Introduction
Globalization has opened up borders and rendered it possible for globally competitive companies such as Khmer Foods Group (KFG) to leverage the best that this new reality presents. However, mounting global operations necessitates managing difficult geopolitical, regulatory and cultural challenges, which, fortunately for KFG, should not be a challenge, given the company’s long experience and high standards. This report gives a detailed account of Brazil’s business environment, and assessment of its suitability for KFG’s purposes. The report includes an analysis of the economic, political, legal, cultural and ethical factors relevant to KFG’s possible operations in the country, before concluding with recommendations on whether the investment should go ahead, as well as the entry strategies.
Khmer Foods Group
Khmer Foods Group (KFG) is a leading rice processors and exporters based in Cambodia. Incorporated in 1994, KFG has grown to be among Cambodia’s largest companies (accounted for 15% of Cambodia’s milled rice exports in 2012), catering to an expanding clientele in the country as well as abroad. In 2009, KFG launched a state-of-art plant to achieve the highest possible quality standards and reached the production volume of 52,000 metric tonnes for export. The company has built and enjoys a strong brand loyalty and equity both in Cambodia and abroad. It supplies fragrant rice under Phka Romdoul (Phka Malis), Sen Kra Oub (SKO), and the long grain white rice, which is a non-fragrant rice variety. The Phka Romdoul is particularly popular across the world, having won the World’s Best Awards in 2013 and 2012. In addition, KFG is committed to ethical business conduct, to which end it has a defined code of ethics, employs clear and transparent rules, offers incentives to achieve high organizational commitment among its employees/partners and strongly encourages corporate social responsibility.
With the further global expansion, KFG hopes to put its quality and quantity advantages, excellent facilities and infrastructure, as well as its brand to a new territory, to facilitate further internal growth. With a contract volume of 30,000 metric tonnes per week, the company believes that it can easily penetrate the Brazilian market, having successfully achieved the same goal in Europe. In 2009, KFG was the first to export Cambodian Jasmine rice to the EU, where it has been successful. Despite this success, the company (along with other Cambodian exporters) are facing increasing competitive and regulatory challenges its existent markets. For instance, Thai prices dropped considerably over the past few years, while producers in the EU such as Italy have pushed for and largely received government/EU subsidies to allow them to counter Cambodia’s lower prices. With other markets elsewhere, KFG believes it can thrive, while at once consolidating greater competitive flexibility in its existent markets in Asia, Europe and North America. Brazil offers substantial market and growth potential, which would allow KFG to best leverage its production potential. Further, the company is looking to insulate itself from market-specific geopolitical risks, by diversifying away from Asian and European markets, to ensure greater predictability in its returns.
Brazil Market Analysis
With a population of 202,656,788 people and a GDP that is in excess of $3 trillion, Brazil is easily South America’s largest economy, and one of the world’s largest commodity exporters. The country has a rich history and heritage. It became independent in 1822 after centuries under the Portuguese rule, before embarking on relatively stable self-rule, which did however come under serious strain in 1930, following the populist Getulio Vargas came to power. Populist governance yielded to military rule that continued until 1985. Civilian rule has long been restored. The country has embarked on and succeeded in transforming its economy, including the introduction of industrialization, and the expansion of the services sector.
Brazil’s GDP stands at $3.073 trillion, which has been expanding by 2.5% in 2014, with the growth rate having declined from close to 8% annually in the year 2010. The GDP per capita was $11,208.08 in 2013. Agriculture only comprises a small proportion of the GDP (5.8%), while the services and industrial sectors account for 70% and 23.8% of the GDP, which implies that as the population and economy grows, the ability of the local agricultural sector to meet the demand would be strained. Even most importantly, Brazil’s 110.9 million-strong labour force, low unemployment rate (5.5%) and inflation (6.3%) mean that the country has the purchasing power to sustain the current high demand for imports (including KFG’s). The country’s labour productivity stands at $19,581 per capita in the year 2014.
Economic Analysis
Brazil has one of the world’s largest demands for rice. In 2014-15, the country consumed 7.85 million metric tonnes of rice. In 2013, the country imported in excess of 757,180 metric tonnes of rice to meet its demand, besides cutting its exports to meet then growing domestic demand. In 2015, it is expected that imports will reduce slightly, but as the population increases, growth in demand is likely to maintain an upward trend. Effectively, Brazil has enough demand capacity to absorb KFG’s additional demand, but the company faces stiff competition from the existent exporters. Currently, Mercosur nations comprise the largest rice suppliers to Brazil (in part because they have preferential access to the Brazilian market). Argentina, Paraguay and Uruguay supplied 41.8%, 22.2% and 35.6% of Brazil’s rice imports in 2014 (Birdsall, de la Torre, & Caicedo, 2010; USDA Global Agricultural Information Report, 2015).
