Study of Economic Risks and International Market Assessment taking Dabur as an Example

Submitted by: -Group 12 Section BMakarand A. TakalePranit UpadhyayRenuga A.Santosh GuptaVipul Bali PGP02.062

1 CONTENTS

2 EXECUTIVE SUMMARY......................................................................................2

2.1 Background and Key Concepts...............................................................................2

2.2 Summary of the recommendations and conclusions.............................................3

3 INTRODUCTION.................................................................................................3

3.1 Problem Definition.................................................................................................3

3.2 Purpose..................................................................................................................4

4 METHODOLOGY................................................................................................4

5 FMCG SECTOR AND INDUSTRY ANALYSIS..........................................................4

6 ABOUT DABUR INDIA LIMITED..........................................................................5

7 RESEARCH AREAS AND PRODUCTS AVAILABLE..................................................6

7.1 Key Research areas for Dabur include:-.................................................................6

7.2 Products available:-................................................................................................6

7.3 Consumer Involvement & Ayurveda......................................................................6

8 SWOT ANALYSIS FOR DABUR............................................................................7

9 FINDINGS..........................................................................................................8

10 INTERNATIONAL MARKET POTENTIAL ASSESSMENT........................................16

10.1 Macro-environmental assessment....................................................................17

10.2 Micro-environmental assessment.....................................................................17

10.3 Market entry mode............................................................................................19

11 CONCLUSIONS AND RECOMMENDATIONS.......................................................20

11.1 Factors affecting International Entry mode choice:...........................................20

11.2 Which markets to expand to?............................................................................20

11.3 Understanding caveats to international expansion:..........................................21

12 REFERENCES....................................................................................................21

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2 EXECUTIVE SUMMARY

2.1 Background and Key Concepts

The Indian FMCG sector is the fourth largest in the Indian economy and has a market size of $13.1 billion. This industry primarily includes the production, distribution and marketing of consumer packaged goods

Dabur India Ltd is one of India’s leading FMCG Companies with Revenues of US$1 Billion (over Rs 5,000 Crore) & Market Capitalisation of US$4 Billion (Rs 20,000 Crore). It has a legacy of quality and experience of over 127 years. Dabur's products also have a huge presence in the overseas markets and are today available in over 60 countries across the globe. Dabur's overseas revenue today accounts for over 30% of the total turnover. Dabur's overseas business has, over the years, transformed from being a small operation into a multi-location business spanning the Middle East, North Africa, West Africa, South Asia, EU, the UK and the US. The overseas business has been growing at a CAGR of 36% in the past 6 years and today accounts for almost 20% of Dabur's overall sales.

Now here we are following AID model of risk assessment for Dabur. According to which first we will analyze the risk associated with Dabur and find out the impact of those risk on Dabur industries and finally we will suggest how to deal with those risk. In Assessing the risks we have major risks as: Chronic fiscal imbalance, Extreme volatility in energy and agriculture prices, Chronic Labour unrest, Hard landing of an emerging economy, Major systemic financial failure, Prolonged infrastructure neglect, Recurring liquidity crises, Unmanageable inflation or deflation and Unforeseen negative consequences of regulation.

Apart from above mentioned risk there are three broad categories of related economic risks which we studied with respect to Dabur namely: Transaction Risk, Translation risk and Economic Risk

To study the international market expansion framework based on a strategic approach to international expansion we analyzed the model given by Schlentrich and Aliouche 2009; their model explicitly takes into account three major elements needed to develop an optimal international expansion initiative. These are: Macro-environmental assessment, Micro-environmental assessment and optimal market entry mode.

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2.2 Summary of the recommendations and conclusions

Factors that affect the International entry mode choice for any company comprise of: High potential value creation opportunity; Economic, political and legal risks; Availability of high quality managerial talent; Cultural and geographic distance and Capital required for ownership. Also, Entry into China and Brazil is recommended through management contracts mode of Entry; as franchises are not considered very good in developing countries.

