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Essay: Entice Exploring rs: “Costco Set to Enter India: An In-Depth Market Analysis

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Executive Summary

This report analyses, evaluates and justifies the best way in which Costco Wholesale Corporation should enter the Indian market. The market has been analysed by looking at India’s economic, political and legal environments as well as exploring the culture and ways in which Costco would have to adapt. Suggestions include less beef products due to Hinduism religion, availability of fresh herbs and spices as well as incorporating Indian clothing instead of only Western. Further to an in-depth analysis of these factors and the use of theories such as Hofstede’s (1984) cultural dimensions, the Indian market was said to be very attractive to MNC’s for reasons such as a growing population with growing incomes and a booming retail industry set to be worth $1.6 trillion by 2026.

Costco was then evaluated in terms of which entry strategy would be best suited for the company to expand into India by. Eliminating, but explaining that four out of a possible six entry strategies were not suitable for a wholesaler company such as Costco, left only a Joint Venture or Wholly Owned Subsidiaries. After evaluating why a joint venture would only be best in the short-term, it was recommended that Costco should enter the Indian market via a Wholly Owned Subsidiary. It was also discussed that an acquisition would not be the method to do this and that due to the nature of the business, Costco should use a Greenfield Venture. This was justified fully and therefore the outcome of this report.

Other key findings include:

– Although MNC’s like Costco will face greater bureaucracy and red tape, this problem will be short-term and to be most successful, Costco should not enter via a Joint Venture.

– Costco, as an MNC operating globally, will be able to overcome the challenges of different culture and contrasts in laws and restrictions, due to having done this successfully elsewhere.

Table of Contents

Executive Summary 3

1.0- Introduction 4

2.0- The Indian Market 5

2.1- Economic system- 5

2.1.1- Population and Income: 5

2.1.2- GDP: 6

2.1.3- Market Size: 7

2.1.4- Exchange rates: 8

2.1.5- Tax: 8

2.2- Political system- 8

2.2.1- Political System and Trade: 8

2.2.2- Corruption: 9

2.3- Legal System- 10

2.3.1- The legal environment: 10

2.4- Cultural- 10

2.4.1- India’s cultural environment: 10

2.4.2- Hofstede’s Cultural Dimensions: 11

2.4.3- The Eclectic Paradigm in relation to India 13

3.0- Entering the Market 15

3.1- Unsuitable ways for Costco to enter India 15

3.2- How Costco should enter India 16

3.3- Justification and Analysis of a WOS 17

4.0- Conclusion 19

5.0- References 20

1.0- Introduction

Costco Wholesale Corporation is an American wholesaler offering products to customers through a membership only club, with its first store opening 34 years ago in Seattle. They sell in bulk and provide large quantities at low prices. There are two types of memberships-trade and individual, the main difference being trade members must own or operate a business. It is the worlds second largest retailer after Walmart and has a strong functional but weaker geographical organisational structure. Roughly 75% of Costco’s operating income comes from membership fees and on average they increase their amount of stores by 4% annually. Costco have 732 warehouses, with 200 not within the US, across 11 locations. (Figure 1) Its revenue for 2017 is currently 129.03 billion an increase of 8.68% from 2016 and its net income has risen by 330 million to 2.68 billion since 2016.

India, being one of the BRIC countries, is a developing country with rapid economic growth, thus a target for MNC’s. One of the main reasons for being an attractive market for FDI is the huge potential of the domestic market that is becoming more and more Westernised. Other reasons include the government encouraging FDI and the growing GDP per capita of individual consumers. India could be a promising investment for Costco, as it could meet and provide the correct needs for Costco.

2.0- The Indian Market

2.1- Economic system-

2.1.1- Population and Income:

India’s growing population of 1.3billion is the second largest population after China however is expected to overtake China’s in 2028. It is also assumed that by 2040, taking into consideration purchasing power parity, nine out of every ten Indians will have daily expenditures of between $10-$100 and will belong to ‘the global middle class group’. This buying power will aid further expansion of India’s retail sector. This is appealing for MNC’s as India offers both a large population and consumers able to spend with their disposable income.

