ECONOMICS ASSIGNMENT

(PROJECT REPORT)

SUBJECT : New Market Entry in Russia (tea Industry)

Group Member :

1. Varun Agarwal2. Ankur patel3. Prateek Gupta4. Neha shymal5. Rashi Goyal

WARREN TEA LTD (India).

Company information

Date of Establishment : 1977

Revenue : 44.4407 ( USD in Millions )

Market Cap : 1671.426588 ( Rs. in Millions )

Corporate Address : Deohall Tea Estate,P O Hoogrijan, Tinsukia Dist-786601, Assam

Management Details : Chairperson - A K Ruia MD - S K GhoshDirectors - A K Ruia, G Bhalla, N Dutta, N Musry, P K Bose, R Magotra, S Bhoopal, S K Ghosh, S Sarma, Siddhartha Roy, U C Arora, U C Sarmah, Vinay K Goenka, Vivek Goenka

Business Operation : Tea/Coffee

Background : Warren Tea Limited was incorporated on May 31, 1977 in the state of Assam. The company obtained the certificate for commencement of Business on June 30,1977. Warren Tea Limited is the flagship of the Warrens group. Being one of the largest bulk tea producers in India and in the world, Warren Tea Limited produces 16 million kgs. of tea annually. With its renowned 14 Tea Estates in Upper Assam spread over Mo

Financials : Total Income - Rs. 2026.827 Million ( year ending Mar 2010) Net Profit - Rs. 222.747 Million ( year ending Mar 2010)

Company Secretary : Siddhartha Roy Auditors : Price Waterhouse & Co.

The regular export markets include quality tea drinking nations like UK, Ireland, Germany, the UAE, USA, Iran and Pakistan.

The quality produced at Warrens has not only stood the test of time and palate, but matured and improved with its passage of time. In the great tradition of its founders, the Company believes that the world is its “cuppa” and tries its best to see that the cup “brimmeth over with joy and good cheer and satisfaction”.

The company exports its products to the United Kingdom, Germany, Ireland, North America, Pakistan, Iran, and the Middle East.

Project Objectives and Approach

Objectives:

1) Market Entry Evaluation2) Russian Market Analysis

Russian business environment Opportunities Challenges

3) Strategic Entry Recommendation

Approach:

Develop best entry strategy based on tea companies’ priorities and future plans

Consider the opportunities and challenges of the Russian business environment

Examine and incorporate best practices derived from practical experiences of other firms and industry experts.

Why go global?

To increase sales, revenues, and profits

1. Limited or declining home market2. Excess capacity3. Competitive advantages in new markets:

Russia: top location for global retail. 70% of Russians' income is disposable vs. around 40% in

the West Lower costs and higher prices - opportunities for profit Global consumers' tastes are converging. Easier to offer a

globally standardized product.

To grow the company’s global market share

To achieve greater economies of scale

To reduce costs

Fixed costs vs. variable costs Labor-related vs. non-labor-related costs Competitive advantage

To reduce risk

To establish a foothold in a promising market

To learn from a leading market

Participate in highly-competitive markets to improve products and marketing. EX.: Koc in Germany, the world's leading market for dishwashers, refrigerators, freezers and washing machines.

To build a global brand

To respond to competitors

Domestic competition entering international markets. “Competitive response.” Eg: Tata Tea’s entry in to the U.S., China, and other global markets; J.V. Gokal’s entry in to the Russian market.

Competition coming from international players.

To receive investment from VCs

Prerequisite for venture funding: very large market. Global firms received more than twice as much funding from VCs.

Global Outlook for Tea (2009)

Market size in terms of retail value: $23,323 millions

Market size in terms of retail volume: 1,765 million kg

Growth rate in terms of retail value (2008-09): 4.5%

Growth rate in terms of retail volume (2008-09): 3.5%

Per capita consumption: 0.3 kg

Average retail price: $13.2 per kg

Growth in retail price: 0.9%

Major producers of tea: China, India, Kenya, and Sri Lanka

Major importers of tea: Russia, U.K., U.S., Pakistan and Japan

Current Statistics and Trends in the Tea Industry

Tight supply due to a projected decrease in Kenyan tea production. Continuation of upward trend in world tea prices. (FAO report)

FAO composite price, (a world indicator price for commodities) has increased 6.5% to US$1.95 per kg in 2007.

For the next 10 years to 2017 World black tea production is expected to grow at 1.9% annually

to reach 3 million tons World green tea production is expected to grow at 4.5% annually

to reach 1.6 million tons (FAO projections).