Brazil’s rice production is expected to reduce in the near future, beginning with the total production area falling by 1% in 2015 as land disputes involving more than 0.3 million hectares (by indigenous tribes, environmentalists and rice farmers) in the Northern state of Para deepens. In the Rio Grande do Sul, production costs are increasing due to the increasing need for pesticides, promising to cut further down production and/or reduce the produce’s competitiveness due to contamination and higher prices. Further, the acreage for rice food crop is expected to reduce as more and more land is committed to farming crops meant for ethanol production, including a rice variety called the “giant rice”, which is meant for fuel production. As a consequence, rice prices in Brazil highly fluctuate but remain considerably high, but this could be affected by the depreciating value of the local currency, which has the consequence of making exports relatively more competitive than local rice produce (Lyons & Trevisani, 2015; Rugman & Collinson, 2012). As shown in the Figure 1 and Figure 2 below.
Figure 1: Average rice prices in Brazil
Other than the rice market, other commodity, labour and financial markets have a direct impact on the demand for imported, especially since rice is consumer good that responds directly to changes in incomes. To this end, Brazil’s prospects are promising in the long term but only average in the short term. While the company may draw on local partners and resellers to distribute its products, the excellent transport and communication infrastructure in Brazil should offer opportunities to ensure lower costs, longer shelf lives and better quality delivery to the consumers.
Figure 2: The economic performance has only been average
Political & Legal Analysis
Brazil has enjoyed political stability with itself and its neighbours. The country has a thriving democratic system of government, led by the federal president. A bicameral legislature is in charge of making laws, and elections for the Federal President, the Federal Senate and the Chamber of Deputies are held every five years. According to Lyons & Trevisani (2015), compared with its neighbours, Brazil is relatively more peaceful, more flexible whenever faced with crises, less troubled, untarnished by brutal dictatorships and has a fairly predictable way of achieving political change. The judiciary enjoys considerable independence from both the legislature and the executive, which in turn has inspired confidence among litigants. Indeed, the independence and impartiality of the judiciary is critical for KFG, not least because it ensures that the costs and efficiency of contract enforcement and dispute resolution with business partners. However, the devolved system of government, which gives state and municipal governments considerable discretion creates political chaos, endless bureaucracies and opportunities for corruption.
However, there a number of political risks. As perhaps bets evidenced during the 2014 FIFA World Cup, the country is often rocked by political demonstrations over government ineptitude, corruption and social inequality. Too frequent demonstrations increase the risks borne by businesses such as KFG. While the current administration insists on having adopted a firm stance against corruption, major scandals involving top government officials and powerful businesses in the country have rocked the country all too often. Influence peddling i.e. the illegal use of official positions to curry favours is rampant, and it undermines the integrity of government systems. In addition, cumbersome bureaucracies, which when coupled with the non-implementation of the Anti-Bribery Convention make the regulatory environment less predictable, burden the private sector.
On the regulatory front, Brazil is signatory to the World Trade Organization, and it is, therefore, committed to subscribing to the Sanitary & Phytosanitary Agreement as well as to Codex Alimentarius principle. Other notable international treaties that may affect KFG include the Common Market of the South (Mercosul) created with Paraguay, Argentina, Venezuela and Uruguay. Respective regulations applicable to food imports and other foodstuffs in the country, and many and varied, but given KFG’s prior experience in the international markets and high quality/safety standards, many of these should not be a problem. To begin with, KFG can be guaranteed of its trademarks, as Brazil has a robust intellectual and other property rights, besides an acceptably firm legal system that can be relied on to enforce such rights. On the other hand, importation procedures are outlined by the Ministry of Agriculture, Livestock, and Food Supply (MAPA), and unlike fruits, flowers and vegetables that attract considerable biohazard restrictions, dry foodstuffs such as rice face limited regulatory restrictions i.e. can be imported without prior certificação fitozoosanitária once the initial due diligence is completed.
Importers must undergo rigorous initial safety and quality standards verification process built into the importation procedures. Firstly, KFG must register its plant for inspection and approval by MAPA, followed by a detailed ingredient evaluation and grading of the products, labelling and finally, product registration, before an import license can be issued. Product shipping and handling is equally regulated. Imports are also subject to tariffs i.e. the Industrialized Product tax, Merchandize and Service Circulation tax and import duty. In this regard, KFG is at a disadvantage given the favourable tariff arrangement for exporters from Mercosur. However, the company’s state-of-art plant and supreme quality standards mean that it should be able to get easy approval and access to the Brazilian market. Other requirements include packaging approval under the National Health Surveillance Agency (ANVISA).
