Integrated

IEPFLS scenario/strategy, mode of entry and organisation

Ana Abdulla

2008

Executive Summary
In 2007, snack bars were the most dynamic packaged food sector in volume growth terms. Such development was due to the emergence of volume sales from a low base as well as increased health awareness among Colombians. The top two companies in packaged food industry are Frito-Lay de Colombia Ltda. within the sweet and savoury snacks sector and Nestl de Colombia SA in the various sectors. Most prominent local players in packaged food industry are Acegrasas SA, Alpina Productos Alimenticios SA, Industrias Alimentisias Noel SA, Productos Naturales de Cajica SA and Ca Nacional de Chocolates SA. Segmentation among consumers for healthy snacks is present. This segment is represented by health conscious young professionals 30 and under living in urban areas. Nearly 60% of the Colombian population is under 30 years of age and has been exposed to changing lifestyles. 70% of people under 30 lives in urban areas and is more health conscious. Go Natural Mission for Colombia With a strong customer focus Go Naturals aim is to provide its customers with the opportunity to enjoy organic whole food products, with on-budget value, that tastes great for everyones pleasure and wellbeing. Joint venture with Colombian partner will help Go Natural to establish itself as a brand name within the Colombian healthy snacks sector and to cross-sell different products in confectionary sector of the food market. Increase in sales at Mom and Pop shops will see value growth in the market. Go Natural strategic agenda for the next five years is to introduce new products and to establish itself at the forefront of the healthy snack sector and confectionary developments. Moreover, the company must support its products with aggressive marketing. Go Natural will move its manufacturing operations to Colombia once virtual manufacturing process is firmly established.

Table of Contents
1. Introduction 2. Food Industry 2.1 Packaged Food Industry- Snack Bars Section 2.2 Sales Growth for Packaged Food 3. Competitor Analysis 4. Market Analysis 5. Entry Mode 6. Strategy and Structure 6.1 SWOT Analysis 7. Functional Strategies 7.1 Marketing Strategy 7.2 HR Strategy 7.3 Financial Issues for Go Natural 8. Forecast 9. Recommendation 10. Conclusion References 3 3 3 4 4 5 5 6 7 11 11 11 12 12 13 13 15

1. Introduction
The objective of this report is to analyse Go Natural prospects within the snack food sector in Colombia in order to identify consumer, product and industry trends that will facilitate companys penetration in the market. This report will include a market analysis, industry analysis and competitor analysis relevant to the company and industry parameters. Specifically, the report seeks to assist the company with its interest and endeavour to enter into Colombian healthy snack food market in 2009. This report is a review of recent literature regarding prospects in the Colombian snack food market. Desk and Internet research has been conducted utilising trade publications, government statistics, as well as trade and consumer statistics from various countries.

2. Food Industry
Food industry is a vital component of the Colombian economy accounting for 21% of industrial production and 28% of GDP (GAIN Report, 2006). Colombians spend 30% of their income on food. Healthier eating habits among Colombians were encouraged through frequent media reports on importance of proper nutrition and diet-related illnesses. As a result Colombians showed willingness to experiment with new cooking methods and nontraditional packaged food. One of the main drivers of growth in packaged food volume and sales is openness of Colombians for try new flavours. Consequently more shelf space in Colombian supermarkets/hypermarkets is reserved for packaged food products (Euromonitor, 2008).

2.1 Packaged Food Snack Bars Section

In 2007, snack bars were the most dynamic packaged food sector in volume growth terms. Such development was due to the emergence of volume sales from a low base as well as increased health awareness among Colombians. Moreover, over 75% of products purchased in Colombian supermarkets/hypermarkets are bought on impulse. Snack bars and sweet and savoury snacks sector benefited from this trend by carrying out an increase of above and below-the-line marketing activities and new product developments. Prediction is that snack
4

bars sector will continue to be the most dynamic sector in terms of constant value and volume sales growth due to health awareness trend as well as relatively low base that it is emerging from. In addition to this, snack bars sector will benefit from rising disposable incomes and new trend of on-the-go consumption. The introduction of new products will further drive the development of this sector (Euromonitor, 2008).

2.2 Sales Growth for Packaged Food

Packaged food sales in Colombia were constantly growing since 2002 and this trend is expected to continue.

Colombia: Value sales of packaged food 2002-2007

US$ million/US$ per capita 2002 2003 2004 2005 2006 2007 US$ per capita 2007 7,249 6,753 7,771 9,517 9,865 10,357 222.2

Source: Euromonitor, 2008

Colombia: Sales of confectionery 2002-2007

000 tonnes/Kg per capita/US$ million 2002 2003 2004 2005 2006 2007 Kg per capita 2007 US$ million 2007 44.7 45.4 46.2 47.6 51.2 52.3 1.12 383.7

Source: Euromonitor, 2008

The key locations for food industry are major cities such as Bogota, Cali, Medellin and Pereira (Fajardo, 2003).

