TRATON- KOMPANGA OOO

Business Entry into Russia: Tea (Consumer Product)

2011

Submitted to: Dr. Raghunathan (Chairman) Prof. Sudhir Sachdev (President) Prepared by: New International Business Development Group (No. 11) Mayank Jaswal (Chairman) Govind Garg (CEO) Harish Ranganathan(CFO) Rajesh Roy (CMO)

Background of Traton
A big conglomerate in India with presence in: Consumer products unit White goods unit Food retail chain Hotels Grocery Retail Chain Established in 1963 with a product Darj T in India

Why Go GLOBAL?
To increase sales, revenues, and profits To grow the companys global market share To achieve greater economies of scale

To reduce risk To build a global brand

To respond to competitors

Where In World ?

Target RUSSIA

The company will start operations in Russia

Why RUSSIA?
Opportunities

To increase sales, revenues, and profits 70% of Russians' income is disposable vs. around 40% in the West. Largest importer of tea in the world. The total value of Russian tea imports in 2007 was $308.97 million, which is nearly 14% of the global market Lower costs and higher prices Retail volume growth rates of 15% and 12% in black standard tea bags and black specialty tea bags respectively, in 2007

Opportunities for Indian Tea Companies in the Russian Tea Market

CATEGORIES GLOBAL INDIA RUSSIA

Market size in terms of retail value ($ million) Market size in terms of retail volume(Million Kg) Growth rate in terms of retail value (08-09)
Growth rate in terms of retail volume (08-09) Per capita consumption (per kg) Average retail price (in US$ per kg) Growth rate in retail price (2008-09)

23,323
1,765

876.4
226.04

3,266
161.44

4.50%
3.50% 0.3 $13.20 0.90%

3.50%
2.60% 0.7 $3.90 0.90%

12%
2.30% 1.3 $20.20 9.50%

Mode Of Entry

To have Joint Venture

Provides access to government contacts and existing distribution network Provides local help minimizing the problems associated with bureaucracy and corruption Good understanding of the Russian market Sharing of profits and risks Pooling of resources

Trade Agreement with Russia

CIS (Commonwealth of Independent States) APEC (Asia-Pacific Economic Community) EURASEC (Eurasian Economic Community) G-20 G-8

No FTA with India so far

SWOT Analysis of Russia

Strengths: Ranked 11th by Nominal GDP and 6th by PPP GDP with average annual growth of 6%. AGR of consumption is 1.7-1.8% per year, largely due to new middle class that constitute 50% of the population Per capita GDP of $10521, as compared to Indias $1265 Rich in natural resources like coal, oil and gas, Russian energy independence Weaknesses: Corruption Ranked 123rd at ease of doing business in Russia (latest world bank survey) Courts are unpredictable and in need of urgent reform Limited access to foreign financing High rate of poverty and unemployment High rate of public expenditure

Opportunities: Indo-Russian Trade Relations Contribution of agriculture into GDP is just 4.2% Instant Translation of web-pages Neighbors need energy Low cost airline carriers

Threats: Unlawful criminal gangs Fluctuating prices of oil and US Dollar. High public debt accounts, due to the drop in stock market and governance issues Increasing rate of unemployment, recently increased from 6.5% to 8.9%

Tax Rates
Corporate Profit Tax: 20% (2% to the federal budget and 18% to the regional budget) VAT Rate: 18% Russia has a regular rate of tax on the income of individual/entity 13% for a resident on income tax 30% for non-residents on income tax 9% for a resident on dividend income 15% for non-residents on dividend income. Custom duty: 8% (23%on packaged tea)

Labor Laws
Russian labor legislations provides certain guarantees for employees, in particular: Standard working hours are not to exceed 40 hours per week. Overtime is permitted for certain categories of employees in certain circumstances, but generally should not exceed four hours in two successive days and 120 hours per year. Trial period last for three months Direct cash payment to Russian employees in foreign currency is prohibited Freedom of employ any personnel regardless of the nationality

Transfer of Profits back home

There is no limit on repatriation of Profit.

Tax rate of 15% is applicable

Political and Economic Analysis

Political analysis Current Strengths:

Current challenges Corruption and crime Terrorism Future risks Pressure from bureaucracy Current challenges Unemployment Dependence on foreign money Future risks Decreasing budget surplus Adverse balance of payments

Continuity in policies International integration Future prospects Growing international relations

Economic analysis Current Strengths:

Successful economic reforms Strong current account surplus Future prospects Comfortable foreign exchange reserves Growing foreign investments

Social and Technological Analysis

Social analysis Current Strengths:

Current challenges High AIDS rate High mortality rate Future risks Widening income inequality and rising poverty Increasing spread of the AIDS epidemic

Improvement in real income and wage levels Educated population Future prospects Revamp of social security benefits National welfare fund Tax benefits to healthcare and education
Technological analysis

