International Trade Analysis

Table of Contents

1. Executive Summary
2. Introduction
3. Screening potential International markets, narrowing the focus, and selecting the target market
4. Organizational Readiness Assessment
5. Planning international market research, selecting a research design and conducting secondary research
6. Cost and pricing analysis for importing/exporting products/services
7. Currency/ foreign exchange risk analysis
8. Analyzing and mitigating political risk
9. Analyzing and mitigating economic risk
10. Analyzing and mitigating social risk
11. Analyzing and mitigating commercial risk
12. Analyzing and mitigating foreign physical asset risk
13. Analyzing and mitigating personnel risk
14. Analyzing and mitigating technology risk
15. Analyzing and mitigating intellectual property risk

Executive Summary

The paper investigates the opportunities of the company FreshCo to begin its international activity. The company is a Canadian based chain of deep discount supermarkets that has a potential to enter new markets. The analysis of the potential target markets revealed that Australian and UK markets are challenging for entrance because of intensive competition. Hence, the paper proposes to enter the Indian market, since there is a potential for the company’s development and weak competition.

India has an emerging economy and growing population, which makes promising opportunities for the development of the supermarket chain in Indian cities. At the same time, there is a lack of quality grocery supermarkets that offer goods at reasonable prices. Hence, the choice of the market is justified in the paper.

The paper also analyzes organizational readiness on the company, plans its market research, conducts price and cost analysis for export, and defines the principal risks of entering the target market with further strategies to mitigate these risks. Basically, the market investigation allows identifying and mitigating currency exchange risks, commercial risks, and general economic risks inherent for the target market. It also evaluates political and social factors that can be hazardous for the company’s operations in India. India's economic and legal particularities influence such aspects as technological development and intellectual property rights, which can bring threats to the company.

Finally, the company’s personnel, as well as physical assets, can be exposed to risks stemming from local particularities of the host country, hence they are also discussed in the paper. Despite numerous risks identified, the company is recommended to develop specific strategies and instructions to mitigate the probability of each risk occurrence and successfully expand its business activity in the target market.

Introduction

FreshCo Ltd. is a Canadian chain of deep discount supermarkets which is owned by Sobeys Inc. It was established in 2010. Its label “FreshCo” represents the fresh side of the store as it provides fresh, high-quality food to customers with modern shopping arrangements at discounted price. FreshCo also supports ethnicity of multicultural customers; therefore, it provides new and different items. The company operates 39 FreshCo stores, with plans to open three more during the fourth quarter, McEwan said.

FreshCo is a Canadian chain; however, it holds the potential to operate business in the international market. FreshCo will have a positive impact on Canada’s GDP. Also, FreshCo opening in India would certainly improve trade between Canada and India. It would further impact trade by giving an incentive to host country to improve quality and distribution.

However, there are various risks of moving to India for business. The Operational Risk service evaluates Logistics Risk, Trade and Investment Risk, Labor Market Risk and Crime. While India will stay one of the quickest developing significant economies on the planet, oil value instability, water dangers, battling non-bank money related loan specialists and a flimsy outer condition supported by worldwide exchange pressures present critical drawback chances over the close to term.

While we accept that a blend of financial and money related boost, proceeded with change energy what's more, ideal base impacts will be steady of financial development, organizations working in the nation will keep on confronting extra basic dangers originating from unavoidable debasement, extreme administration and frail utilities foundation. However, chances of conflict and crimes are also high in India. There is an assortment of security chances that subvert India's working condition. There is scope of inner dangers coming from the nearness of fanatic gatherings, dissident associations, which are all equipped for doing assaults.

Moreover, conflicts between India and Pakistan over Kashmir could also prove dangerous, while not our center view, we see rising dangers of military clash among India and Pakistan, given the probability of an all-encompassing Indian military nearness in Kashmir, and Pakistan's enthusiasm for testing India's control of the locale. Apart from this, India offers significant potential as an investment destination but risks like the weak legal environment and concomitant corruption, high import requirements for industries; and extensive bureaucratic hurdles affects negatively most to the business.

Potential International Markets

First of all, Australia can be a good choice for Freshco to move. In the current financial and economic climate, it is essential for investors and indeed management to monitor the financial performance of companies and this is especially pertinent in the retail industry. The retail industry has been confronted by many competitive challenges in the past. This intensified competition may be beneficial for consumers, but it is an extensive challenge for the retail industry. As of 2011 there were almost 140 000 retail businesses in Australia, accounting for 4.1 percent of GDP and 10.7 percent of employment (Productivity Commission Report, 2011).

