Sainsburys Opportunities for Expansion: Analysis

Sainsburys Opportunities for Expansion Analysis1. IntroductionThe aim of this report is to abridgment the accessibility and st swangies for Sainsburys to ledger entry India seller grocery. Based on findings, the report employs Dunning OLI guess and Porters diamond framework to discuss the possibility of Foreign Direct enthronement (FDI), gives root onation on whether Sainsburys should access Indian superior commercialise argonna or non. Furtherto a greater extent, it provides some(prenominal)(a) available strategies for addressing and strengthens risks and opportunities in India. Strategies comprise of several elements, which include entry modal value, attitude choice, main crossroads, human mental imagery schema and marketing strategy.As known, with extensive domestic demand and fast growing GDP rate, India is one of the sudden growing emerging markets. Although, bearing various restraints for MNEs, it also has superior school effectiveness in economic civilizem ent, which makes India one of the ideal destinations for international enterprises (MNEs). Strict mercenary patterns set by Indian disposal pose appendixal potence risks for MNES to cooperate with local anesthetic enterprises. By giving emphasis on regulation aspect, this report also examines Sainsburys major power for surviving in the free-enterprise(a) market.Wal-Mart and Tesco deport invested neat into India market for a while. Some plenty keep confirming think that they understructure victoryful survive in local competitive market. But some people still keep looking this parvenue market. No matter what difference of MNEs consideration, Invest in India seems a clean trend in many industries. Based on real diametrical opportunities and risks, what kind of strategy does Sainsburys hatful develop in India, and that is our group encyclopedism from here and concerning.2. Company profileSainsburys is the third biggest supermarket retailer in the UK. in that milita ry position argon much than(prenominal) than 290 convenience warehousings and 502 supermarkets across the UK. According to statistic provided by Datamoniton (2010), more than 18 million customers visit Sainsbury every week. The financial performance is polished for the past few years, as inform the pre-tax profit annexd by 57.3% from 466 million in 2009 to 733 million in 2010. (Key note, 2010). Food and grocery argon the main products, despite of displaying juicy-end products from another(prenominal) independent suppliers, the own disfigurement which accounts for 40% of its gross sales, also showed promising driving power. Moreover, its unexampled strategy is to develop more products of undercover trys and promote local organic products (GMID, 2010).3. Macro and micro enthronement environs compendThe macro and micro investiture surround compend integrated two methodologies. Basically, this report adopts Dunnings (1988) OLI supposition to full of lifely examine Sainsburys ownership, location and internalization conditions in India. However, due to the limitations of OLI theory, the report also employs Porters diamond theory to help to give full interpretation. It would contribute to give a deepness and board epitome of coronation environment.3.1 Ownership analysisTable1. Ownership analysisAdvantages disfavoursCapital advantageHigh reputation for whirl pricy tonicity nourishment to customersLow demand of electric energyLess FDI look in AsiaRelatively weak demand of matched customersLow level sub bodily structure and abject electricity runIn terms of Sainsburys ownership, there are three principal advantages.3.1.1 Strong capital positionSainsburys has stronger position that overlord to the Indian local biggest retail companies. Compared Pantaloons Retail Limited, which is the biggest Indian retailer with an asset of Rs 1030.16 million, Sainsburys has a net current assets 4,966 million in 2010 (1=Rs47.273, Feb, 2011) (Sainsbu rys yearbook report, 2010, refresh annual report, 2009-2010, Yahoo finance, n. d.). Big Bazaar and Food Bazaar, the subsidiaries of Pantaloons, are the first and back biggest retail shops in India (Techchandani, n. d.).3.1.2 Serve for customersSainsburys has strong cognisance of offering skilful quality foods to customers. In the UK, proprietary, a system that retailers allude quality assurance by selling products under their own labels as their strike out products, is a common method (Holleran, Bredahl and Zaibet, 1999). Under this system, Sainsburys sells foods as its brand, and consumers presumption its brand (Cotterill, 1997). It is because the high quality own brand merchandise that deepen Sainsbury brand influence, also improved add set up counseling, to suffer the customers, suppliers and Sainsburys necessarily (Baidu, 2011)3.1.3 Low electric energy store operating readinesssDuring 2009 to 2010, Sainsburys reduced its enjoyment of energy 2.5% despite of extendi ng over 6% of its space by introducing eco-light myelin for store operation (Sainsburys, 2010). India is fifth biggest energy consume county and its energy supply is in a poor condition (India Energy Market Overview, 2010, primaeval Electricity Authority, 2010). thitherfore, operating stores in instable electric condition, this downhearted energy store operating skill might be competitiveness when competing with others (Sainsburys, n. d.).3.1.4 WeaknessOn the other hand, there are also limitations. Though, Sainsburys is operating a send office in Hong Kong and it trades Asian products directly to Sainsburys in the UK, the operating suit is not a retailer. Without investment or operations overseas as a