Current Strengths: Advanced space technologies Future prospects Increasing presence of IT sector Increasing number of skilled workers Military technologies helping the farming sector

Current challenges Poor performance on patents Weak science and technology systems Future risks Piracy and poor infrastructure

Marketing Plan
PRODUCT Darj Tea
Black Tea(500Gm,1Kg)

SEGMENTATION
Two cities with highest population
Moscow with population 11514330 Saint Petersburg with population 4848742

TARGETING
Tea Consuming middle(46%) class in income group of $16000 to $50000 80% of targeted population consumes tea Total Consumption of tea in both cities by middle class= 80% x 46%x (11514330+4848742)*1.3kg= 7828094 Kg Black tea consumption is 40% of total tea consumption Black tea consumption = 40% of 7828094=3131237 kg We are targeting 7% of the total black tea consumption by middle class = 7%(3131237) =219187 Kg Price of Our Tea per Kg = $ 10.5 (50% less than average retail price in Russia) Total Market Share which are targeting is of worth = $10.5 per Kg* 219187Kg = $ 2301463 (approx)

PRICING
Cost Selling Price Import Duty Shipping charges Middle man expense Advertisement cost Other charges Profit 1.25 10.5 1 0.01 1 6 0.25 2.69

COMPETITORS
Company /Brand Orimi Trade OOO Ahmed Tea fabika OOO Market share 13.1 13.0

Unilever SNG OOO Mai Kompanga OAO

Akbar Bros Ltd

9.9 9.6
3.8

DIFFERENTIATION
Price less than the competitors Average Retail Price of Tea in Russia= $20.2 Our Price = $ 10.5 (50% less than avg. Retail Price)

Quality Black Tea from Darjeeling, India Brews Quickly

PROMOTION
Advertisement
Newspapers Argumenty i Fakty The Moscow Times Hoardings Promotion Schemes

Initial Investments:
Investment Dollar (US)

Publishing in newspapers Hoarding Budget Promotion scheme

Retail Incentives Salaries & other expenses Banner Cost Miscellaneous expenses Shipping & Distribution expenses Grand Total

54000 200000 480000

300000 500000 200000 54796 440565 1788796

Income statement: (Projected)

( All figures in US $)

2012 Sales Revenue Less: Cost of Goods Sold Gross Margin Less: Advertisement expense Less: Salaries & Wages Less: Miscellaneous Expenses Earnings before Taxes Less: Tax expenses (20%) Net Income 2301463 273983.75 2027479.25 1332656.96 500000 54796.75 ( 60108.07)

2013 2761752 361658 2400094 583913.28 439250.08 600000 65756

2014 3314094 477387.35 2836706.65 773288.6 514473.64 700000 78907 770037.41 616029.92

Less: Selling & Distribution expense 440565.87

-300540.35 761174.6 (240432.28) 608939.68

152234.92 154007.482

Breakeven Analysis:
Initial Investment Profit/Loss ( I Year ) Profit/Loss (II Year ) $ 1788796 $ - 240432.28 $ 608939.68

Profit/Loss (III Year )

Breakeven

$ 616029.92
3-4 Years

Both cost and Revenues will be shared on the 50:50 ratio between TRATON-KAMPANGO

Organization chart:

EXIT Strategy:
If MAI KAMPANGO wants to exit the business FIRST RIGHT OF REFUSAL to be with TRATON Valuation to be done by a mutually agreed firm.
If MAI KAMPANGO wants to exit the business, it can do so only after 5 years

Conclusion
The Joint venture Traton-Kompango Ltd will help our Company to Penetrate the Russian Market and help us in achieving our corporate goal of going Global.

Product Registration Certificate

Sanitary-Epidemiological Conclusion Certificate

GOST-R Certificate of conformity: Health & Safety

Bibliography
The Economist July 4th 2009 pg.63 Article "Courting Disaster" http://dipp.nic.in/fdi_statistics/india_fdi_index.htm, India FDI Fact Sheet April 2011 http://www.gost.sgs.com/product-registration.htm#procedure http://www.rusimpex.ru/Content_e/Custom/index.htm http://www.doingbusiness.org/ExploreEconomies/?economyid=159, "Doing Business in Russia 2010". World Bank http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP_PPP.p df, GDP(PPP), world bank CIA (Central Intelligence Agency) The World Factbook Russia, https://www.cia.gov/library/publications/the-worldfactbook/geos/rs.html#Econ http://commerce.nic.in/trade/international_tpp_cis_13_russia.asp www.fni.no/russcasp/DBF-bon1009-49-53.pdf, Reflections on Modeling the Russian Economy41, Wehrheim, P. (2003) Modeling Russias economy in transition. AshgatePublishing Ltd.