3. Competitor Analysis
The top two companies in packaged food industry are Frito-Lay de Colombia Ltda. within the sweet and savoury snacks sector and Nestl de Colombia SA in the various sectors. Both companies have long-standing presence in Colombia, strong distribution networks and financial backing from the parent companies. Regular advertising campaigns assisted both
5

companies in positioning their brands in the upper price segments and establishing high quality reputation among Colombian consumers willing to pay little extra for their products (Euromonitor, 2008). Most prominent local players in packaged food industry are Acegrasas SA, Alpina Productos Alimenticios SA, Industrias Alimentisias Noel SA, Productos Naturales de Cajica SA and Ca Nacional de Chocolates SA. All of these companies are implementing competitive pricing policies, having extensive distribution networks, regular product development and knowledge of the tastes and preferences of Colombian consumers which in turn maintains their presence in the top ten positions within the industry (Euromonitor, 2008). In addition to this Colombian packaged food market remains fragmented with a large number of local, regional and multinational players present (Euromonitor, 2008). According to GAIN Report (2006) there is significant space for new products in healthy food, dietetic, ethnic and organics sector of the packaged food market.

4. Market Analysis
Colombians are quite brand conscious when it comes to healthy snacks and the market is dominated by few major players with a tendency to become more open and competitive. Nevertheless, healthy eating is big business across Latin America. Even the World Health Organization has made a daily intake recommendation in order to combat malnutrition (Tabion, 2008). Segmentation among consumers for healthy snacks is present. This segment is represented by health conscious young professionals 30 and under living in urban areas. Nearly 60% of the Colombian population is under 30 years of age and has been exposed to changing lifestyles. 70% of people under 30 lives in urban areas and is more health conscious. Demand for new high-value products is also increasing due to rising female participation in the workforce. In addition to this healthy snacks are increasingly becoming part of school children lunch-boxes. However, due to global economic crisis that can lead to decline in disposable income it is reasonable to expect that a good number of consumers will trade down to less expensive products (Gain Report, 2006).

5. Entry Mode
The mode of entry is an important factor in the success of the project. There are four possible modes of foreign market entry and each mode may be appropriate under different circumstances. Go Natural is a family business with limited investment potential considering entry into Colombian market. High trade barriers and tariffs, limited resources of Go Natural and security risks in Colombia as well as countrys persistent failure to effectively protect intellectual property rights have ruled out export, licensing and direct investment as a preferred mode of entry for Go Natural leaving the joint venture as the only feasible option (Storz, Taylor and Fairchild, 2004). Joint Venture would overcome import barriers and cultural distance. Hence the products will be perceived by the customers as local. Moreover it will combine resources of two companies without establishing a new legal entity. Local company can provide skills and distribution network and Go Natural can supply its knowledge and brand name. Joint Ventures are valid under the contractual principles of Colombian law and are commonly used in Colombia. The most important aspect and probably the most time consuming will be finding the right joint venture partner. Joint venture partner for Go Natural should be a national category player or multilatina. Thereafter, careful consideration needs to be given to all aspects of the venture. Finally sound legal advice and signing the contract will take place. After taking into consideration all aspects of this entry mode educated guess would be that not more than three years is required for establishing joint venture (JVWEB, 2008). Austrade Bogota can assist Go Natural with partner searches.

6. Strategy and Structure

Go Natural Mission for Colombia With a strong customer focus Go Naturals aim is to provide its customers with the opportunity to enjoy organic whole food products, with on-budget value, that tastes great for everyones pleasure and wellbeing.

6.1 SWOT Analysis

Strengths Experience and knowledge in natural food category Major brand name in Australia for natural food bars Experience in foreign markets Innovation driven product development Products that provide value for money Well developed processes, systems, communication and IT Clear rules for all family and co-workers Management is in the family ensuring that everybody is sharing same vision and goals

Weaknesses New to customers, no reputation or brand name Size, market power, and resources are small compared to the industry leaders Conflict over asymmetric new investments Mistrust over proprietary knowledge Performance ambiguity - how to split the pie Lack of parent firm support Cultural clashes If, how, and when to terminate the relationship
8

Opportunities State of the art technology for food production Information and technology are strong tools for food marketing Change toward healthy lifestyle Large niche target market Partner local expert Leveraging brand, technical expertise and investment The best product prospects according to retailers and producers is in the healthy food sector

