Executive Summary
The purpose of the paper was to assess Canadian market for the ability of CBT, the UK-based supermarket chain, to enter it. Environmental analysis was made taking into account political situation in the country, economic overview, legal aspect and socio-cultural perspective. It was found that CBT is going to have more opportunities than threats. Competitive analysis showed that supermarket industry in Canada is monopolistically competitive. The characteristics of such market were properly described. In general, there are three main CBT’s competitors and numerous small, therefore, the company should enter Canadian market with some competitive advantages. In order to enter Canadian market, CBT could make direct investments by conducting negotiations with some local chains or separate groceries. This method of entering international market has its advantages and disadvantages, which were briefly given. However, when the global company is entering new territory, the most important thing is to be the best local retailer. Finally, as for a regional player it became easier than ever to enter foreign market due to the development of e-commerce and the online economy, CBT is recommended to consider this option.
Introduction
Currently, many companies have already been presented in the international marketplace for several decades. The intensity of global competition is increasing. More and more, businesses operating in national markets are subject to “attack” on the part of global players. The best solution in these circumstances is the continuous improvement of company’s products sold in the domestic market and the expansion of geography of activity. In particular, the formation of company’s penetration strategy in the foreign market is a prerequisite for the survival and success (Hollensen, 2014).
Facing increasingly competitive domestic market, a UK based supermarket group – CBT, is considering expand into international markets. CBT is a family run business that prides itself in sourcing most of its products from local areas and looking after its employees. It was established in 1983 by the Townsend family in Leeds, and now has 95 branches in the UK. All of their UK branches donate 10% of their profits to local schools every year.
Such researchers as Philip Kotler, A. M. Godin, S. Hollensen and others dedicated their work to problems of selection and analysis of methods of penetration and behavior of companies in foreign markets. The relevance of this topic is that in globalized economy, conditions for easy and quick enter of organizations into foreign markets are created and international exchange of goods is intensified. Any market in line with the global trend is becoming more open for both the flow of goods from the outside and outbound flow of goods (Kotler and Armstrong, 2012). Enhancing the transparency of national boundaries, the active penetration of foreign companies on the domestic markets of other countries, the alignment of the business environment in the national markets for domestic and foreign companies make the complex of issues on the development of foreign markets relevant for companies. Decisions made by organizations in the field of foreign trade activities are of a strategic and operational nature. The most important strategic decision forming the subsequent actions of the organizations is a decision to participate in one way or another form in the international division of labor, to choose targeted foreign markets and ways of their development, about strategies of companies’ functioning in these markets (Grewal, 2014).
The purpose of the paper is to analyze CBT’s potential expansion of entering Canadian market, specifically examining the potential challenges and difficulties it may experience, when entering this new international market. First of all, in a country, where it is planned to start the implementation of the activities, it is necessary to study the political situation, the level of state regulation of the market, economic factors, socio-cultural factors, because the latter play a significant role in the acceptance or rejection of the goods by consumers. The next step is to make proper competitive analysis. Then, a decision is made on the feasibility of entering the foreign market. It is based on the results of research and company’s goals. Having made the decision to engage in a market in a particular country, the company decides how it will operate (Webster, 2014).
Environmental Analysis
The main reasons for entering foreign market may include the relative saturation of the domestic market and the emergence of the business opportunities abroad; the availability of unused production capacity; the favorable commercial situation on the foreign markets; the possibility of liquidation of the seasonality in demand for goods; the ability to extend the life cycle of the product; and the change in purchasing power and the exchange rate of the national currency (Hollensen, 2014). Making a decision about entering foreign markets, the company’s management must consciously go for the expansion of the functions carried out by it and conduct a serious preparatory analytical work on the feasibility and potential effectiveness of economic activities in foreign markets. A special role in this regard should be given to economic studies, as maintaining successful, efficient operations, especially in a foreign territory, without the proper development of sound economic policies in the present conditions is impossible (Kotler and Armstrong, 2012).
Each country has its own specifics. The willingness of the country to the perception of those or other goods and services and its attractiveness as a market for foreign firms depend on its current economic, political, legal and cultural environment. The attractiveness of the country as an export market is determined by the structure of the economy. The economic structure of the country determines its needs for goods and services, income and employment levels, etc. (Krugman, Obstfeld and Melitz, 2014).
Economic Overview
Canada is developed industrial-agrarian country with great economic potential. At the same time, Canada’s economy has some features that are usually characterized by underdeveloped and dependent countries. This primarily refers to its distinct specialization in the production and export of raw materials, in particular mineral, agricultural, forestry and energy. Unlike other countries (developed) in Canada, the primary sector accounts for over 25% of the material cost of production. Another important feature that is unusual for industrialized countries is the significant role of foreign investment in the economy. The US influence is particularly large in Canada (Central Intelligence Agency, 2015).
According to the structure of its economy, Canada is not very different from other industrialized countries. Industrialized countries are the main exporters of manufactured goods. They trade in industrial goods between them, as well as take out these products in the country with other types of business structures in exchange for raw materials and semi-finished products. Large scale and diversity of productive activities make industrialized countries with their impressive middle class rich markets for all goods (Krugman, Obstfeld and Melitz, 2014). So, more than half of the gross industrial product of Canada falls on the scope of services, and the value of this indicator is second only to the United States (Central Intelligence Agency, 2015).