On the other hand, 22% of the population living below the poverty line, which could cause some hesitation. This however is a large improvement and fighting poverty continues to be one of India’s top priorities. (Figure 2) For MNC’s this is promising within such an attractive market.

2.1.2- GDP:

It has one of the fastest growing economies with a GDP of $2.264 trillion (Figure 3). Goldman Sachs predicts that the 2020 GDP will be quadruple what it was in 2007 and continue to rise.

Its GDP per capita has also risen, currently at $1709, a 290% increase from 2000, reflecting an increase in productivity.  India is classed as a mixed economy (Figure 4) as the government directs some economic activity through the encouragement of FDI but also lets the price mechanism to take place.

2.1.3- Market Size:

Market Size: India’s general growth rate has recently slowed with the second quarter of 2017 being its third consecutive period. This follows the demonetisation program which removed 86% of India's currency in circulation. The retail industry accounts for more than 10% of the GDP and has immense potential for the retail sector due to four factors. (Figure 5) India’s retail market is expected to grow at 10% to $1.6 trillion by 2026 an increase of 900 million from 2016, suggesting that modern trade would expand twice as fast at 20 per cent per annum.

2.1.4- Exchange rates:

The average USD/INR exchange rate throughout 2017 so far has been 1/64. The rates do not fluctuate by much, meaning a more stable environment for MNC’s to set up in.

2.1.5- Tax:

India’s corporate tax rate stands at 30% and for corporations, paying taxes has become easier. Payments are to be made electronically, as well as introducing administrative actions that make complying with corporate income tax regulations, increasing appeal for MNC’s.

2.2- Political system-

2.2.1- Political System and Trade:

A political system is the set of formal institutions and practices that define a government's structure or the system of government in a nation. India is the worlds largest democracy and generally, countries that stress democracy tend to be market based economies, the case for India. A democracy allows more flexibility for MNC’s to enter the market and operate within as oppose to China, similar in appeal, which is ruled by communism. For India, economic liberalisation is seen as important, once again emphasising the appeal to expand there for MNC’s. Whilst the environment is stable, there is a more laid back approach to paperwork which could lead to delays. In terms of trade (Figure 6) India imports 59% more than it exports, showing the high consumer demand, ideal for MNC’s.

2.2.2- Corruption:

Whilst the high potential of the domestic market continues to make India the 3rd most attractive country for global corporations to invest in, there are high levels of corruption.(Figure 7) Whilst retail is not one, corruption effects the ‘ease of doing business’ and India are tightening the rules, punishments and anti-graft laws for taking part in such activities as well as increasing transparency, which combats corruption.

2.3- Legal System-

2.3.1- The legal environment:

India maintains a mix of civil and common law with the legal framework instilled from the colonial era with the British ruling. Combined, they provide a favourable environment for MNC’s, lessening risk. FDI has increased by $24billion inflows in the past 3 years under Prime Minister Modi, seen to be due to intense and bold policy reforms. In terms of trade blocs, India is part of the RCEP group, significant for future trade and globalisation. (Figure 8) National Floor Level minimum wage stands at 176 INR/day.

2.4- Cultural-

2.4.1- India’s cultural environment:

India’s culture is becoming more Westernised but is very different to the US’s and this will need to be taken into consideration. India now claims to be the worlds second-largest English speaking country, thus this would not be seen as a barrier to MNC’s and less stress on developing cross-cultural literacy. Parts of India still use the caste system, through social stratification. In a host country with a rigid caste system, those of higher rank (Figure 10) do not like working with those of lower ranks. This could cause tension within a working environment, and has to be carefully managed.

2.4.2- Hofstede’s Cultural Dimensions:

Culture has been further analysed below in relation to Hofstede’s cultural dimensions. (Figure 11-12) India has been given a score relating to each of the six dimensions.

PDI- 77: Demonstrates high inequality (shown in the Caste System) but seen as a cultural norm.

IDV- 48: India has clear collectivist traits, showing preference for belonging to a larger social framework and loyalty relationships from employers.