However, it is a developed country and there is not very much a new supermarket can do where there are already many other supermarkets. It will not be easy for FreshCo to have a competitive edge for these many companies. This sector is one of the most competitive in Australia. There are already two big supermarket corporations, Woolworths and Coles, which are all well known for cutting prices and expanding their business. Apart from this, United Kingdom can also be a good market for FreshCo. It is a developed country and people buy almost everything from supermarkets.

However, it already has various supermarket brands and one of the leading is Tesco. groTesco PLC (Tesco or 'the company') is a food and grocery retailer that operates a network of hypermarkets, supermarkets and convenience stores. The company offers beverages, fresh food, bakery, frozen food, clothing, fuel, grocery, garden and baby products etc. Tesco retails its products through a combination of in-store and online business formats. Th. The UK and ROI segment was the major contributor to the company’s revenue stream. In FY2019, the segment accounted for about 80.8% of the company’s total revenue and reported a year-on-year growth of 15%.

The growth in revenue was due 2.9% growth in like-for-like sales In the Republic of Ireland (ROI) and the UK. Strong performance of the segment enabled the company in achieving overall growth in revenue. The company operates 6,993 stores with total areas of 91.3 million sq. ft. in Europe and Asia. However, the company's Central Europe and Asia segment reported a decline in revenue in FY2019, but it has a very strong base in the UK and ROE. Therefore, it will be a major competition and threat for Freshco. However, by keeping the risks in mind of doing business India, it still offers a good opportunity. It can be seen as a wise choice for FreshCo to enter the international market.

In India, there are fewer food chain supermarkets which supply fresh, high-quality groceries; therefore, customers go to random shops to get vegetable, fruits, drinks, food and other necessary items. Although, in big cities such as Delhi, Mumbai etc. some food chain supermarkets are found; nonetheless, in small cities people go to different places to collect groceries which is highly time-consuming whereas FreshCo difference is department spacious design and people can roam freely and can save a lot of time.

Organizational Readiness Assessment

This type of evaluation should consider the company's financial history and experience in implementing similar projects. Besides, the culture of the organization and its level of maturity are critical factors. The following diagnostic approach can be used to assess organizational maturity, considering organizational readiness in 5 perspectives:

1. The formulated vision of the project

The presence of a clear and consistent representation of all participants in the project about business reasons of the project goals and objectives of the project the resulting benefits and advantages for the entire company and each participant individually impact on daily work practices.

2. Willingness to go all the way

The attitude of the company's management and the project and its participants to the project in terms of their readiness: completion of the project, participate in design work, to the extent necessary, go the extra mile, project results, navigate as planned, business result.

3. Governance and management

Effective governance aims to achieve project objectives with the following characteristics: Interest in the project of the company's top management, keen interest in the middle management project, clear delineation of authority and responsibility, and effective conflict resolution procedures.

4. Skills and competencies

All project participants are aware of the need to acquire new skills to work with the implemented technologies and business processes: awareness of the upcoming intensive training, awareness, and preparedness for upcoming changes in processes and job responsibilities, the willingness of project participants to expand their technical skills set, the readiness of the project participants to expand the set of communication and presentation skills.

5. Communication

Organize effective project communications to communicate complete information through the correct channels that meet the following requirements: ensuring the necessary level of quality of the information provided, proper functioning of channels and communication, feedback loopback, support the ability to assess the quality of the communication process is implemented accurately.

Planning International Market Research

The purpose of planning is to determine the type of information required and how to collect it effectively, related to the need to choose a balance between the quality of information and the cost of conducting marketing research. The principles of planning types of information are as follows:

1. Flexibility and adaptability (timely response to changes in the marketing environment of the enterprise).
2. Continuity of information flow.
3. Level of competence in planning, which should correspond to the level of competence concerning the set goal of marketing research and the required information.

The requirement of continuity of marketing researches is realized based on clear and consistent plans of their conducting. The plan should reflect all marketing information collection methods, which will be applied at a specific time stage, as well as regions, markets for marketing research, and other essential circumstances that ensure an uninterrupted supply of marketing information to the company but also its completeness and reliability. Marketing information is a systematic set of data with a particular market parameter or group of parameters necessary for the preparation and adoption of marketing decisions to assess the market situation.

Cost and Pricing Analysis for Importing/Exporting Products/Services

The setting of business targets is an essential part of the company’s price research. For, e.g., the business targeting long-term sales development or an avenue for excess or outmoded goods tries to enter a new sector. Marketing and pricing goals can be universal or targeted to particular international markets.