The country occupies 16th position in terms of GDP at PPP (Central Intelligence Agency, 2015). Industrial production grows at an average of 5-6% per year. Sectors of the “new economy”, namely production of computers and office equipment, communications equipment, aircraft components and pharmaceuticals are the most rapidly developed segments. Inflation within the last period of time is at the traditionally low level for Canada (1.6% in December 2015 compared to three years earlier of about 10%). Unlike most developed countries, Canada relies on its own powerful resource base, which far exceeds the needs of its own economy and is a major source of exports. The per capita production of mineral raw materials in Canada is much higher than in other developed countries, including 45% higher than in the US (Trading economics, 2016).
Canadian service sector experiences rapid growth. Especially, the following non-material production sectors as wholesale trade, business services for the business sector, hotel industry, catering and telecommunications successfully develop. Renewal of the service sector is associated with the refusal of the state from direct involvement in the production of goods and services that gave additional incentives for the private service industry (Central Intelligence Agency, 2015).
The unemployment rate was 7.1% in December of previous year, whereas three years ago unemployment was approximately 15-16%. Concerning trade balance, Canada has trade deficit of CAD 584.90 Mio in December 2015. Foreign trade comprises a great portion of the Canadian economy. Canada imports typically technology and tackle, motor vehicles and spare parts, electronics, substances, energy and durable consumer products. Country’s major imports partners include the United States, European Union, China and Mexico (Trading economics, 2016). It is worth mentioning about Canada’s level of the ease of doing business. The country ranks 14th position. For example, by the factor of trading across borders, Canada occupies 44th position, while the United Kingdom takes six positions higher. At the same time, Canada ranks third by starting business and ninth by paying taxes (The International Bank for Reconstruction and Development / The World Bank, 2016).
Political and Legal Condition
Countries are very different from each other by their political and legal environment. When deciding on the establishment of legal relations with one or another party, at least four factors, namely related to purchases from abroad, political stability, international organizations and the state machine, should be considered (David, 2011).
The role of government is very high in the Canadian economy. The state owns 90% of the land area and 70% of the country’s forests. The state controls nearly 70% of railways, 10% of coal and 16% of the capacity of ferrous metallurgy. State powers produce almost 70% of all electricity. The state owns a large part of the telephone network, water and gas companies, port facilities and warehouses, funding and building a nuclear power plant. However, the state supports the development of the services sector, providing the right conditions for business. In general, Canada has a very sympathetic attitude to the procurement (Central Intelligence Agency, 2015).
Regarding political stability, Canada’s index of political stability fluctuated within almost 20 years, being the lowest in 2005, but remaining quite stable (The Global Economy, 2014). Canadian society is fundamentally safe and calm if considering, for example, terrorism index (2.3) (Trading economics, 2016).
Until recently, Canada, in addition to its main NAFTA treaty, had agreements on mutual liberalization of trade investment modes with just a few small countries not belonging to one of the leading market economies. Therefore, Ottawa is considered a great achievement of the signing an agreement in principle to conclude a comprehensive trade and investment agreement between Canada and the European Union (CETA) in October 2013. This was preceded by five years of negotiations, and the coordination of positions on the most contentious issues continued for almost a year. It was only in August 2014, the parties announced the completion of the final text of the CETA agreement (European Commission, 2016).
The country has a common law system, accepts compulsory ICJ jurisdiction with reservations and ICCt jurisdiction. Its membership in international organizations is very extensive, from being the founding member as in case of the World Bank (playing vital role in affecting its growth priorities) and NAFTA, to being even non-regional member and dialogue partner as in case of ADB and ASEAN correspondingly (The World Bank, 2013; Central Intelligence Agency, 2015).
Socio-Cultural Environment
Socio-cultural infrastructure is a robust set of real elements that provide the conditions for the rational organization of all major human activities – labor, socio-political, cultural and family and household (Hollensen, 2014).
Canadian population makes up 0.5% of the world population with 35 million inhabitants (Trading economics, 2016; Central Intelligence Agency, 2015). According to the standard of living, Canada is the fifteenth largest in the world. Canada surpasses the United States in life expectancy, and Japan – by level of education, which was the reason for the proclamation of Canada by the UN the best country in the world for human habitation (Numbeo, 2016).
Canadian multiculturalism is a policy of the Canadian government, aimed at preserving and developing the culture of each nationality in the society. Immigration plays an important role in the development of the country. There over 30% of Canadians, almost 20% of English people and over 15% of French people, while about 35% include Scottish, Irish, German, Italian, Chinese, etc. (Central Intelligence Agency, 2015).
Also, it is necessary to identify customers’ top ten preferences, when choosing the supermarket in Canada.
