MDH Expansion Plan to ITALY

February 27

2011
By: Group 4 Hitakshi, Vikalp, Swaraj , Kunal, Mayank, Zarine Prateek Kothari

MDH is a very successful brand in India. It has been selling spices for more than 88 years in India. MDH has a well established export segment and is thriving financially. MDH now plans to enter Italy which is the seventh largest EU importer of Spices and Herbs amounting to 54 million EUROs. MDH is evaluating the Italy Market competitiveness before they enter the market to grab their share of the pie in Italy spice market.

Contents
Executive Summary ................................................................................................................................. 3 Information about the company .............................................................................................................. 3 Situational Analysis .................................................................................................................................. 3 Internal Analysis of Company ............................................................................................................... 3 Environmental Scanning ...................................................................................................................... 3 Issue Statement ................................................................................................................................... 4 Business case Development ..................................................................................................................... 4 Market Attractiveness.......................................................................................................................... 4 Country Entry Risk Analysis ...................................................................................................................... 4 Political Climate in Italy........................................................................................................................ 4 Financial Climate in Italy ...................................................................................................................... 5 Economic Climate in Italy ..................................................................................................................... 5 General Risks ....................................................................................................................................... 6 Market Assessment ................................................................................................................................. 6 Market Competitiveness ...................................................................................................................... 6 a. b. c. d. e. Bargaining Power of Buyers: ..................................................................................................... 6 Threats of Substitute Products: ................................................................................................ 7 Bargaining Power of suppliers: ................................................................................................. 7 Threat of New Entrants: ........................................................................................................... 7 Rivalry amongst Existing Competitors: ...................................................................................... 7

Legal Regulatory Structure ................................................................................................................... 7 Distribution Channel ............................................................................................................................ 8 Market Entry Strategy Framework ........................................................................................................... 9 Market entry: ...................................................................................................................................... 9 Market Segmentation .......................................................................................................................... 9 Overall Strategy ..................................................................................................................................... 10 References............................................................................................................................................. 10

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Executive Summary
MDH is a very successful brand in India. It has been selling spices for more than 88 years in India. There are more than 52 varieties of spices that are available in 140 different packages. Already MDH has penetrated in the global market and so far has been successful in all their ventures. We have decided to expand the company to Italy. Italy is seventh in the order for European spice import trade for both grounded and un-grounded spice and herb products. There is a good demand of spices in Italy. There are existing players in the market and also an existing distribution channel. MDH s venture in Italy will be successful; however we have to be very careful with the market entry strategies. We must be ready to accept certain changes in our system.

Information about the company

MDH (Mahashian Di Hatti) Limited is an Indian company that serves as the manufacturer & distributor of spices. Since its incorporation in 1919, the company has expanded its operations both in the domestic market as well as internationally. It has a huge distribution network in India through wholesalers & retailers. It has started exporting its products into various countries like U.S., Canada, U.K. & Switzerland. Within India, it has several automated manufacturing plants in Indian cities like Amritsar, Gurgaon, Ghaziabad and Nagpur. It is a renowned brand known in every household due to its wide product offerings. Overall, it has more than 45 products that include single spices or blend or mixture of spices. Some of the famous products are Chana Masala, Kitchen King, and Garam Masala. Recently, the company has entered into a new segment of ready-to-eat food. Besides the spices, the company also manufactures Ayurvedic powders & incense sticks. With this diversified portfolio in the spice segment, the company was felicitated with the Arch of Europe award for its excellence & quality.

Situational Analysis
Internal Analysis of Company
MDH has five state-of-art plants to meet the growing business needs and to support the expansion plans for MDH. Its fully integrated processes enable them to clean, dry, grind, test samples and pack goods without any human touch. MDH procures raw material directly from the place of production to maintain high quality standards and uniform taste. MDH already has earned repute in international markets and has presence in several countries and can now look for entering Italy markets.