Suggestions for Dabur on dealing with the economic and related business risks are that before they decide on how to deal with the economic risk it is very import to find out which risk is impacting more on companies’ performance. The risk which impacts more should be dealt first and then other should follow.Companies moving into more sustainable business models and practices can sail through the financial crisis without big difficulties. This can be done with the help of NGOs which help the companies improve the sustainability of their businesses by focusing on the welfare and growth of all its stakeholders simultaneously. Business, government and NGOs should work together to deal the employment risks. More opportunities should be created and made available for people. In order to deal with high inflation and deflation it is better to hedge raw material and maintain a strong relationship with supplier. This will not only help in controlling price of raw material but also ensure long term supply.

It is also suggested that Dabur keeps in mind the following caveats i.e. Domestic success formula might not often work abroad even though China and Brazil might be similar to India in quite a few aspects, the organization should try to maintain unity amidst diversity and Diversifying without knowing how to sustain market share for products in the International market can be detrimental to the value of the company.

3 INTRODUCTION

3.1 Problem Definition

Research Problem: Through any particular Indian company operating or planning to operate in International market do an International market business potential assessment if International entry is just being planned or in early stage of its implementation. Another thing is to analyze the Economic risks faced, what are its consequences and suggest remedial strategies adopted.

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3.2 Purpose

This project was carried out as part of the academic coursework for the International Business course fourth trimester. The purpose of this report is to understand the economic and other related business risks faced by an Indian company trying to establish a foothold in the international market. Also, another purpose to be served in this report was to establish an appropriate international market expansion strategy framework for the above identified Indian company.

4 METHODOLOGY

The information on Dabur India Ltd. was collected from its website, different research papers, annual reports and newspapers/magazines. The collected data, facts and figures and insights regarding the FMCG Sector and WEF Risk analysis report formed the secondary data and provided a starting point for further analysis. All the above data was compiled together and inferences were drawn from this body of research.

The primary focus of this exercise was to learn about the economic and other related business risks faced by a company planning foray into international markets.

Through this study we have also tried to identify the International market business potential assessment for Dabur India and which countries should its next foray as a global player should be.

Finally, we have also identified economic risks and factors affecting International market entry for an Indian company entering into International markets taking Dabur as an example.

5 FMCG SECTOR AND INDUSTRY ANALYSIS

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FMCG outperformed other sectors by going up nearly 25%, Auto and Pharma did quite well, as did discretionary spends. The worst were Metals, Realty and the Infra/Power spaces

The Indian FMCG sector is the fourth largest in the Indian economy and has a market size of $13.1 billion. This industry primarily includes the production, distribution and marketing of consumer packaged goods

Fig. Product Portfolio for FMCG Sector

6 ABOUT DABUR INDIA LIMITED

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Dabur India Ltd is one of India’s leading FMCG Companies with Revenues of US$1 Billion (over Rs 5,000 Crore) & Market Capitalisation of US$4 Billion (Rs 20,000 Crore). Building on a legacy of quality and experience of over 127 years

Dabur's products also have a huge presence in the overseas markets and are today available in over 60 countries across the globe. Its brands are highly popular in the Middle East, SAARC countries, Africa, US, Europe and Russia. Dabur's overseas revenue today accounts for over 30% of the total turnover.

Dabur's overseas business has, over the years, transformed from being a small operation into a multi-location business spanning the Middle East, North Africa, West Africa, South Asia, EU, the UK and the US.

The overseas business has been growing at a CAGR of 36% in the past 6 years and today accounts for almost 20% of Dabur's overall sales.

7 RESEARCH AREAS AND PRODUCTS AVAILABLE

7.1 Key Research areas for Dabur include:-

Ayurvedic Research, Pharmaceutical Research, Phyto-pharmaceuticals, Biotechnology, Agronomy, Synthetic Chemistry, New Drug & Peptide Research, Food Research

7.2 Products available:-

Health Care, Skin Care, Hair Care, Oral Care and Food

Fig. Dabur Product Line

7.3 Consumer Involvement & Ayurveda

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Dabur has differentiated from other FMCG companies in the international market on the basis of Ayurveda i.e. they claim their products have the Ayurveda properties which they have got from Indian tradition and culture.

They have an interactive forum where consumers can give their inputs regarding various products of the consumers. The consumers can anytime write to Dabur and gather information on the latest products etc.