Figure 1. Reasons for Selecting Grocery Store in Canada (STATISTA, 2015)
Thus, business atmosphere in Canada is European. Nevertheless, the French-speaking Quebec – the east – has mostly French culture based on the recognition of its dignity; the south of the country, particularly in Ontario, is dominated by an open American type of culture, and there is the most international in the west of Canada – in British Columbia. By their nature, Canadians are friendly and helpful, but more restrained than their neighbors – Americans. Nevertheless, Canada is a very open society, so friendly behavior is a familiar norm, when meeting business partners, and public tolerance is the norm. British heritage of Canadians made them quite courteous people. Leadership style in Canadian companies is very different, namely from the focused on the head to the democratic, with the group decision-making. Traditionally, Canadians are proud of the company, where they work, and leadership is brilliantly able to motivate its staff. In business communication, Canadians prefer being restraint, so at the negotiations it is recommended to behave strictly business-like, express thoughts briefly, but exhaustively (Kwintessential, n.d.).
Competitive Analysis
Understanding competitors and their activity may provide several advantages. First, an understanding of current strengths and weaknesses of competitors can help to identify opportunities and risks, which will serve as a basis for action. Second, understanding of future strategies of competitors can give the possibility to predict the future threat or opportunity. Thirdly, the decision on strategic alternatives may depend largely on the ability to correctly predict the reaction of the main competitors. Finally, competitive analysis may lead to the formulation of some strategic issues that are in the future should be researched.
CBT will operate on the market of monopolistic competition. Fairly large number of small firms, which create similar, but not identical products, operates in the market. From this it follows that a private company has only a small share of the market of the product; market power is limited to a single firm; there is no possibility of collusion of firms as sufficiently large number of firms competes on the market; and almost every firm is independent in its decisions and does not take into account the reaction of other competing firms of changing prices of their goods. Implemented in the industry product is differentiable by nature, namely by the quality of different products; a variety of services and conditions associated with the sale of the product (quality of service); differences in the distribution and availability of products; sales promotions (advertising, trademarks and signs) and packaging often create imaginary differences, which are imposed on consumers. The market is characterized by freedom of entry and exit. The possibilities of price competition in a monopolistic competition are limited, and the main pool here belongs to non-price competition. Non-price competition is based on the use of the advantages of individual firms in the technical level, design, reliability and use of the products they produce (Grewal, 2014).
In general, Canadian supermarket industry has top three representatives, namely Loblaw Companies (the biggest Canadian food retailer that includes one thousand corporate and franchise superstores that functions under over 20 local and market sector banners), Jim Pattison Group (Canadian second biggest privately held organization and, which recently has occupied 62nd position among Canada’s biggest companies) and Sobeys (the 2nd biggest Canadian food retailer, exceeding 1,500 superstores functioning under numerous different banners). These supermarket chains are very popular in Canada. Nevertheless, among Canadian representatives, there is Wal-Mart Canada, which is the leader in current grocery vendors, because of its supremacy over hypermarkets in the world, where it had a 69% market share in 2015. Wal-Mart Canada continues changing its mass merchandiser arrangements into hypermarkets, including grocery shopping into its outlets, due to the fact that the hypermarkets arrangement has confirmed prosperous in the Canadian market. The company’s aggressive development makes it being the one particular crucial driver for the general increase of current grocery vendors. In the meantime, Wal-Mart Canada has not changed its fundamental principle of providing with low prices, as well as following its price corresponding policy. Together companies occupy over 60% of the market share. Their market share has increased by 10% within the last five years (STATISTA, 2015).
Conclusions and Recommendations
As regards threats, the role of government is very high, even despite its supportive measures. Also, the population of Canada is very small compared to its territory. Additionally, multiculturalism can be a threat as CBT should carefully evaluate its products and marketing campaign as there can be situations, when what for some cultures is appropriate, for others can be inappropriate, as well as CBT should consider defined customers’ top ten preferences, when selecting supermarket.
However, it can be said that CBT will have more opportunities than threats entering Canadian market.
In general, there are three main CBT’s competitors and numerous small, therefore, the company should enter Canadian market with some competitive advantages.
In order to enter Canadian market, CBT could make direct investments by conducting negotiations with some local chains or separate groceries. The investment of capital in the creation of own assembly or manufacturing plants overseas is considered to be the most complete form of involvement in the activities of the foreign market. Foreign direct investments give the highest level of control that the organization can have when entering a foreign market. The company can fully determine the marketing and sales policy. The company has direct contact with its customers in the foreign market, and therefore can better meet their needs, increasing its competitiveness. There are also disadvantages of direct investment like risk associated with foreign currency devaluation, political instability, the decline in the market and the possible nationalization of property. Due to the large financial investment in the foreign market, the flexibility of company’s policy declines in respect of this market (Webster, 2014).
It is worth to say that not everyone entering the international market will be successful. However, when the global company is entering new territory, the most important thing is to be the best local retailer. The network should not rely on its international presence, but depend on the fluctuations of the global economy.
Finally, today, international expansion for a regional player became easier than ever, due to the development of e-commerce and the online economy. The categories of non-food, such as textiles, can first be sold online, and then later a number of stores in major cities can be opened. Therefore, for CBT it is recommended to consider this option.
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