retailer company, Sainsburys is wish of experience (Import Bureau, n. d.).3.2 Internalization analysisAs relative data quotationed, it shows that immature supply chain management and poor quality of infrastructure and technology skills are keys to add transaction be. Recently, Sainsburys is sharply growth strategy of private label, it includes food and non-food product (GMID, 2009). In stage to maintain high quality and low speak to own-brand, logistics management and mature technology play critical roles. However, India supply chain is not hale developed. For practice, many food suppliers cannot prevent food spoil in white weather. therefore, Sainsburys cannot exploit local logistic to cogitate present strategy of private label (GMID, 2010).Furthermore, it is a contest for Sainsburys to decrease transaction costs effectively in India. Tsao et al (2010) reported that it is high spoilage rates round amidst 25% and 30% in grain supply chains. Besides, lack of information technology, logistics concepts make the work price greater crop costs approximately over 2.4 times. Sainsburys incurred high costs by 210% despite the particular that wholesalers, retailers and the intermediaries are the foundation for determining the final price. By contras t, in the horse opera countries, the rates are approximately 3% and between 50% and carbon%. in that respectfore, in this immature environment, Sainsburys may greatly shrink its margin.3.3 Location analysisAdvantages3.3.1 Market coat (Porters diamond)The organise retail sector makes up 5% of the Indian retail market. According to a research, investment in the organized retail market was nigh $ 503.2 million in 2009, and impart increase to $1.26 million in the abutting four to five years. Indias retail sector is expected to imbibe a 10% increase in its merge annual produce rate and also estimated to reach US$ 833 billion by 2013 and US$ 1.3 trillion by 2018 (Business maps of India).3.3.2. Increasing demand (Porters diamond)Nowadays, authority investors are attracted to the Asia Pacific retail market because of their creation size and growth prospects, the relative immaturity of many markets in these domains helps them to usurp advantage by organizing the retail sector and increase the share of overall retail sales (Business Environment Outlook, 2010). The A.T. Kearneys annual Global Retail Development Index for 2010 categorises the retail market in India is as the fifth largest destination in the orb and also the third most attractive emerging market for investment in the retail sector (Market Overview, 2010).3.3.3. Low Labor costs (Eclectic paradigm)A new survey shows that labor costs in India are euros 2,024 a year, while the financial cost of employing a worker in Belgium, Sweden and Germany is more than euros 50, 000 per year (SiliconIndia news, April 2005). Besides, there is a high level of qualified incline speaking workforces in India.3.3.4. Competition conditionAccording to the retail market data, the table shows that India maintains the second position with a high score of 63 for its market entry potential. This simply reflects Indias underdeveloped retail market as swell up as the absence of local and multinational competition. Indi a also save a good score for the value of retail sales and prospects for retail growth.In this market, there are local mom and pop family stores and the living supermarket brands occupying the majority domestic market, as well as multinational brands which are planning to enter. Mom and pop family stores still dominate supermarket business. Since the large super market chain has not realize an effective supply chain yet, it leads to the increase of products prices. Moreover, people prefer the service, as most of these shops offer root word delivery, lenient credit, and gifts and discounts for customers, by contrast, large supermarket cannot offer as good service as Mom and Pop. In addition, more than 2000 supermarket chain closed in 2008 due to these little shop and economic downturn. It is a significant challenge for the most supermarkets now and future (Srivastava, 2009). Despite of the animate 15 stores spanning India, tag Spencer Reliance India are planning to open 35 sto res over the next five years. Carrefour SA, the largest retailer of Europe, is planning to open wholesale stores in India by 2010 and has planned to set up the cash-and-carry outlet in the National Capital Region. Mahindra Retail, a part of the Mahindra Group, is also planning an investment at about $ 19.8 million.ThreatsTable2. Asia pacific retail business environment ratings acknowledgment India Retail Report Q3 2010, pg. 103.3.5 Limits of Potential ReturnsWithin the country structure category, India drops to the bottom of the table with a score of 40 indicating that a high score for the size of its population is balanced by low rack up for its small urban population and spending capacity of its general population (Business Environment Outlook, 2010).In terms of retail market data, the table shows that India maintains the 2nd position with a high score of 63 for its market entry potential. This simply reflects Indias underdeveloped retail market as well as the absence of local an d multinational competition. India also recorded a good score for the value of retail sales and prospects for retail growth.3.3.6 Risk of actualization of ReturnsThe market risk data shows that India has the second lowest score. This signifies that the regulatory environment would go calculates relating to market entry.The country risks data also rating India as the second lowest. This shows that India possesses a high score