Pro-capita income is a good measure of the abilities of the market for most consumer goods. Some goods (e.g., famous US fashion labels) generate a high demand that their selling price can only be affected by low per capita incomes. The product may be an answer to the company's low per-capita income in markets to simplify its sales price. Management of the company must also bear in mind that fluctuations in currency can change its affordability.

Currency/Foreign Exchange Risk Analysis

The currency or foreign exchange risk is one of the types of financial risks characterized by currency exchange rate fluctuations that generate financial losses of an enterprise during export and import operations. Thus, when importing goods, an enterprise loses from the increase in the exchange rate of the respective foreign currency against the national one. The decrease in this exchange rate determines the financial loss of the enterprise when exporting goods. Currency risk is divided by operating risk, translational and economic.

Methods of foreign exchange risk management:

• Buying the right number of monetary units with which the firm works to close its currency position. The latter can be regulated if the company has concluded a large number of export and import contracts simultaneously.
• Compensation by correcting ruble prices per currency growth.
• Diversify when contracts are signed in different currencies with opposite trends in exchange rates. As a consequence, if the terms of receipts and payments in a specific monetary unit coincide, the balance of assets and liabilities is achieved.
• The introduction of a currency clause into export-import contracts, which can be of two types: calculation of the sum of the transaction in a stable currency and inclusion in the contract of a condition of change in its value in the same proportion as there will be an exchange rate fluctuation of the payment currency agreed by the parties.
• Hedging currency risks - consists of buying (selling) currency contracts simultaneously with the sale (purchase) of available currency with the same delivery term and carrying out a turnover operation with the actual delivery term of currency.

Analyzing and Mitigating Political Risk

The political risks in our project can be divided into four groups:

• The risk of nationalization and expropriation without adequate compensation.
• The transfer risk associated with possible restrictions on the conversion of any currency.
• The risk of contract termination due to the actions of the country's authorities where the counteragent company is located.
• The risk of war and civil unrest, as a result of which entrepreneurial firms may suffer significant losses and even go bankrupt.

Since the entrepreneur does not directly influence political risks, as their occurrence does not depend on the results of his activities, political risk should be classified as external or objective risks.

Analyzing and Mitigating Economic Risk

While researching the idea of opening FreshCo in India, we faced several economic risks factors that needed to take into consideration:

• Inflation rates in India have been increasing over the last decade. This has slightly decreased, however, since 2010. Nevertheless, India's economy has been doing quite well, with its GDP steadily increasing for years, and its national debt shrinking. The budget balance in comparison to GDP does not look so good, with a government deficit of more than 9 per cent of GDP. However, according to the latest data released by the Ministry of Statistics & Programme Implementation (MoSPI), India's retail inflation, calculated by the Consumer Price Index (CPI), rose 6.09 per cent in June (Plecher, 2020).
• India's unemployment rate dropped from a record high of 23.5 percent in April and May to 11 percent in June 2020, as several companies resumed operations after weeks of closures due to the COVID-19 pandemic (Trading Economics, 2020).
• In the quarter ended June India's fiscal deficit hit Rs 6,62 lakh crore, or 83.2 percent of the estimate budget as government revenue remained strained in the face of the pandemic disruptions (Ohri, 2020). As of 2018, the total value of exports was US$ 322,292 million. The total value of imports was US$ 617,946 million.
• In India the tax system is divided into direct and indirect taxes. The Indian tax system is such that taxes are imposed by the federal government and the governments of the states. Local bodies such as the Municipality and the Local Councils also charge certain small taxes. Over the last few years, various policy reforms and simplification processes have been undertaken by the central and many state governments towards great forecasting, fairness, and automation. As a result, India's meteoric rise to the top 100 in the Ease of Doing Business (EoDB) ranking at the World Bank in 2018 has resulted (Invest India).
• Exchange Controls in India. India's foreign exchange control system is regulated by the Foreign Exchange Management Act (FEMA), which is implemented with the goal of facilitating international trade and payments, encouraging the orderly growth and preservation of the Indian foreign exchange market and economic policy liberalization (Trade, 2019).
• The Free Trade Agreement between Canada and India is a free trade agreement currently being negotiated between Canada and India.

Overall economy of India is doing well and steady despite the fact that coronavirus pandemic made negative impact. In order to mitigate economic risk, we can develop relationships with foreign financial involvement, sharing risk, develop contingency plans or acquire insurance like Foreign Funds Insurance.