8 SWOT ANALYSIS FOR DABUR

STRENGTHS WEAKNESSES

1. Constant innovation in existing products from customer feedback

2. Penetration to rural markets with strong distribution channels.

1. Dabur imports raw materials. The margins of these companies will be under pressure until the rupee stabilizes.

2. Sharp depreciation in the value of rupee against other currencies

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OPPORTUNITIES THREATS

1. Rapid increase in the rate of urbanization,

2. Rise in disposable incomes enabling the companies to focus on premium product brands

3. Rise in rural non-agricultural income and benefits from government welfare schemes contributes to top-line growth for FMCG companies,

4. Investment in this sector stocks also attracts investor’s attention because the demand for FMCG products is throughout the year

1. Rise in inflation leading to increase in raw material costs,

2. New packaging norms from 1st July which is expected to increase cost of regular products like biscuits, coffee, tea, toiletries and personal care items by about 10% and more,

3. Rising fuel cost leading to increase in distribution costs,

4. Slowing economy will lead to lower demand of FMCG products affecting its volume growth,

9 FINDINGS

Economic risks associated with Dabur in accordance with World Economic Forum report

In the seventh Edition the World Economic Forum’s Risk report a Risk Response Network (RRN) was launched to provide private and public sector leaders with an independent, impartial platform to map, measure, monitor, manage and mitigate global risks. An important aim of this report is to help decision-makers evaluate complex risk events and to respond proactively in times of crisis. This report enlists 50 types of global risks and categorised into five dimensions namely economic, Geopolitical, Environmental, Societal and Technological.

Our concern here is economic risks enlisted in the report in reference to Dabur overseas Ltd operations. The economic category addresses those risks that are of greatest concern in terms of likelihood and impact in areas covering a range of macroeconomic concerns, from financial systems and infrastructure to price volatility and regulation (see Figure below for the full list of economic risks). Being in the forefront of public debate in recent years, chronic fiscal imbalances and severe

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income disparity emerged this year as the two most likely economic risks to manifest in the coming 10 years. In addition, these two risks are rated as having potentially high impact, along with extreme energy and agriculture price volatility, as well as major systemic financial failure.

It is clear from the above diagram that chronic fiscal imbalances are the most important as it is highly likely and its impact is also high. Also Chronic fiscal imbalances shares important interconnections with risks from three categories and it is most strongly associated with the economic risk of major systemic financial failure – a risk that captures the collapse of both major finance and banking institutions, as well as currency regimes. It is also strongly associated with global governance failure, mismanagement of population ageing and several geopolitical and societal risks, which relate to the collapse of governments and international trade. Interestingly, all four Critical Connectors are economic in nature, which demonstrates that economic risks play a particularly significant role in defining the level of resilience or instability within the global risk system as a whole.

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Economic risks of industry:

Key Drivers for growth in FMCG Sector

Rapid increase in the rate of urbanization,

Rise in disposable incomes enabling the companies to focus on premium product brands,

Constant innovation in existing products from customer feedback,

Penetration to rural markets with strong distribution channels,

Rise in rural non-agricultural income and benefits from government welfare programs contributes to top-line growth for FMCG companies,

Investment in this sector stocks also attracts investor’s attention because the demand for FMCG products is throughout the year

Key concerns for FMCG sector

Rise in inflation leading to increase in raw material costs,

New packaging norms from 1st July which is expected to increase cost of regular products like biscuits, coffee, tea, toiletries and personal care items by about 10% and more,

Rising fuel cost leading to increase in distribution costs,

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Decline in industrial growth,

Slowing economy will lead to lower demand of FMCG products affecting its volume growth,

Sharp depreciation in the value of rupee against other currencies because most companies such as Marico, Godrej Consumer Products, Colgate, Dabur, etc import raw materials. The margins of these companies will be under pressure until the rupee stabilizes.

AID model of risk assessment

Now here we are following AID model of risk assessments to Dabur. According to which first we will analyze the risk associated with Dabur and find out the impact of those risk on Dabur industries and finally we will suggest how to deal with those risk.

