The following report discusses the potential entrance of the firm Treasury Wine Estates into a new market in the country Peru. Treasury Wine Estates is an established and well-known winemaking and distribution business that operates in over 100 countries. The country of Peru lends itself to the process of making wine and has potential to attract many customers due to its food and drinking culture. Peru is an attractive target market as it is an emerging market with a young population, growing middle class, and increasing wine consumption year to year. Although there are many cultural, administrative, geographic, and economic challenges associated with this expansion, there are also many benefits that make this a worthwhile endeavor. We suggest that Treasury Wine Estates should enter Peru initially by exporting established brands targeted toward both millennials and more upscale restaurants. If the venture seems profitable, we then recommend that Treasury Wine Estates acquires an established vineyard in order to produce their own line of Peruvian wines.
Treasury Wine Estates
The firm that will be discussed and examined in this project is Treasury Wine Estates. This firm is a global winemaking and distribution business with headquarters in Melbourne, Australia. The business is mainly divided among four regions: Australia and New Zealand, Asia, Europe, and the Americas (Treasury Wine Estates). The company is one of the world's largest wine companies, and it is listed on the Australian Securities Exchange. Treasury Wine Estates emphasizes that, “our business is focused on meeting evolving consumer interests across the globe, and on delivering sustainable growth” (Treasury Wine Estates). Currently, Treasury Wine Estates operates in over 100 countries, with 3,500 employees and over 14,000 hectares of vineyards worldwide.
The industry of winemaking itself is competitive and well established. Treasury Wine Estates utilizes the winemaking industry in the United States in addition to its Australian facilities. The company owns an established vineyard in Napa Valley, a very well-known “wine country” in California. The wine industry is fast growing and ever evolving. Wine consumption has been growing since the 1980s, showing a volume consumption growth of 370 million gallons to over 770 million gallons between 1984 and 1988 (Mullen, 2018). Importing wine is also a growing trend, and Treasury Wine Estates can thoroughly take advantage of this. Imports specifically from New Zealand are as a high a 10.7% (Mullen, 2018). Overall, the wine industries growth lends itself to the expected expansion of Treasury Wine Estates.
The industry boasts countries from around the world as leading wine makers and distributors, and Peru can lend itself well to the winemaking industry. The leading countries that make wine are France, Italy, Spain, United States, Argentina, Australia, South Africa, China, and Germany respectively. The leaders in wine consumption are Vatican City, Andorra, Croatia, Portugal, and Italy respectively. Although Peru is not currently on either list, Treasury Wine Estates has a chance to utilize the wine drinking and grape growing cultures in Peru to expand their brand and perhaps lead Peru to global dominance in wine.
The primary reason any company looks to expand is to gain access to new markets and increase revenue while also diversifying revenue streams. Peru has a population nearing 32 million, and approximately 65% of the population is old enough to legally drink (Index Mundi, 2018). This allows for a target market of about 21 million working age people in a growing Peruvian economy to target. Peruvian GDP grew about 4% last year and is projected to increase 3.8% next year, meaning Peru's economy is expanding at a healthy rate. And while GNI per capita is only about $12,000, cost of living in Peru is about 45% less than in the US (Numbeo, 2018), meaning a bottle of wine is still an attainable commodity for most of the population. Thus, Peru has a growing middle class with increasing amounts of disposable income at a time when prices are still relatively low. Treasury Wine Estates should consider market entry while prices are low in order to get maximum benefit from expansion.
Peru's economy and agriculture industry make it an attractive investment option. Though Peru's economy averaged 5.5% growth from 2009-2013, a decrease in world price for metals and minerals exported by Peru caused the country's economic growth to slow. Growth has since stabilized at an average of about 3.3% growth each year (Central Intelligence Agency, 2018). Agriculture makes up 7.5% of the country's GDP, and some of Peru's main agricultural products are potatoes, asparagus, coffee, and grapes, which are of particular importance for a wine manufacturer and distributor. Peru has the world's 38th largest labor force, and nearly 26% of that labor force is employed in the agricultural sector (Central Intelligence Agency, 2018). By setting up operations in Peru, Treasury Wine Estates would be able to capitalize on this large labor market.
