Essay: The potential entrance of the firm Treasury Wine Estates into a new market

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  • Published on: July 3, 2019
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Executive Summary

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.

Introduction

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.

Winemaking Industry

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.

Peru

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.

CAGE Analysis

Culture Distance

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.

Administrative Distance

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).

Geographic Distance

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.

Economic Distance

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.

Hofstede Dimensions

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

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