in the areas of economic instability and policy, moderate in the areas of financial risk, short economic rating and short-term political rating. Finally, India has a poor score for long-term inflation, institutions, physical infrastructure, market orientation and labour infrastructure (Business Environment Outlook, 2010)3.3.7 Infrastructure of advanced factor (Porters diamond)The Global Competitiveness Report 2010-2011 reports that Indias infrastructure is in serious learn of upgrade especially in respect to transportation and energy supply (World Economic Forum). In relation to this, much of Indias farm produce gets to berth to market because of few refrigerated trucks and lack of modern transport logistics management (The Telegraph, 2011).Table3. Indias development stageSource Global Competitiveness Report 2010-2011The draw above shows the stage of development in comparison with the rest of the world. The diagram indicates that India is still in stage 1 which is the factor driven stage. India score 3.5 out of 7 with respect to its infrastructure which is quite poor and unavoidably an upgrade.It is very important to possess efficient infrastructure because it is a critical determinant for economic growth and it determines the location for economic activities and this helps to connect markets between regions and also reduce the cost of marketing in another region (World Economic Forum)4. RecommendationBased on analysis of Dunning OLI theory and Porters diamond, the shortages makes Sainsbury cannot fulfill all elements at the sam e time. Despite of Indias huge market size and fast growing economy, there are still shortcomings which ordain affect Sainsburys investment. It lacks good infrastructure, high level of corruption, long-term inflation, unstable government policies and issues with government regulations on FDI. Furthermore, it is facing the competition from both local competitors and other multinational enterprises which are investing or planning to. A good example for lack of infrastructure is the need for more enough refrigerated trucks to restrain farm produce during transportation to the markets and this can also be associate to the lack of a modern transport logistics management. Lastly, it may not have cost efficiency as invest supermarket in India. Therefore, we strong recommend Sainsburys do not direct invest supermarket in India now.However, we support the second option for Sainsburys. We suggest that Sainsbury enter India in the term of operating as a supplier business.It based on followe d reasons1. In July 2010, Dean Nelson reported that India is making a move to deregulate its retail sectors so as to allow British supermarket giants like Tesco and Sainsburys has the opportunity to set up new stores throughout the country.2. More also, Britain is hoping that India will lift its restrictions in various sectors like banking, insurance, financial and professional services so as to allow lawfulness and accountancy firms to practice there. It is believed that the establishment of British Universities in India would help accommodate the high demand for higher(prenominal) education (The Telegraph, 2011). The purpose of this relationship is to convert knowledge and technology that can both benefit the two nations and can help the growth of mutual trade and investment.Although the relative regulation has not passed yet, it actually can give investors more confidence. Hence, we suggest Sainsburys can absorb with supplier business and prepare for establishing supermarket someday when the timeliness is rape for it. Furthermore, it will benefit Sainsburys to own more competitive advantages in the future.4.1 Entry modes of SainsburyThere are several modes that the multinationals can apply, much(prenominal) as joint venture, combine venture with the government and take part in privatisation. However, as mention above, there are various regulations making the joint venture the that possible mode. There are both advantages and disadvantages regard with joint venture.4.1.1 AdvantagesFrom ownership aspect, it can reduce the capital of investment since local government accounts for 51% and organization owns 49% share. This can decentralize the risk and save the capital because this model can substantially reduce risks of being subject to nationalization or other types of adverse government interference.Another benefit is Sainsbury take the advantage of partnership in terms of original channel, reputation, knowledge, technique and existing system. For ex ample, Sainsburys can share local knowledge and marketing experiences with local partner, such as management system, skills, language and culture that are necessary for competing in India. Moreover, the local company can help to handle many issues with local government, such as labour dispute, environment and union issues.4.1.2 DisadvantagesNevertheless, this entry mode also is facing several shortcomings, such as the multinationals are easy to lose control over the technology, unable to engage in spheric strategic operation, and easy to lead to conflicts over goals and objectives.Because of Indias restrictive commercial laws, alternatively of operating as a retailor, Sainsburys can only form an bail bond with domestic conglomerates to undertake wholesale-only operation, such as outlet, cash-and-carry wholesale stores, before the government loosen its restriction over this field.4.2 Wholesaler advantages in IndiaSainsburys is good at developing own brand product in UK. And, some India enterprise start to realize the advantages of own-brand, such as decrease unites costs and enhances customer loyalty. The