In terms of trade policy, Peru has paid particular attention to building comparative advantages and to reducing barriers to trade. Peru has tried to promote domestic and foreign investment, specifically by the enactment of laws such as the 2008 Framework Law on Public-Private Partnerships. This law promoted private-sector participation in the development of public infrastructure in order to close the infrastructure gap. With many other laws also supporting investments, the flow of private investment doubled, increasing 13.5% average rate and receiving US$48 billion of FDI, which was 5.3% of GDP of Peru. Moreover, after the free trade agreement in 2007, Peru decided to reduce import tax of alcohol from 12% to 9%. Import tax of rice, wheat, sugar, construction materials and textiles also reduced from 20% to 0% after the free trade agreement. Clearly, the Peruvian government is supporting lenient foreign trade and investment regulations in order to grow its economy.
Treasury Wine Estates is in a good position to pursue expansion to Peru. The company has increased in market value over the last year, with their stock price increasing over 50% and revenues exceeding $1 billion (Mickleboro, 2018). Though they are Australian based, they have operations in over 70 countries meaning they are generally acquainted with the process of doing business abroad (Treasury Wine Estates). This should make the notion of expanding to Peru a little less daunting and perhaps their previous experiences will help lower the costs of entering another new market. Additionally, on February 12 of this year, the governments of Peru and Australia signed the Peru-Australia Free Trade Agreement into law. This should make Peru an extremely attractive target market because, thanks to PAFTA, Treasury Wine Estates will not need to alter any of its general business practices or deal with onerous tariff/import barriers when doing business in Peru. This could be the dawn of an era of prosperous trade between the two nations and Treasury Wine Estates should aim to be at the forefront of such an economic shift.
This paper will examine the specific risks and difficulties that we foresee Treasury Wine Estates encountering in Peru, as well as the numerous advantages to this expansion. We will also offer a recommendation on how Treasury Wine Estates should enter the Peruvian market and the specific steps that TWE should take to market and sell its wine successfully.
Peru has a diverse variety of ethnicities and cultures, in part stemming from the country's rich history of indigenous cultures. The most spoken languages in Peru are Spanish (84%), Quechua (13%), and Aymara (1.7%). All three of these are recognized as official languages of Peru (Central Intelligence Agency, 2018). Fewer than 1% of the population currently speaks English, and English speakers are mainly concentrated in cities that are popular with tourists.
Australia, in contrast, has more immigrants and a wider variety of languages spoken within the country. Though there is no official language in Australia, the top 5 languages spoken are English (76.8%), Mandarin (1.6%), Italian (1.4%), Arabic (1.3%), and Greek (1.2%). Fewer than 1% of the population speaks Spanish (Central Intelligence Agency, 2018).
This variance in languages could pose a large issue for Treasury Wine Estates. With less than 1% of the Australian population able to speak Spanish it may be difficult for TWE to find employees that speak Spanish fluently enough to conduct business meetings in Peru. The language barrier could also be difficult when TWE is marketing and selling their wines in Peru. Wine labels, sections of their website, and advertising campaigns will all have to be translated into Spanish because so little of the Peruvian population speaks English. This will be costly for TWE, but could be a sound investment if the company decides to expand further into other Spanish-speaking South American countries.
Australia is a Federal Parliamentary Constitutional Democracy. The country is overseen by the Queen of Australia, Queen Elizabeth II, who is their monarch and chief of state. The country has a Prime Minister, Malcolm Turnbull, who heads the executive branch. The government also has a legislative branch, containing the Senate and House of Representatives, and a judicial branch (Central Intelligence Agency, 2018). The Australian government has been relatively stable in recent decades. The country has a Corruption Perceptions Index rank of 13 out of 180 countries, indicating that there is relatively little corruption (2017).
The Republic of Peru is a presidential republic. The country has a president, two vice presidents, and a Council of Ministers, all of whom make up the executive branch. The government also consists of a legislative branch and a judicial branch (Central Intelligence Agency, 2018). The executive branch in particular has been unstable in recent decades, and many government officials have been ousted for corruption (Goldenberg, 2018). This corruption often affects business practices. During presidential elections, candidates are often financially backed by foreign powers. The winning candidate is then pressured to give large government projects to specific businesses from that country (Goldenberg, 2018). This corruption is widespread and pervasive, and has lead to Peru's rank of 96 out of 180 countries on the Corruption Perceptions Index (CPI). Navigating this corrupt environment could be challenging for Treasury Wine Estates, which must abide by the OECD's Anti-Bribery Convention.