Threats Multinational companies Multilatinas and well-known national companies Free trade agreements with Andean countries and the USA lowering the price of their products Security risk Economic difficulties forcing consumers to reduce spending Strategic imperative for Go Natural should be to gain and to maximise the advantage for joint venture, but also to maximise its own competitive position. Out of the SWOT analysis conducted the strategy for Go Natural is to enter Colombian market with low priced products. Unique selling proposition for the product that will appeal to consumer aspirations relatively fast is a must. In order to achieve this Go Natural will need to adapt its distribution models and products to suit local conditions and to develop manufacturing in Colombia. Higher margins will be achievable by nurturing consumer intimacy and expanding product portfolio. Go Natural should focus not only on supplying hypermarkets and supermarkets but also Mom and Pop stores. Joint venture with its shared resources will make Go Naturals goals achievable.
9

Tactics to achieve goals set by Go Natural will include well formed vision shared by both partners in the joint venture enabling them to achieve long-term goals. Both partners need to be equally involved to achieve results. Strategies for governance, accountability, decisionmaking process, and conflict- and issue-resolution procedures will be clearly stated within the contract. Go Natural will have to check thoroughly prospective partner in order to find out the way they treat their customers. In the beginning Go Natural may need to sacrifice some of its up-front profit for a partner given that they already have client-base willing to share with Go Natural. Go Natural is to provide expertise in staff development and integration. Management functions such as organisation, planning and budgeting will ideally be joint responsibilities, while marketing is to be the responsibility of Go Natural in the beginning. Strict control of resources will be put in place. Finally, since joint venture is a contractual agreement, Go Natural will obtain legal advice before signing the contract. The contract will include circumstances for termination of the joint venture and each partners liability. Governmental regulations for setting up business in Colombia require documents that need to be presented to the local chamber of commerce and they include Documents of incorporation and the bylaws of the foreign corporation Resolution from the board of directors of the home office authorising the opening of a branch in Colombia, with details regarding capital assigned to the branch and the initial appointment of officers and statutory auditors Certificate from the chamber of commerce at the intended domicile of the branch to the effect that extract documents mentioned under paragraph one above have been registered Statement from the chamber of commerce that the official books have been registered and identified Certificate from the manager and the statutory auditor that the capital assigned to Colombian operations has been paid in accordance with legal requirements (Storz, Taylor and Fairchild, 2004).

10

Go Natural

Colombian partner

Identifying and selecting JV partner Market research Partner search Evaluating options Negotiations Business valuation Business planning Due Diligence

Legal procedures Memorandum of Agreement Joint Venture Agreement Ancillary Agreements Regulatory Approvals

Joint Venture Formation Management

11

7. Functional Strategies

7.1 Marketing Strategy

Product Target markets for Go Naturals products are young professionals who live in urban areas. Customers in Colombia buy on instinct 75% of the time so packaging should be appealing. Organic food is highly valued among consumers. Colombia has extensive number of fruit organic farms that can be used in manufacturing of bars. Healthy and organic should be written all over. Products for the Colombian market should be developed from 60 already existent products instead of developing customised products for Colombian market. Price Even though Colombians are aware of the fact that healthy food snacks cost more especially when manufactured from organic ingredients price is extremely important factor in buying decision. The price must be high enough to cover costs and make a profit but low enough to attract customers. Pricing strategies will include penetration pricing at first, with a possibility of not quite covering costs in order to gain position in the market and after that cost plus pricing still keeping prices attractive for consumers. Promotion Advertising should be extensive including media ads especially on television, cable TV, newspapers and Internet announcing sales and special offers such as buy one get one free. In store promotions are important due Colombians habit of buying on instinct. In addition to this promotion in schools, gyms and spas can create brand awareness among target market. Place In addition to hypermarkets and supermarkets products must be present in Mom and Pop shops and petrol stations. Go Natural will focus exclusively on major cities in Colombia.

7.2 HR Strategy
HR strategy is to develop distinct identity and culture for the new organisation. Communication with employees has to be open and to address importance of sharing same
12

vision and goals. Compensation, incentives and retention programs will be tied to the success of the Joint Venture. This aspect of HR will be responsibility of the partner with an input from Go Natural. The main values will include being fair with yourself and others, setting clear rules for everyone to understand, listening and being actively involved to reach the goals.

7.3 Financial Issues for Go Natural

Assuming that Go Natural has start-up capital for a joint venture in Colombia obtained through bank loan there are other financial issues that need to be considered such as less bargaining power in raw material purchasing than large companies. Manufacturing efficiency and distribution as well as marketing budget will cost considerably. In addition to this the price of critical ingredients such as fruits, nuts, soybean, wheat and corn can increase significantly due to poor farm yield, unpredictable weather and government regulations (www.hoovers.com, 2008). The most important issue is that Go Natural does not have financial back up by a parent company.