Assessing the risks: Dabur India Ltd and Dabur Export Ltd

1. Chronic fiscal imbalance- It is the failure to redress excessive companies’ debt obligation. Since Dabur has very less debt on the balance sheet. So this risk is not applicable to Dabur Industries.

2. Extreme volatility in energy and agriculture prices- Severe price fluctuations make critical raw material costly which lead to price hike in products and make it less affordable to masses. This will lead to slow growth provoking shareholder protest and increase tension in management.

This Risk is applicable to all the companies operating in the FMCG sector. So in case of Dabur also the risk is more important because most of the raw materials are agriculture based.

3. Chronic Labour unrest- Differences in payment of permanent and contractual labour lead to chronic labour unrest. Till now there is no report as such related with this risk.

4. Hard landing of an emerging economy -The abrupt slowdown of a critical emerging economy. India and many other emerging economies are moving towards the slowdown. This risk is very much applicable in case of Dabur India.

5. Major systemic financial failure - A financial institution or currency regime of systemic importance collapses with implications throughout the global financial system. Most of the globe right now is crying due to Euro crisis. It is still not clear whether Euro will survive as a common currency or not. Right now it is difficult to associate this risk with any company.

6. Prolonged infrastructure neglect - Chronic failure to adequately invest in, upgrade and secure infrastructure networks. Dabur has been developing and maintaining world class factories and distribution network. But India like country where supply chain is yet not

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developed its growth can be limited. Company has to develop its own infrastructure to distribute its products. So this risk has relevance to Dabur if it wants to grow faster in developing and underdeveloped countries.

7. Recurring liquidity crises- Recurring shortages of financial resources from banks and capital markets. From the dabur point of view this risk is least important because company has enough cash flow to fulfil the requirement for day to day operations as per the cash flow statement of company.

8. Unmanageable inflation or deflation- Failure to redress extreme rise or fall in the value of money relative to prices and wages.

9. Unforeseen negative consequences of regulation- Regulations which do not achieve the desired effect, and instead negatively impact industry structures, capital flows and market competition.

Apart from above mentioned risk there are three broad categories of risks namely:

• Transaction Risk – The risk of Forex fluctuations, when a consignment is imported or exported. The difference between the rate in purchase agreement and the rate on the date of payment is exchange gain or loss

• Translation risk – On the date of B/s finalisation, assets abroad, esp. – cash when translated in home currency. It’s a non cash exposure in b/s, nevertheless it does impact the P&L in accounting terms.

• Economic Risk – The risk that future earnings and cash flows will be adversely affected by foreign exchange volatility and collapse of the financial system – long term in outlook.

RISKS ASSESSMENT OF RISKS IN CONTEXT OF DABUR

Chronic fiscal imbalance

Low risk due to negligible amount of Debt

Extreme volatility in energy and agriculture

High risk and poor monsoon and increasing crude oil prices

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prices

Hard landing of an emerging economy

Very applicable as India and other emerging economies are moving to slowdown

Major systemic financial failure

Eg. Euro crisis but not yet completely failed

Unmanageable inflation or deflation

High inflation can lead to increase in raw material cost

Unforeseen negative consequences of regulation

Relevant from point of view of import and export, packaging regulations etc.

Prolonged infrastructure neglect

Very much relevant as it determines the growth in the country

Impact of economic risks on Dabur

The impact of chronic fiscal imbalance in companies account leads to high interest cost. The high cost of interest on debt decreased the profit margin which will ultimately lead company to bankruptcy when company will not able to able to pay high interest on long term debt. But as per the balance sheet of Dabur India and Dabut Export Ltd. there is not so much debt. So this risk is very low. Similarly other risks was analysed in context of Dabur India and Dabur exports Ltd. Impact of relevant risks is summarised in following table

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RISKS IMPACT OF RISKS IN CONTEXT OF DABUR

Chronic fiscal imbalance No impact as such

Extreme volatility in energy and agriculture prices

Decrease in bottom line and increased competition

Hard landing of an emerging economy

Slow top line and bottom line growth

Major systemic financial failure

Yet to be observed

Unmanageable inflation or deflation

Again not sure about the growth

Unforeseen negative consequences of regulation

Can inhibit growth in some of the markets, slower expansion in international market. Company can be wiped out from a sector.