Peru is actively trying to combat the corruption in its legal system, and in the next few decades this administrative distance will likely be lessened. Significant effort has been put into improvement, including two Justice Services Improvement Projects funded by the World Bank (World Bank Group, 2016). These improvements have included better training and staffing practices for the Oficina de Control de Magistratura (OCMA), the office charged with overseeing the judicial system and lessening corruption (World Bank Group, 2016). Peru also ranks 68th out of 190 countries for ease of contract enforcement, which is higher than almost all other countries in the region, though lower than Australia's 3rd place ranking (World Bank Group, 2018).
Australia and Peru are quite geographically distant. The capitals of each country are approximately 8,000 miles apart from each other on either side of the Pacific ocean. Flights between the capitals of both countries take a minimum of approximately 21 hours, and average about 35 hours on commercial airlines (Kayak, 2018). The two countries also have a large time difference because of their geographic spread. Victoria, the city where Treasury Wine Estates is headquartered, is approximately 15 hours ahead of Lima, Peru. This could pose a huge problem for Treasury Wine Estates in their expansion to Peru, because business hours for one country are during the evening for the other country. This would make it incredibly hard to hold any sort of web-based meeting between TWE personnel in both countries. The long flight time adds to this by making it impractical for TWE employees in Australia to fly to Peru in order to hold meetings, and vice versa. Fortunately, TWE is used to overcoming these barriers. The company does business in the United States, part of which shares a time zone with Peru. Treasury Wine Estates can most likely employ whatever strategies it is already using to communicate with employees in the US and other distant countries in their new venture in Peru.
Australia has what economists would consider a mature economy, whereas Peru has a developing economy. The Australian economy relies mainly on service sector jobs, and their economy has remained fairly stable in recent decades. Conversely, Peru's economy is bolstered mainly by the exporting of silver, bronze, and other metals, which has caused it to be highly affected by fluctuations in world price. The Peruvian economy has grown an average of 4% year over year over the last decade, while the Australian economy has averaged approximately 1% growth year over year (Central Intelligence Agency, 2018; ).
The distance between their economies is lessened by their shared commitment to free trade. Australia has an open market with few tariffs or restrictions, and is a member of a variety of trade groups and forums such as the World Trade Organization. The country prioritizes entering bilateral trade agreements with other countries but is also a part of many multilateral agreements, including the Trans-Pacific Partnership (TPP) (Central Intelligence Agency, 2018). Peru is focused on opening their market, and as discussed above it is specifically doing so in order to gain more foreign direct investment. To this end, Peru has pursued a multitude of trade agreements with both South American countries and more distant countries. Peru is also a part of the TPP. As was discussed above, the two countries have recently signed the Peru-Australia Free Trade Agreement. This agreement opens the door for Australian firms such as Treasury Wine Estates to enter the Peruvian market with relative ease.
While Peru and Australia have many commonalities in their Hofstede dimensions (Figure 1.3), the two countries differ in several key areas. The most dramatic difference is in individualism, in which Australia scored a 90 and Peru scored a 16. While Australian employees are expected to be independent and take initiative, Peruvian employees prefer conformity and enjoy working in larger companies (Hofstede Insights). Similarly, Australia scored 36 in power distance while Peru scored 64. Australian workplaces are hierarchical, but superiors are accessible and communicate with their subordinates frequently. Peruvian workplaces, however, are more rigidly structured. Superiors demand respect from their employees, who often find them inaccessible and difficult to trust (Hofstede Insights). These issues could cause conflict in the expansion if TWE is not aware of the differences in working attitudes and does not devote significant human resources effort to lessening this divide.
Peru's uncertainty avoidance score is also noteworthy. While Australia scored a neutral 51 in this area, Peru scored an 87. This high uncertainty avoidance has resulted in a comprehensive legal system and other institutions that structure daily life. Unfortunately, widespread corruption has rendered many of these institutions ineffective, and with conflicting legal and administrative practices citizens have learned to rationalize lawbreaking and other acts of immorality (Hofstede Insights). TWE will need to create a strong culture of ethics and internal controls in any business the company may start in Peru in order to combat this.