Analyzing and Mitigating Social Risk

Social risks can usually arise from negative perception of our company’s impact on the Indian community. While researching the idea of opening FreshCo in India, we faced several social risks factors that needed to take into consideration:

• There are 30 human rights in India that any business should keep in mind. Most common are They are Right to Equality, Right to Freedom, Right against Exploitation, Right to Freedom of Religion, Cultural and Educational Rights, and Right to Constitutional Remedies.
• Land Use and Ownership: Governing is by far India's biggest landowner. The Indian state has a lot of land under its purview, with assets reported to be upward of Rs 114,000 crore according to some old estimates.
• Indigenous Rights: India voted for the United Nations Declaration on the Rights of Indigenous People, on the condition that all Indians became aboriginal after independence. Hence, the definition of "indigenous peoples," and therefore the UNDRIP, is not considered applicable to India.
• Environment: India has plenty of environmental problems. Air pollution, water pollution, domestically banned garbage products and natural resource degradation are all problems for India. Nature has some dramatic effects on India, as well.
• Working Conditions and Fair Wages: A government report released in 2019 paints a grim image of the situation of employees in India with the majority receiving less than half of the minimum agreed requirements, 71 per cent without a written contract of employment, 54 per cent with no paid leave and more than 57 per cent in rural areas and almost 80 per cent in urban areas employed well beyond the eight-hour working day (48-hour week) (Varma, 2019).

There are several proactive strategies associated with mitigating social risk. We can incorporate local content into our business plan, establish strategic relationships, establish and adjust policies and procedures, ethically obtain rights to purchase or use land, monitor suppliers for compliance and communicate risks and mitigation strategies to stakeholders.

Analyzing and Mitigating Commercial Risk

FreshCo is incorporated by Sobeys Inc. which is a leading food retailer among Canada. Revenue generating $24.21 billion in 2018, Sobeys now has 257 self-titled retail stores and more than 1,500 stores under different shopping banners, including the Sobeys, Safeway, IGA, Foodland and FreshCo supermarket chains. Private label consumer brands include S! - Gnal specializing in simple budget products, and compliments offering a selection of gluten-free, organic pieces and eco-friendly goods (Bedford, 2020).

1. Risk of Financial Crime Involvement

Estimates suggest that 2-5 per cent of India's GDP is lost because of financial crimes. When the nation is rising at 5 per cent in real terms, it means that virtually all the growth is eaten away by financial crimes (Raj, 2020). India has criminalized money laundering, both under the 1985 Narcotic Drugs and Psychotropic Substances Act (NDPS Act), as amended in 2001, and the 2002 Prevention of Money Laundering Act (PMLA), as amended in 2005 and 2009. The Money Laundering Prevention Act, 2002 levies a fine up to five lakhs at Rupees (Legal, 2013).

In India, corruption is a problem which in many ways affects the economy of central, state, and local government agencies. Not only has it kept the economy back from hitting new heights, but the country 's growth has been stunted by widespread corruption.

2. Commitment to Ethical Practices

Since FreshCo is a Canadian supermarkets’ chain, it follows mainly Canadian ethical guidelines. While expanding to India it is essential to take into account Indian moral practices as Canada and India are completely different regarding ethical guidelines.

There are several strategies associated with mitigating commercial risk. Firstly, we can negotiate contract details. Secondly, we can acquire insurance like Accounts Receivables Insurance or Contract Frustration Insurance.

We can also use a supplier management process by processing for auditing suppliers, maintaining supplier cards, measuring the cost of poor quality and developing recovery practices. Since financial crime is an existing problem in India, we can establish and adjust policies to address it like conflict of interest policies (ethics and integrity pacts or code of ethics).

Analyzing and Mitigating Foreign Physical Asset Risk

To thoroughly analyze foreign physical asset risk, we need to identify critical risks and measure probability and impact. Basically, a physical asset is any item, equipment, or property of an organization with commercial value. There are two main risks for physical asset – damage and theft. The company considers the establishment of offline supermarkets in India. Hence, it is exposed to the risk of being burglarized and to small thefts of goods. The theft of equipment is one of the main threats to physical assets, because of high criminality rate in the country. There is also a risk of terrorist attacks in India because of social instability (Open to Export, 2016).

Terrorist attacks occur in hotels, railway stations, hospitals, markets, cinemas, restaurants, mosques, and other open public areas. Hence, an established supermarket is at high risk of damage caused by terrorism. While theft and terrorist attacks are human-made events, destruction of equipment or any other property can also stem from natural forces. However, there are several strategies to mitigate foreign physical asset risk. Firstly, the company can consider alternatives to ownership. Secondly, to develop and implement security measures. Also, the company is recommended to create contingency plans. Lastly, it is rational to consider insurance acquisition.