Possibility of an oversupply of black tea in the coming years in the global tea market (FAO)

A growing health and wellness trend boosting the sales of specialty tea varieties such as fruit/herbal tea, green tea, and other tea

Higher disposable incomes in many developing economies such as China, India, and Russia prompting a shift from unpackaged to branded and specialty tea varieties

Why Russia

1. Surging Economy

Real GDP Growth ↑ 8.1% to $1.3 trillion The fastest growing economy in the G8 group of industrialized

nations Investors pouring money into improved storage facilities,

infrastructure, and logistics Improving financial services, rule of law, and banking

infrastructure FDI into Russia to reach $58 billion in 2008, an increase of about

16% compared to the value in 2007

“Even as the financial crisis shows no signs of abating and deleveraging continues, Russian economy will remain strong because of very low levels of public debt.”

2. Government

Government seeking to streamline customs and taxation regimes to attract more FDI

Supporting the E-Russia program, designed to stimulate growth of e-commerce, including B2B ecommerce

New reforms targeting bureaucracy and corruption Government focus on expanding manufacturing base and

improving infrastructure development

3. Deals in Russia 2006 – 2007

Measured by dollar volume, M&A activity in 2007 in Russia rose 61% in 2006, registering an estimated $179 billion.

M&A activity equaled a robust 14% of GDP and contributed to Russia’s continued strong economic growth

2,151 M&A deals in 2006 – 2007; 146 in the food & beverage industry

249 JVs formed in 2006 – 2007; less than 10 in the food & beverage industry

Increasing middle class demanding more premium products.

4. Private consumption and GDP

Distribution in Russia

• Limited geographic coverage

• Well-organized: Western Russia – Moscow, St. Petersburg (large scale retail stores, shopping malls)

• Rapidly developing: Southern Russia – the Volga region, Urals, Siberia, Russian Far East

• Direct Marketing is very effective outside of developed distribution regions

• Multiple channel options:

a) Agents – not common practice

b) Distributors –variety but not suitable for advertising and promotion (products from multiple suppliers)

c) Branch/Representative Offices – direct contact with end-users and control over promotion and distribution

d) Foreign Subsidiaries – full control of supplier over distribution

Reasons for Indian companies to enter Russian Market

Grow revenues Lower fixed costs per unit Higher prices + lower costs = greater margins Mature home market and/or excess capacity Global competition Gain access to a distribution network Broaden existing products portfolio Global branding, exposure, and geographic reach Diversify business risks

Opportunities for Indian Tea Companies in the Russian Tea Market

CATEGORIES GLOBAL INDIA RUSSIA

Market size in terms of retail value 23,323 876.4 3,266Market size in terms of retail volume 1,765 226.04 161.44Growth rate in terms of retail value (08-09)

4.50% 3.50% 12%

Growth rate in terms of retail volume (08-09)

3.50% 2.60% 2.30%

Per capita consumption (per kg) 0.3 0.7 1.3Average retail price ((in US$ per kg) $13.20 $3.90 $20.20Growth rate in retail price (2008-09)

0.90% 0.90% 9.50%

Opportunities for Indian Tea Companies inthe Russian Tea Market

Largest importer of tea in the world. The total value of Russian tea imports in 2009 was $308.97 million, which is nearly 14% of the global market.

Retail volume growth rates of 15% and 12% in black standard tea bags and black specialty tea bags respectively, in 2009.

Forecast of Tea Volumes by Sub-sectors: 2007-2012

Tonnes 2007 2008 2009 2010 2011 2012

Tea 226,045 231,273 235,790 239,745 243,099 245,822

Black Tea

222,724 227,769 232,111 235,900 239,101 241,683

Green Tea

3,321 3,504 3,679 3,845 3,999 4,139

Cost Benefit Analysis of the Different Sales Channels

Auction Export Local sale to retailer

Sale to Russian distributor

Sale to Russian retailer

cost (E) $1.25

cost (E) $1.25

cost (E) $1.25

cost (E) $1.25 cost $1.25

revenue $1.62

revenue $2.45

revenues (E) $2.90

revenues (E) $7

revenue (E) $10.5

marketing (E) $0.25

trade promotions(E) $0.25

other

import duty $1

shipping charges $0.01

middlemen

import duty $1

shipping charges $0.01

middlemen

profit $0.37

profit $0.95

promotions(E) $0.25

profit $1.15

expenses (E) $1

trade promotions (E) $0.25

profit $3.49

expenses (E) $1

trade promotions (E) $0.25

profit $6.74

Estimatefrom Russian tea customsfrom freight carriers

Entry mode - Joint Venture

Advantages of a Joint Venture

o Provides access to government contacts and existing distribution network

o Provides local help minimizing problems associated with bureaucracy and corruption

o Sharing of profits and riskso Pooling of resourceso Time-to-market advantages

Joint Venture Best Practices

o Establishing a JV in Russia demands meticulous planning and sustained commitment

o Thoroughly explore whether a potential partner shares your priorities and expectations

o Conduct due diligence as much as possible on partner before committing

o Spend time and get to know the partner

Conclusion

The time for cooperation between India and Russia has never been better

Plenty of resources on both sides to be taken advantage of Have a clear strategy and an end result in mind Know the process and requirements for getting to that end result Rely on experts who can “bridge” the needs and wants of all

parties internationally.