One positive for TWE is Peru's indulgence score. Peru scored a 46, which means the society is moderately indulgent (Hofstede Insights). This is good for TWE because wine is a luxury good, and thus is something that individuals might want but do not necessarily need. While it would perhaps be easier for TWE if Peru had scored slightly lower in this dimension - or more indulgent - a 46 still represents and overall tendency to purchase more luxury goods and enjoy leisure time.
Economic Overview: Attractiveness and Risks
Over the past ten years, Peru has been one of Latin America's fastest growing economies, and overall is the seventh largest economy in the region. With an average annual growth rate of 4% and an average annual inflation rate of just 2.9%, Peru is blossoming into a potentially major economic player.
A key factor to Peru's newfound economic success is the country's adoption of new technologies. In all industries, new technology has made the country more efficient and as a result, more profitable. In addition to the technological innovations, Peru's economy has benefitted from consistent economic policies implemented by its government. As was mentioned above, Peru's economic policy over the last decade has involved making the country open to foreign direct investment (FDI). This policy has accelerated Peru's already fast development (Central Intelligence Agency, 2018). The following sections will outline the attractiveness and risks associated with doing business in Peru.
Peru, in many ways, is an attractive location for Treasury Wine Estates. Peru is on the coast of South America and shares a border with Brazil, Ecuador, Colombia, Bolivia, and Chile. This means that Treasury Wine Estates will be able to easily distribute their Peruvian products both abroad and into neighboring countries, either by means of land transportation or nautical shipping. More importantly, Peru is a budding wine country, and has the potential to become “the next big thing” in the wine industry according to Adolfo Hurtado, chief winemaker of Cono Sur, a Chilean based winemaking enterprise. Hurtado cites Peru's abundance of fertile land as the main reason for this potential, as runoff from the Andes Mountains irrigates the lowlands near the ocean (Shaw, 2012). Hurtado also notes that Peru produces few quality red wines, and this is an incentive for TWE to invest in the country. If TWE and its associates can develop a great red wine, they can build a strong customer loyalty in the Latin America region.
As mentioned before, Peru ranks 58th on the World Bank's Ease of Doing Business Index; one of the highest rankings in the region. Because of this relative “ease,” Peru would be a great place for TWE to operate a full-scale vineyard in the region.
On the macro-level, Peru maintains its attractiveness to Treasury Wine Estates. First, President Martin Vizcarra has focused on keeping the country open to foreign direct investment, and has initiated projects to improve the country's infrastructure. This includes starting an anti-corruption program in wake of the Odebrecht scandal, which will be further explained in the following section.
As was mentioned previously, another factor that enhances Peru's attractiveness to a firm like Treasury Wine Estates is the country's involvement in free trade agreements and partnerships. In total, Peru has 27 bilateral investment treaties, and 13 free trade agreements including the Trans-Pacific Partnership and MERCOSUR (associate country). Perhaps the most relevant free trade agreement was the one signed earlier this year with Australia, the home nation of Treasury Wine Estates.
Peru's economy will also benefit from the average age of its population being 26 years old. A direct result of this youth will be a large labor pool and a high labor force participation rate which will increase the productivity of all facets of Peru's economy, as well as offering the potential to lower labor costs. If Treasury Wine Estates chooses to invest in Peru, not only will it have a steady supply of available employees, it will also be in a country with a youthful population, and with it, a desire for wine.
Like all developing countries, Peru has risks for foreign firms looking to expand into the country. At the root of Peru's issues is its history of corruption. This is best exemplified in the previously mentioned Odebrecht scandal. In recent years, evidence has surfaced showing Odebrecht, a Brazilian conglomerate, bribed government officials in order to get public-works contracts. The findings of this investigation resulted in the indictment of former President Alejandro Toledo and other high-level government officials, as well as the resignation of President Pedro Pablo Kuczynski (Goldenberg, 2018). This scandal and the subsequent unravelling of the incumbent government regime highlights the political risks Treasury Wine Estates must be wary of when choosing to conduct business in Peru.
Another risk associated with doing business in Peru is the lack of economic formality. According to England's Foreign Affairs office, 56% of jobs in Peru are with informal or non-regulated businesses. Without formal, law-abiding businesses Peru had issues enforcing taxes, intellectual property rights and human rights laws.