7. Forecast
Joint venture with Colombian partner will help Go Natural to establish itself as a brand name within the Colombian healthy snacks sector and to cross-sell different products in confectionary sector of the food market. Increase in sales at Mom and Pop shops will see value growth in the market. Go Natural strategic agenda for the next five years is to introduce new products and to establish itself at the forefront of the healthy snack sector and confectionary developments. Moreover, the company must support its products with aggressive marketing. Go Natural will move its manufacturing operations to Colombia once virtual manufacturing process is firmly established.

13

8. Recommendations
Choose a larger partner with strong distribution network, specialist employees and financial resources Establish good relationship with supplier Set out clear terms and conditions in your agreement Make written confidentiality agreement to protect any commercial secrets that Go Natural will disclose Aim for flexible relationship with clear performance indicators in place Approach any disagreement positively aiming for win-win solutions Communicate with a partner and share information openly in particular financial Well planned agreement to be put in place addressing shared intellectual property, protection of the confidential information, termination conditions and liabilities Employ an MBA graduate from Australia who is fluent in Spanish and loyal to Go Natural

9. Conclusion
Go Natural will benefit from placing its products in Colombian market due to health and wellness trend among Colombians. Moreover company will benefit from the growing interest of Colombian consumers in foreign products. Snack bars are expected to be the most dynamic sector in terms of constant value and volume sales growth. Success can be achieved
through a combination of product and packaging innovation combined with affordable pricing. In

order to become and remain competitive in Colombia, Go Naturals healthy snacks must be differentiated by consumers from other competitors both local and foreign
14

Joint venture with Colombian partner will save company money and reduce risks through capital and resource sharing. In addition to this Go Natural will get an opportunity to increase sales, gain access to wider markets and enhance technological capabilities. Austrade Bogota will help in finding right partner for joint venture. By contracting manufacturer from Colombia Go Natural will further decrease costs associated with manufacturing in Australia once Colombian manufacturer becomes as efficient and effective as the current one.

15

References
Fajardo, L. F. (2003) Impact of Globalization on Food Consumption, Health and Nutrition in Urban Areas of Colombia, retrieved from ftp://ftp.fao.org/docrep/fao/007/y5736e/y5736e02.pdf on 3 January 2009 GAIN Report (2006). Colombia Retail Food Sector, retrieved from www.fas.usda.gov/gainfiles/200611/146249658.pdf on 2 January 2009 Packaged Food in Colombia, retrieved from http://www.euromonitor.com/Packaged_Food_in_Colombia on 2 Jnauary 2009 Snack Foods Manufacturing, retrieved from http://www.hoovers.com/snack-foodsmanufacturing/--ID_395--/free-ind-fr-profile on 3 January 2009 Storz, C. D., Taylor, T. G. and Fairchild, G. F. (2004). A Primer on Exporting to Colombia, retrieved from edis.ifas.ufl.edu/pdffiles/FE/FE50800.pdf on 2 January 2009 Tabion, M. (2008). Packaged Foods Goes Healthy, retrieved from http://www.latinbusinesschronicle.com/app/article.aspx?id=2842 on 3 January 2009

16

Appendix 1
Colombia has made significant improvements to its military and security arrangements over the past few years lessening overall political risk. Colombias major weaknesses in this regard are the guerrilla groups and the illicit drug trade. The major guerilla unit, the FARC, has suffered major setbacks recently (http://mycmmb.com/docs/EMW/2008/july/EMW2%20%20The%20Upgrade%20Race.pdf). Foreign investments in Colombia do not require prior government approval. Foreign investors are allowed to control 100% of the capital of a company or corporation with no prior approval or obligation to divest their investment. Foreign investments must be registered before the Central Bank on entry of currency into the country or, upon filing of relevant documents. In some cases, registration must be made within three months following the date on which the investment was made, and may be extended for another three months. Registration of foreign investment grants remittance and repatriation rights to the investor, while failure to report or register will result in the imposition of fines by the pertinent agencies. The registration of foreign investment must be annually updated with the Central Bank (http://www.bakernet.com/NR/rdonlyres/3B938B40-D216-4C22-A42EA405F23ABEF3/0/dbi_colombia2005.pdf). The Colombian Federation of Chambers of Commerce is focusing on promoting corporate governance as a tool to improve the countrys competitiveness. For this reason it is working with non-listed companies, including small and medium-sized companies, state-owned enterprises and any other kind of entrepreneurial organisation in the country. It has been recognised that effective corporate governance practice is a key to improving microeconomic efficiency which provides the foundation for access to finance for all firms. The objective is to ensure the sustainability and competitiveness of Colombian businesses in todays globalised economy, emphasising the importance of closely held companies for the future of the economy (http://www.oecd.org/dataoecd/18/10/37329870.pdf).

17