mexico.

Modelo illustrates how further regional integration empowers companies to produce better foods and to position them as stronger competitors at the world scale. Currently, Modelo’s beers are exported to 154 countries; it is the seventh-largest beer producer in the world and is widely perceived as a global leader. In conclusion, this paper identified and discussed the trends in global beer markets. It discussed how Modelo’s International expansion was made possible through strategic partnerships with experienced distributors in local markets. The paper also focused on how Modelo should enter in the foreign market and what is the best strategy.

Lastly, we discussed various challenges Modelo faced from his competitors and whether he should diversify his business to promote growth. References Berndt, W. (1996) ‘A Clean State: Lessons about Branding from the World’ Newest Markets’, Vital Speeches of the Day, vol. 63, no. 5, pp. 139-142. Bradley, F. (2002) International Marketing Strategy, Fourth Edition, Financial Times, Prentice Hall. Czinkota, M. , H. Gaisbauer and R. Springer (1997) ‘A Perspective on Marketing in Central and Eastern Europe’, The International Executive, vol. 39, no. 6, pp. 831- 848. Day, G. and R.

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