In addition to the previous two risks mentioned, Peru has economic disparities throughout regions. For example, while major cities like Lima and Cusco prosper, cities in the Andean and Amazonian regions face major poverty issues. While economic disparity in developing countries is not uncommon, prolonged disparity will lead to economic and social problems in the future.
Peru must also take strides to improve its infrastructure. As of 2009, in a study called the “Quality of Infrastructure in Latin America,” Peru lagged behind other countries in the region specifically in the highway, health care, and education sectors. A consequence of this is Peru's susceptibility to the consequences of climate shocks such as El Nino and earthquakes, which can easily disrupt major transportation routes without warning.
In a risk assessment of doing business in Peru, globalEDGE, funded by Michigan State University, gave Peru a rating of A4, meaning doing business in Peru presents some risks, but the benefits associated with doing business in Peru make the risk acceptable. This rating is understandable as all developing countries face similar political, economic, and geographic risks as Peru. However, due to Peru's advanced stage of development, openness to foreign direct investment, and involvement in trade agreements, the risks are acceptable due to the vast potential of the Peruvian economy.
According to the Canadian Market Snapshot 2018, sales volume in Peru has been growing every year since 2008. Besides Peru, many other countries including Japan, South Korea, China, the United States, the United Kingdom, Sweden, Netherlands, Switzerland, and Belgium show significant increase in wine imports, especially in the super-premium still wine category. Widespread phenomenons of growing economies, westernization and high alcohol consuming culture have resulted in the Asian market becoming especially lucrative. To take advantage of this, TWE has entered these markets with midpriced “masstige” brands, which are inexpensive wines that appear luxurious and are often sold at a slightly higher price point than wines of the same quality. Michael Clarke, CEO of the Treasury Wine Estates, has emphasized a focus on specifically growing these masstige brands (Treasury Wine Estates). We believe that the wines adapted for these markets will perform well in Peru. Treasury Wine Estates has focused primarily on millennial-oriented wines as they believe millennials in emerging market will be interested in fine wines. For this reason, Treasury Wines built a new French brand, 19 Crimes, to capture a slice of segment where fine French brands are welcomed and put as a priority brands next to their existing brands such as Wolf Blass and Lindeman's (Treasury Wine Estates). They also invested in an AR app to stimulate consumption experience. Moreover, the median age of Peru is about 27, labor force population is 17 million, ages between 14-54 are almost 60% of the entire population, and almost 80% of population live in urbanized area. These features represent the impeccable market segment that Treasury Wine Estates seek, where there is a high millennial population and have westernized culture, as they believe ages between 18-34 and westernized population demand more fine wines. The wine market in Peru is still expanding and this bodes well for TWE. Peru seems to be an adequate target market considering its current states as an emerging market with high millennial population, high urbanization, growing middle class, and high alcohol consumption.
Market Entry Strategy and Looking to the Future
Initial Market Penetration
While Treasury Wine Estates has been thriving of late, this recent success does not warrant recklessness in future ventures. Simply because the company has exceeded one billion dollars in revenue does not mean it should blindly pour money into Peruvian operations and hope something works. Rather, a thought out and comprehensive market entry strategy should be employed to ensure the best results are reached and to continue the company's record of success. The market entry strategy that Treasury Wine Estates should employ is multi-faceted and begins with the fairly simple practice of exporting.
Exporting is an extremely important aspect of any multinational firm and it is essentially sending product to a foreign country to be distributed by a third party in order for the parent company of the product to make money. The reason why Treasury Wine Estates should begin its venture into Peru with exporting is rooted in the fact that exporting is cheap and risk free relative to more audacious market entry strategies. The parent company gives up a portion of the revenue being made on their product in return for the ease with which they can sell it; they are not bound to any physical capital in the foreign country that may obsolesce or be damaged, nor are they particularly impacted by any of the conventional political or economic risks associated with moving to a new country. They supply the product and everything else is dealt with by the third party transportation and distribution networks. And if something goes wrong, the parent company simply must cut off their supply and they are no longer liable for anything that may happen. Exporting is favorable for being low-cost and low-risk and is the optimal method for Treasury Wine Estates to initially penetrate the Peruvian market.