Environmental Scanning
The use of spices and herbs in Italy is moderate, however uses of spice is an integral part of Italian cuisine. Thus there is a potential market for our products. There is a limited production of spices in Italy. This gives MDH the opportunity for exporting spices to the country. Also the demand for products like Mixtures, Ginger, Turmeric, Cloves have increased over the years. There is an increased demand of organic foods and spices presently in Italy.

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Issue Statement
MDH has a well established export segment and is thriving financially. MDH now plans to enter Italy which is the seventh largest EU importer of Spices and Herbs amounting to 54 million EUROs. MDH has to see if they can get a pie of the huge upscale business of Italy spice market.

Business case Development

Market Attractiveness
y y y Italian cooking uses a wide variety of spices as a means of flavouring ingredients. As of 2008 Italy consumed about 6.4 thousand tonnes of herbs and spices. Ginger, pepper, mixtures, cardamom, mace, nutmeg and cinnamon were among the largest products that were imported in Italy in 2008. These products are similar to the products that MDH sells and has in its wide range of product mix. In the year 2008, Italy was the seventh largest EU importer of herbs and spices, accounting for about 4.8% of total imports in this sector. Total imports to Italy were worth 54 million in 2008, increasing at an annual average rate of 12% in value between the years 2004 - 2008. Italian imports of spices and herbs sourced internally within the European Union accounted for 48% whilst imports from developing countries accounted for about 52% of total imports in 2008, increasing at an annual average rate of 16% since 2004. Iran (with a share of 17% of imports) was the leading developing country (DC) supplier in 2008, followed by India (11%), Indonesia (6.3%), Vietnam (6.2%) and Sri Lanka (1.7%).

y y y

Reference: CBI Market Survey Report: The spices and Herbs Market in Italy.

Country Entry Risk Analysis

Political Climate in Italy
y y y y y y y y y y Italy currently possesses a democratic government headed by Mr Berlusconi with the next general elections due in 2013 However political stability may be questioned, Prime minister of country is being accused in several cases of mafia associations, sex scandals etc. It is flexible when it comes to foreign investments, however government has a veto power Government has the power to maintain a controlling interest in private ventures Italy is highly bureaucratic in spite of having a healthy business environment Corruption is rampant across the country especially in South Italy Political influence present on banks Ineffective public administration system as well as lackadaisical infrastructure Legislative system is complex with a slow judicial system Presence of organized crime

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Political

Financial

Factor Analysis

Economic

General

Financial Climate in Italy

y Italy has not been as severely affected by the global crisis as compared to its European counterparts for the simple reason that Italy has a highly risk-averse banking system, high household savings and low household debt Huge budget deficit (5.3% of the GDP in 2010) According to S&P, its gross debt ratio will touch 120% of GDP this year mainly because of excessive government spending Italy has a very complex regulatory environment and thus in spite of being a developed nation, it does not possess the transparency and smoothness of such nations The cost of doing business in Italy is very high High levels of taxation Following are the current rates* in Italy: o Interest rate 1% o Inflation rate 0.8% o Exchange rate 0.72 against US dollar
* Source trading economics.com

y y y y y y

Economic Climate in Italy

y Diversified industrial economy with the northern part developed and dominated by private companies while the south is less developed and dominated by agriculture and high unemployment Largely a manufacturing and service driven economy

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y y y

Government slow on implementing structural reforms Major imports in chemicals, transports and food No barriers to repatriation of profits

General Risks
y Presence of private and public customs office (Private customs are accessed by couriers like FedEx and thus are fast. Public customs are through Airmail and thus much slower)

Market Assessment
Market Competitiveness
Italian market competitiveness can be assessed using Porter s Five Forces model.