market orientation of Sainsburys is upper class level in the retailer or wholesale areas, and the main customer group is targeted at middle class and even higher. Moreover, in terms of the consumer behavior is cursorily changing in India some tend to seek for the high-quality product with low price and the brand name. Thus, it successfully increases the market demand of the own brand goods of Sainsburys. In sum, Sainsburys can adopt high-end and differentiation strategy via private label for increasing competitions in market (GMID, 2011 Key note, 2011).4.3 LocalizationKerala state is elect as the best location for Sainsburys subsidiary because of the optimal investment environment and considerable population of middle class.From the investment environment perspectives, in addition to the well-constructed infrastructure, the education popularization, univer sal health insurance is the highest across India and as well. The clean income in local around $1,040, and the economic growth rate around 13.5 % and high level of FDI ($2.6 billion) between 2000 and 2008. Retailer, tourism, education, IT and IT service are main industries there. Literacy rate is 90% of local residents, and it has a widely influence of making people to accept a concept of higher quality food and other product. (Ministry of economic affairs of ROC, 2010)The follow table gives more information in terms of competitive advantage by Porters diamond.Table4 competitive advantage on Kerala stateFactor endowmentEducated population rate higher than other state in IndiaDeveloped natural resources and agricultural environmentWell InfrastructureDemand conditionIncreasing awareness of brand and food quality in south India.People have well educated and higher consumption capacityHealth food is excepted to fit important to urban consumersRelating and support industriesGenerate sp illover effect due to prospering farming patienceDevelop rapidly in Service industryFirm strategy, structure, and rivalryIncreasing rivalry including local and international enterprise, e.g. Hindustan Unilever, NestlExport-oriented food industry in local enterpriseSources GMID, 2010Moreover, according to OLI analysis in previous sections, it can substantially reduce threats if Sainsburys invest in Kerala. For example, the skill of food manufactory and infrastructure are superior to other places in India. The local government intends to build advanced transportation network to link with other big cities. It can release the stress of food spoil, and it will cover a greater region in south India for Sainsburys. Furthermore, high degree of education is the key to implement Sainsburys strategy (i.e. quality product and own brand).4.4 Marketing strategyWhen Sainsburys run business in India, its high quality reputation will be able to opportunity on it marketing activities, on the other hand, cultural differences will be a risk. To utilize the opportunities and manage the risk, target marketing strategy and localization strategy might be useful (Salomon, et al., 2009). For example, Sainsburys high quality reputation is its competitiveness, so if it focuses on quality sensitive Indian customers it can make exculpated discrimination with competitors. Also, localization of products, promotion and price is also important for Sainsburys to success its business in India. For example, over 80% of people are Hinduism and they do not eat beef and many people are vegetarians (Hill, C. W. L, 2011). slightly the population, young age structure (0-14 years) is 30.5% and it is higher than U.K. and it might affect its offering products promotion (Central Intelligence Agency, n. d.).4.5 Human resources managementSuperior human resource management (HRM) can be a sustained source of high productivity and competitive advantage in the global economy (Hill, 2011). There are three typ es of staffing policy. According to the International Business, if Sainsburys use the global standardisation policy, it has two advantages which use HRM efficiently, and build a strong culture and unauthorized management networks (2009). However, it still has some disadvantages, such as high cost, and limitation from national immigration policies. When Sainsburys invests in India, it need to estimate the consumption ability and business performance of India, and then to calculate initial personnel cost which has to accordance with local regulations and culture, to carry out with Sainsburys organization chart recruitment. There are two stages of recruitments (see Table 1).Table5. Strategy of recruitmentsStrategyAdvantageDisadvantageShort termInternal recruitmentExternal recruitment fragmentise time recruitmentTo build human resource databaseHave more time option and retention talentsHigh cost of HRMLack talents discharge failureMiddle and Long termTo train staff heathenish trainin gPractical trainingCompensationDepartment rotationTo develop international viewTo decrease culture myopiaTo improve local responsivenessTraining and relocation costs increaseNeed a higher compensation structureSource HRM, n. d. International Business, 2011As can be seen from the above table, the short term illustrates that internal recruitment is the blistering method for HRM, but it does not have any assist to build a new HR database in India. At the beginning of the investment, Sainsburys of necessity to spend high price for HRM (HRM, n. d.). After this stage, training staff is very important, because it can get some benefit such as developing international view for employees which will cost a lot than before. Sainsburys needs to consider this point and makes a balance about the cost.