Exporting is also advantageous because it will allow Treasury Wine Estates to gauge market interest without too much investment. Food and drink products are uniquely volatile in that they can fail even when their supply chain works efficiently due to poor taste and lack of popularity. The last thing a company would want is invest in developing a supply chain in a new country only to find the native population despises their product. Accordingly, Treasury Wine Estates must first gauge the popularity of their wine through partnering with reputable restaurants in culinary centers throughout Peru. Citizens and tourists alike will be more exposed to the wine than if it were just sold in stores, which leads to greater brand recognition and the development of consumer loyalty and trust. Higher exposure gives Treasury Wine Estates the data it needs to determine whether or not the demand is high enough to warrant a more permanent establishment in Peru or if the money to begin such an enterprise would be better spent elsewhere. Assuming Peru appreciates Treasury Wine Estates' product (and the previously stated data supports this notion), the company can move forward with the next phase of the market entry strategy: acquisition.
Once Treasury Wine Estates has determined that there is sufficient demand for their wine in the Peruvian market through exporting and partnering with restaurants, the next (and final) step to full market penetration is to acquire an established vineyard or winery in Peru. Through an acquisition, Treasury Wine Estates would purchase an existing vineyard or winery in its present state and begin operating out of it with perhaps a slight transition period due to logistical proceedings (changing brand name, establishing management, etc). An acquisition would be the best course of action because all of the equipment, personnel, and processes are already in place and being used efficiently. Though it is a relatively large investment, an acquisition would benefit the market entry of Treasury Wine Estates in a multitude of ways in addition to showing commitment to the people of Peru.
Purchasing a vineyard or winery in Peru would allow Treasury Wine Estates to begin producing wine domestically, drastically increasing supply chain efficiency for the Peruvian market and giving them the ability to achieve economies of scale. Because the climate is similar to that of Australia, similar grapes can be grown and therefore the product line of wines would have to differ much. This would help Treasury Wine Estates in marketing their product as an Australian wine, while also giving them the opportunity to experiment with new Peruvian wines. The workers and management would already have experience in performing the requisite processes and this knowledge is invaluable when starting a new enterprise, as it could take decades for new workers to gain similar insight. All of the equipment is already there and set up so production could begin almost immediately, and this manufacturing establishment could prove to be a launching point for the company to expand to the rest of the continent.
The benefits of acquiring a preexisting establishment are the reasons why Treasury Wine Estates should pursue this venture over other market entry strategies. A greenfield initiative would be more costly than an acquisition, without the added advantages of workers' knowledge, management's experience, or developed agricultural space that come with purchasing an existing firm. As outlined previously in the discussion on cultural differences, almost no one in Australia speaks Peru's native Spanish language, making it very difficult to start an enterprise from scratch. Through acquiring a Peruvian firm and their management team, Treasury Wine Estates would perhaps only need one bilingual employee to coordinate the Peruvian branch with headquarters, not to mention the Peruvian management team's invaluable experience with the business-political landscape in their home country.
Currently, Peru does not have any primarily dominant players in the wine industry, making a merger inconsequential for Treasury Wine Estates. Instead, the company should use this to their advantage and become a predominant force in the Peruvian wine industry through establishing a domestic supply chain in Peru and achieving economies of scale with an independent manufacturing base in Peruvian wine country.
Once the acquisition is complete and production begins domestically, Treasury Wine Estates will no longer need to export product to Peru. Though they could still export certain specialty wines that are not made in their Peruvian winery, much of the current inventory that is being sent to Peru can now be diverted towards the next foreign market they are looking to enter, perhaps even through Peru to other South American countries.
With the Peruvian market all but conquered, Treasury Wine Estates should look to further regional expansion in the wake of its acquisition. Having a production foundation and strong supply chain domestically gives it an enormous advantage over other firms that are simply exporting from abroad. This will allow the firm to expand relatively easily into other nations in South America, initially through exporting, though this is made much easier by having a winery in Peru. Its main competition in this space comes from Chile and Argentina, established wine producing powerhouses in their own right, though there is no Chilean or Argentine wine company as large or well funded as Treasury Wine Estates. Through its brand and economies of scale, Treasury Wine Estates should be able to fend off smaller competition in the race for South American dominance.
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