a. Bargaining Power of Buyers: There are large supermarket chains such as Esselunga, Coop, GS, Conad and Auchan. These retail units buy in bulk and thus have a strong buying power. Thus the best strategy can be of a wholesaler s approach and supply these retail supermarket chains. Also there is a demand for better and high quality products which can be fulfilled by setting up a niche market. Wide varieties of spices which cater to specific food items like pizzas etc. specific to Italian taste will be the product line of the niche market. Italian consumers still prefer traditional specialized organic shops. There are over 1000 such stores and mainly situated in the Northern Italy. MDH products can be placed in such stores to meet the high bargaining power of buyer. Also the merger between ECOR, the largest distributor of Organic and biodynamic products and NATURASI, the leading supermarket chain specialized in organic and biodynamic products points toward growth prospect of organic products. 6|P ag e

b. Threats of Substitute Products: For MDH products are organic and in line with international standards lay down by the Italian Government. MDH products become part of generic spices used for preparing various food items, so they can be substituted with other products available in market. c. Bargaining Power of suppliers: MDH is a well established Indian manufacturer, distributor and exporter of ground spices. What we plan is to expand its markets into Italy, part of Europe Union. MDH would be using its already established supplier network to fulfil the extra demand of raw material for exports to Italy. So, we see no challenges in terms of bargaining power of suppliers. d. Threat of New Entrants: There are already existing producers and exporters of organic spices in the market which can pose threat for our entry. Everest another Indian based brand is also span across other countries. The lucrative market of Italy may attract other players to compete with MDH. e. Rivalry amongst Existing Competitors: There are other developing countries trying to increase their foot hold in Spice exports while targeting European Markets due to secured returns. Increasing trends of suppliers flowing in from Indonesia and Vietnam as the retail giants like ECOR and NATURASI have combined their operation the competition has increased for supplying these big chains. Everest which is also an India based company has been growing its international presences and area already present in UK, USA, Middle East, Australia, Canada and South East Asia.

Legal Regulatory Structure

Before entering into a new market, it is essential to understand the government policies & regulations that could impact your business plan. It is very essential for any exporter to comply with the trading policies & the requirements of Italian government. Being a part of European Union (EU), Italy needs to strictly adhere to the importing regulations. Similarly, MDH as an exporter of its products would need to adhere to the exporting regulations defined by EU for food ingredients products. At the same time government of Italy would influence the business activity by defining employment policy, international policies, taxation policies etc. keeping in mind the interests of the local manufacturers. EU regulations are binding on all states/countries that are part of the EU group. For instance, government would be keen to promote & approve our proposal if our business plan of exporting spices would stimulate employment in the country. In EU, exporters from developing countries need to have high quality & trends on health, sustainability & innovation as per the standard guidelines defined. It s really important for our company (MDH) to provide the proof of quality as per international standards i.e. ISO certification. We would face major competition from other EU member countries as they don t have to abide by such stringent laws & enjoy the free trade market without export/import tariffs.

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Besides the custom regulations, in-depth knowledge of incoterms as laid down by the International Chamber of Commerce would be essential to effectively run the business & designing of contracts with our channel partners in Italy. We will design effective supply chain systems with proper export documentation like COO (certificate of origin), quality assurance, and purchase orders, invoicing, as per EU guidelines to ensure that our goods are safe & will not stuck in Italian customs. For instance, documents that would accompany our goods to Italy will carry detailed instructions like importer, consignee address, payment terms, Incoterms, bank guarantee in case of letter of credit (LC) contracts. Compliance to the EU export regulations & understanding of the Italian customs is critical for success of our business. Our collaboration agreement with the wholesalers/retailers would clearly specify the details like trading currency, payment terms as Letter of credit, incoterms etc. The purpose of letter of credit is to minimize the risk while dealing with offshore clients. For global transactions, majority of the companies have opted for LC s to mitigate the risk & it serves as an assurance from the buyer s end to pay off the liabilities against goods or services availed from suppliers. At the same time, it assures the buyer of goods that certain tasks must be fulfilled within the specified time limits such as delivery performance, condition of the goods. For any export business, understanding of these policies & regulations is highly critical for the success.

Distribution Channel
We are following the conventional method for distribution channel for spices. Imports directly from India will be supplied to Food processing Industries. From there, the processed spices will be distributed to pharmaceutical industries which use spices to make medicines.