Culture and Ethics
Food is inherently driven by and comprises an important part of Brazil’s local and national culture. Rice is a staple food, and even though there are notable dietary changes among the middle classes, these are largely offset by the rapid population growth that characterizes Brazil. Main meals comprise rice and beans, meat, salad, bread, potatoes, fruit and other vegetables. According to, the three most eaten foods in Brazil include rice, coffee and beans. The daily rice intake among Brazilians is 0.4 pounds per capita, accompanied by 0.35 pounds of beans and 2220ml of coffee. Other popular foods include beef, pork, pig’s ears, tail and feet. Even most importantly for KFG’s prospects, is the fact that the expanding middle classes have a taste for higher quality, exotic rice varieties, which the company can provide.
Brazil shares multiple similar cultural aspects as KFG’s parent country (Cambodia) as well as other key markets that the company has thrived in, including the European Union. According to Hofstede’s cultural dimensions theory, the closeness of key dimensions that define cultures represents the ease with which the company’s business practices and culture will thrive in the new market. Effectively, Cambodia and Brazil have nearly similar power distance (respect for, and willingness of people to accept authority), as perhaps best embodied in the strong role of status not only in Cambodia but across numerous other Far Eastern countries such as Mongolia, Japan and China. Other cultural dimensions include clear role definition between men and women, preference for long-term gratification. However, Brazilian culture encourages greater risk aversion compared to Cambodian culture, higher individualism and indulgence.
Brazil is a multicultural, multi-ethnic nation, with a long and proud history. About 47.7% of the warm, outgoing, and free-spirited population are white, while 43.1% are mixed race (black and white) or mulatto, and a further 7.6% and 1.1% are black and come from several indigenous races respectively. The country’s colonial history bequeathed it with the Portuguese language, which is the official language and most spoken language in the country. Brazilians are deeply religious, being the country with the largest Roman Catholic population (64.6% of the population are Catholics). An estimated 22.2% are Protestants while the remaining population belongs to minority denominations, including some that are indigenous to Brazil. Important cultural values include religiosity, and respect for authority and the elderly.
With regard to ethics, businesses are expected to conduct businesses with the highest regard to ethics, but there are no clear-cut regulations/laws on what such conduct should be. According to Ardichvili, Jondle, Kowske, Cornachione, Li, & Thakadipuram (2011), Brazil has developed a system of informal ethical practices, which serve the same purpose as formal business contracts with the society. This fits in perfectly for KGF, not least because the company is equally committed to the highest possible standards of ethical conduct. Some large multi-national organizations fail in this role because they take advantage of the global supply chain to use exploitative products, just to create value for their customers. It is critical that the company ensures that its ethical code is adhered to throughout the supply chain e.g. by ensuring fair and equitable compensation for labour, non-engagement in corruption, avoidance of unethical labour practices such as use of child labour in the production and processing of the products.
Conclusions
While the country’s GDP growth, inflation, exchange rate and economic inequality have taken a turn for the worst since the year 2010, Brazil’s relatively good economic management and performance ensured that emerged from the global economic crisis unscathed. Important indicators have worsened, but still good enough for an investment into the market, especially since the country’s long-term prospects are particularly promising. Brazil has a large population, with relatively high incomes to provide the demand for KFG’s exports. While Brazil produces and exports a considerable amount of rice, it imports just as much as it exports. Its rice exports is likely to reduce as the acreage under rice reduces and the population expands rapidly, exacerbating the fact that agriculture only comprises a small proportion of the Brazilian economy. High per capita incomes, high employment rates, and an expanding middle class has resulted in a change in diets and a slight shift away from rice consumption among the high-income groups, but the rapid population growth has meant that there remains a considerable constituency of people to whom rice is still staple food. Even most promisingly for KFG is the fact that the expanding middle class means there is an increased number of people with a taste for exotic foods including imported rice (backed up by high purchasing power). High incomes mean increased indulgence, convenience, concern for health and quality, backed by strong spending power (Yip & Hult, 2012; Euromonitor International, 2015).
While there are stern requirements f or import licensing in Brazil, KFG boasts of great quality and success on similarly tough export markets including the EU, and thus it is unlikely to be unfavourably affected by the regulations on quality, import/shipping and packaging requirements, among others. Effectively, KFG should take on Brazil, and the sooner this is done, the better for the company. Exporting directly to retailers (supermarkets, gourmet and specialty stores) is possible, especially if the export volumes are small. However, local retailers are fully aware of their market power over both the suppliers and consumers, and thus KFG may struggle martialling meaningful synergies that would render the operation lucrative. The best entry strategy, given the language and other cultural as well as regulatory nuances that may impede KFG’s understanding of the market, it is important for the company to collaborate with local firms.
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