Analyzing and Mitigating Personnel Risk

There are also personnel risks stemming from the Indian market entrance. Although the company will hire local employees for jobs in its Indian subsidiaries, top management employees will be involved in the launching of the business in India and will need to travel to the country. As a result, they will be exposed to risks related to their health and security. Indeed, India has entirely different cultural particularities than the home country of FreshCo. There is still gender inequality tendency, which will complexify the work of female managers in India (Open to Export, 2016).

Besides, differences in cultural particularities can lead to misunderstandings and even crucial issues related to social norms, religion, traditions, and even dress-code. Also, the country has a high criminality rate because of the critical social inequality gap. Foreigners often become victims of theft or even physical damage. The country is also known for its level of pollution and difficulties related to hygiene. Because of polluted rivers, water supplied to buildings is a source of a health hazard, as well as street food and beverages. Hence, employees are also exposed to the risk of health damage.

Before empowering employees to travel to the target market and establish a subsidiary in India, the company has to develop instructions for employees to prevent unfortunate situations. Employees must be familiarized with the country's cultural particularities, languages, legal aspects, taxation, and other formalities needed for the development of a business entity. Further, employees must be informed about hygiene and sanitary particularities in India and provided with means of individual hygiene. Finally, the company has to provide the employees good insurance programs to secure them.

Analyzing and Mitigating Technology Risk

Particularities related to technological development in India deliver both threats and opportunities. Indeed, India positions itself as a research and development country; hence, the technological sector is well-developed (Consultancy India, 2018). Besides, regarding the cheap labor force, services related to technological development are not expensive. It brings opportunities for the company to optimize investment costs in the country. However, there is also a risk of digital disruption and issues related to cybersecurity. It is worth mentioning that technological disruption and cybersecurity are two of the three main risk factors for doing business in India - 25% of risks stemming from cybersecurity while 31% from technological disruption risks (Consultancy India, 2018).

Indeed, digital disruption is a global reality, and every country considers technological development as both threat and opportunity. However, India is a worldwide hub for IT services. Hence, the occurrence of technological disruptions is much higher than in other countries. At the same time, cybersecurity risks are related to fast-changing technological development because cybersecurity frameworks do not always evolve accordingly with the digitalization of companies. The supermarket collects and maintains significant amounts of data related to goods, supplies, prices, and financial documentation. Besides, it collects data from cashless payments. Hence, the company can be vulnerable to cyber-attacks and data breaches.

To address threats related to technological disruptions and cyber-attacks, the company has to develop a risk strategy. This strategy must define strict requirements for outsourcing technologies to prevent the occurrence of data breaches. Also, it is essential to secure working processes with quality and safe hardware and software. The financial operations must be secured by privacy and confidentiality, while all payments must be encrypted. Finally, the company must secure information from internal data breach establishing access and confidentiality settings and acquiring insurance.

Analyzing and Mitigating Intellectual Property Risk

The government of India takes different initiatives to protect intellectual property rights. India is a member of the World Trade Organization (WTO) since 1995 and WTO requires the incorporation of IP laws into legal acts of the member-countries. Hence, India regulates intellectual property rights on the state level. India is ranked 59th out of 97 countries for IP rights protection in the International Property Rights Index 2016 (Australian Trade Commission, 2016).

Besides, the country is a signatory to several international legal acts related to IP. For example, such international laws as The Paris Convention, Berne Convention, The Patent Cooperation Treaty, and The Madrid Protocol secure IP on the international level, and India must stick to the requirements provided by these acts (Australian Trade Commission, 2013). Foreign companies are allowed to register any kind of intellectual property, including patents, trademarks, designs, and copyrights. Moreover, the country positions itself as a research and development focused country. Hence, it is concerned with the strengthening of intellectual property rights.

However, there are still challenges related to IP rights maintenance in India. Copyright abuse and piracy are common issues related to intellectual property in India (Open to Export, 2016). There are difficulties associated with IP law enforcement because of bureaucratic delay. Some civil and criminal cases last for many years. Hence, foreign companies are recommended to ask Indian IP experts for advice before developing intellectual property or launching them. It is also crucial to register intellectual property as early as possible before starting an operational activity in India.

Indeed, the country's government simplified the process of IP registration by launching an online registration service in 2016 (Mehta, 2018). In general, although there are gaps in intellectual property rights maintenance, leading Indian companies obey the IP laws.