Prolonged infrastructure neglect

Increased distribution, marketing and other cost, lead to decreased in profitability

Dealing with economic risks:Before company need to decide how to deal with the economic risk it is very import to find out which risk is impacting more on companies’ performance. The risk which impacts more should be dealt first and then other follow.Companies moving into more sustainable business models and practices can sail through the financial crisis without big difficulties. This can be done with the help of NGOs which help the companies improve the sustainability of their businesses by focussing on the welfare and growth of

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all its stakeholders simultaneously. Government regulations and interventions would help people in handling severe price fluctuations and afford critical commodities as well. Business, government and NGOs should work together to deal the employment risks. More opportunities should be created and made available for people. Government can join hands with NGOs to train people in critical skills and make them more employable in business. In order to deal with high inflation and deflation it is better to hedge raw material and maintain a strong relationship with supplier. This will not only help in controlling price of raw material but also ensure long term supply.

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10 INTERNATIONAL MARKET POTENTIAL ASSESSMENT

Based on a strategic approach to international expansion, the above model explicitly takes into account the major elements needed to develop an optimal international expansion initiative.

These are:

1. Macro-environmental assessment

2. Micro-environmental assessment

3. Optimal market entry mode

These sections are summarized below:-

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10.1 Macro-environmental assessment

There are many potential countries or markets that may be targets for expansion for an India-based FMCG firm planning to expand overseas. Even the most resource-rich franchise firms do not have the financial and human resources needed to enter a large number of international markets simultaneously. Franchise firms need to strategically select priority countries/markets on which to focus their expansion efforts and resources. For profit and shareholder maximizing firms, priority countries should have optimal opportunity/risk profiles. Selecting countries with high potential market opportunities and low market risks at the outset enhances the potential for high revenues, profits and shareholder value, while reducing the risks of failure and loss.

The macro-environmental assessment helps identify and rank all potential target countries according to their opportunity/risk profiles. A given country’s market opportunity (or potential) is measured as a weighted average of it market size, purchasing power, and real GDP growth. Risk is measured as a weighted average of political, economic, legal and regulatory risks; and distance (cultural and geographic) (Schlentrich and Aliouche, 2009). Once a ranking based on macro-environmental assessment is obtained, a micro-environmental assessment is performed on these countries in order to assess the country. More or less countries may be included in the analysis depending on a firm’s resources and ambitions.

10.2 Micro-environmental assessment

As for most other operational and strategic initiatives, a firm’s expansion into a foreign market should ultimately enhance its long term shareholder value. Shareholder value is enhanced by engaging in projects and initiatives that create value as measured by a positive net present value. NPV is a function of four variables:

NPV = f (OCFt, kA, I0, n)

where OCFt = Operating Cash Flows (operating revenues less operating expenses) generated by the project at time t, kA = weighted average cost of capital (with capital being a mix of debt and equity), I0 = total investment, and n is the length in years of the venture.

An international expansion initiative may require an initial cost I0, may need to be financed through debt and/or equity at a cost kA, and may generate cash flows OCFt over the life (n years) of the venture. The value created by the international expansion venture is then a function of:-

1. The magnitude of the future cash flows generated in the new market – everything else being equal, the larger the future cash flows, the more value will be created (this is captured by the OCF term);

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2. The timing of the future cash flows generated by the new venture: everything else being equal, the sooner the cash flows are received, the more value will be created (due to the time value of money);

3. The riskiness of the future cash flows generated by the new venture: everything else being equal, the more certain future cash flows are, the more value is created (this is captured by the cost of capital kA); and

4. The magnitude of the initial investment necessary to deploy the new venture: everything else being equal, the less the initial cost, the more value is created. This is captured by I0.

In situations where costs and benefits occur at approximately the same time, the well-known rule of setting “Marginal Benefit = Marginal Cost” can be used to make resource allocation decisions. However, in many situations (for example, projects involving capital expenditures), costs occur immediately while benefits materialize over a number of future time periods. In these situations, Net Present Value is the appropriate criterion for decision making.