Import from INDIA to ITALY Importers/Shippers Grinder/Processor/ Blender/Packer

Non Food Industries e.g Pharmaceuticals

Food Processing Industry

Retail Sector (Supermarkets, Grocery Store, Organic Store)

Catering Sector (Restaurants, Hotels, Institutions)

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Other distribution channel will be by the grinders, processor, blenders and packers to support other catering services. This distribution channel is a conventional practice in Italy. No modifications will be done as we need the support of the local workforce there.

Market Entry Strategy Framework

Market entry:
Already it s a late entry for MDH. Pricing should be challenging. To sell their product MDH should keep the pricing of the products in line with the other player s product prices in the market. Pricing should not be less because the product quality is high. High Quality product catering to local taste and packaging is an advantage for MDH. Target customers are superstores and pharmaceutical industries: Supermarkets chains account for the major share of sales of spices and herbs in Italy. The largest supermarket chains operating in the conventional food market are: Esselunga, Coop, GS, Conad and Auchan.MDH should supply its product to the superstores. Setting up stores will not be a good idea during the market entry. Existing distribution channel is very good, and MDH should adopt this channel. In Shop Branding, Advertising are also very necessary to increase the brand perception among the customers.MDH needs to educate people about the high quality spice from India through the advertising. We shall offer intense promotional support for Retail Super marts and big grocery stores, effectively highlight MDH products on shop floor stands, distribute free samples, gift cookbooks and promotional containers.

Market Segmentation
Spices find their use in non food market, such as pharmaceuticals and perfumery and herbs is the foodindustry. Food consumption is of these spices and herbs falls under 3 sectors: 1. Industrial Consumption: Bakery, Processed food products, Ready-to-eat soups, noodles, pastas etc. 2. Retail Sector: Sold through departmental stores 3. Catering Sector: This sector small but is growing MDH would be catering all these segments of customers as these are not dependent on each other and combined volumes shall be in benefit of the expansion plan and would provide buffer for tough times.

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Overall Strategy
MDH is already an established international exporter for high quality Indian Spices. MDH has already created a mark in the world trade and is realized as a reliable exporter following international Standards. Italy is seventh in order for European spice import trade for both grounded and un-grounded spice and herb products. Currently most of the direct imports of spices and herbs from developing countries in Italy are form of whole and un-ground. Being a respectable exporter following high quality standards, MDH plans to export its processed and packed spices to Italy directly to food processing industry and pharmaceutical industry. Currently direct buying or importing of organic products is not very common in Italy but with increasing demand for Organic spices in Italy would open more avenues for MDH to expand in Italy. Other exports would be done through inter-mediatory like grinders, processors or packers to gain more market knowledge and study consumption trends closely. Italian imports majorly comprise of ginger and cinnamon for which India has a very good supply. India has high quality suppliers for Saffron, Pepper, Paprika and Chillies associated with MDH already. Finding suitable trading partner for expansion and market development would be done through Trade Fairs. Also, due to imports ease in Italy, the imports are more than the actual consumption in Italy for its spices. This provides MDH extra growth opportunities to support Italy based exporters too.

References
y y y y y y y y y y http://www.theodora.com/wfbcurrent/italy/italy_economy.html http://www.economywatch.com/world_economy/italy/export-import.html http://www.heritage.org/index/country/italy http://www.estandardsforum.org/italy/business-indicators?id=156 http://www.alacrastore.com/country-snapshot/Italy www.soopertutorials.com/business...del.html Doing Business in 2011 (A COPUBLICATION OF THE WORLD BANK AND THE INTERNATIONAL FINANCE CORPORATION) Doing Business in ITALY1 (A COPUBLICATION OF THE WORLD BANK AND THE INTERNATIONAL FINANCE CORPORATION) The Global Competitiveness Report 2010-2011 2010 World Economic Forum http://www.cbi.eu/marketinfo/cbi/docs/the_spices_and_herbs_market_in_the_eu

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