The Weighted Average Cost of Capital approach to NPV can be represented as follows

NPV = Σt=1 n OCFt / (1 + kA)t – I0

All country-, industry-, and firm-specific factors that can impact the magnitude, timeliness, and riskiness of the future cash flows generated in the new markets are therefore important in decisions to enter into and/or expand in a new market. In addition to the macro factors discussed in Section One (market size, market growth, purchasing power; political, economic, legal, and regulatory risks; and cultural and geographic distances), micro country factors may include extent and quality of the local infrastructure; availability, educational level and cost of labor; availability and cost of real estate; availability and cost of capital; quality of supply chain; etc. Industry factors may include size, number and reputation of competitors; presence or absence of local competitors; industry structure; etc.

Firm-specific factors may include firm size; human, financial and organizational resources; international experience; core competency; perceived competitive advantages; brand name recognition; management’s growth strategies; risk tolerance; products and/or services produced; level of saturation of domestic market; etc. (Schlentrich and Aliouche, 2009).

Country Market Potential

Market Risks

Distance Score Overall Rank

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China 9 7 8 24 1

Brazil 8 6 8 22 2

Chile 5 4 5 14 5

Vietnam 6 5 7 18 4

Indonesia

7 7 7 21 3

A given firm, within a given industry, can assess its value generation potential from the countries identified in Section One. Focusing on the top 1 – 2 value generators from the above table Dabur can gauge expansion to which country would generate the most value for this firm and should therefore be its priority expansion markets.

10.3 Market entry mode

When firms have identified a country to target for entry and/or expansion, they must determine what organizational structure and management strategy best help them maintain their competitive advantage and maximize their value creation. The interplay between the characteristics of the host country, the industry, and the firm itself (as discussed above) will determine the entry mode that is optimal for a particular firm planning to enter a particular country. There are a large number of possible market entry modes, including:-

1. Direct ownership, 2. Franchising (in its various forms – multi-unit franchising, master franchising, area

development, etc.), 3. Management contracts and a variety of combinations of these basic modes.

Here, we focus on the three basic market entry modes most common: equity (ownership), franchising and management contracts.

In equity projects, the owner of the property operates it itself.

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Franchising and management contracts, on the other hand, do not require ownership of the property in order to generate revenue. Franchising consists of a continuing commercial relationship between a firm with a proven business system (the franchise company) and a third party (the franchisee), whereby the franchise company (the franchisor) grants rights to the franchisee for a given period of time to operate their business system using a common brand and common format for promoting, managing, and administering this business.

In a management contract, the management company agrees to manage the company on behalf of the owner in exchange for management fees. The owner provides the property (land, building, and equipment) and (in most cases) working capital, while the management company provides the professional expertise to build, market and operate the company.

A major distinction between management contracts and franchising is that the management company operates the hotel itself, whereas the franchise company relies on an independent franchisee to run the property. The macro and micro factors discussed above determine to a large extent the mode of entry that is optimal for a particular firm into a particular country.

11 CONCLUSIONS AND RECOMMENDATIONS

11.1 Factors affecting International Entry mode choice:

Various factors that affect the International entry mode choice for Dabur are as given below:-

1. High potential value creation opportunity; 2. Economic, political and legal risks; 3. Availability of high quality managerial talent; 4. Cultural and geographic distance and 5. Capital required for ownership

11.2 Which markets to expand to?

The countries (along with mode of entry) that Dabur should expand into now after looking at our International market expansion model are:-

Entry into China and Brazil through management contracts mode of Entry; as franchises are not considered very good in developing countries.

11.3 Understanding caveats to international expansion:

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There are certain caveats that Dabur must understand before expanding to the above markets suggested. These are: Domestic success formula might not often work abroad even though China and Brazil might be similar to India in quite a few aspects; the organization should try to maintain unity amidst diversity in their organization as such and Finally, diversifying without knowing how to sustain market share for products in the International market can be detrimental to value of the company.

12 REFERENCES

1. A MODEL OF OPTIMAL INTERNATIONAL MARKET EXPANSION - THE CASE OF US HOTEL CHAINS EXPANSION INTO CHINA – ALIOUCHE and SCHLENTRICH

2. WORLD ECONOMIC FORUM – GLOBAL RISKS REPORT 2012

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