MAS- 56: Classed as a masculine society, and its focus is success and achievements.

UAI- 40: As a medium to low score for avoiding uncertainty, people seek change, not avoid it. Thus consumers will welcome MNC’s as a new venture.

LTO- 51: Concept of ‘karma’ dominates religious and philosophical thoughts. The high score means forgiveness for punctuality is easily earned.

 

IND- 26: It is a culture of restraint meaning people can control the gratification of their desires.

2.4.3- The Eclectic Paradigm in relation to India

In summary, the overall attractiveness of the market is very high, due to India’s promising prospects for the market as well as for consumer demand. Whilst there will be issues such as cultural, India is the worlds fastest-growing G20 country, and China is seeing a slowing growth rate currently and forecasts from PwC.

3.0- Entering the Market

3.1- Unsuitable ways for Costco to enter India

There are 6 entry strategies MNC’s can take, however for the purposes of Costco entering India, not all of them are suitable options. Exporting for instance is not suitable, as Costco will set up a store in India-the host country and invest FDI. Licensing and Turnkey Projects also have low commitment, with the latter meaning an international firm would handle all the details. This would be more appropriate for manufacturing operations. Franchising is a specialised form of licensing, however would result in Costco having low amounts of control, which could alter from Costco’s reputation.

This leaves, joint ventures (JV) and Wholly owned subsidiaries (WOS). If Costco were to enter the market via a JV then Costco would be able to establish themselves faster with a well-known and trusted company. Costco could also benefit from gaining local knowledge in order to break down the cultural barriers that have been discussed. Such aspects of Indian culture such as ‘no beef’ policies, when one of Costco’s main fresh products is beef, will have to be adjusted and having a firm from the host country could be extremely beneficial in being successful. When Walmart tried to enter Germany for example, they did not understand that due to their consumers culture, low quality products would not be well received, resulting in a failed entry. Nevertheless it offers limited experience curve and could lead to potential conflict between partners as the Indian way of doing business, such as working relationships and punctuality, differs from the American way Costco is more familiar with. It would also mean Costco has a lower amount of control over their store, products and brand reputation. Costco has already expanded successfully globally and would have dealt with adopting new country specific traits as well as culture. This is evidence that Costco will not necessarily need the help of an Indian firm when entering the market and WOS emphasise long-term performance unlike a JV which may be beneficial at first but not in the long-run.

3.2- How Costco should enter India

Based on the conditions of Costco, it is recommended that they enter the Indian market through a Wholly Owned Subsidiary. This is not simply because Costco have chosen to enter other global markets this way, but also because this entry method is best suited for Costco when entering the Indian market. There are 2 ways in which a firm can set up a new operation in a different country. (Figure 13)

A Greenfield Venture would mean Costco setting up a new operation in India. An acquisition would be acquiring an established firm in the host nation (India), and then use that firm to promote its products. The second option is not as appropriate for Costco as they would not just want to sell their products under an established firms name, they would want to develop brand recognition and sell under their own corporate name like they have so far across the globe. In India, the largest and most well known and respected chain of supermarkets is Safal. This would be the suitable option for Costco to acquire if it wanted to take this route; nevertheless previous expansions into foreign countries suggest that Costco would want to remain selling their products under Costco and not under a different brand.

For these reasons Costco should enter the Indian market via a Greenfield Venture as a wholly owned subsidiary. (WOS)

3.3- Justification and Analysis of a WOS

There are many advantages to this entry strategy that apply directly to Costco and India, the most obvious being Costco would have a 100% share in the profits generated in India, the foreign market. First, Costco’s competitive advantage can be said to be its business model. By buying and then selling large quantities of goods at low prices through a membership only type of club, Costco have been able to implement this strategy globally unlike no other company. Entering as a WOS essentially eliminates the risk of losing control of operations, management and brand reputation. For a global corporation such as Costco, brand image globally needs to be consistent whilst taking

into account cultural needs, and if Costco were to not have control over their store, the reputation of the company as a whole could be significantly damaged. This tight control would help to engage in global strategic coordination. It is also encouraged by PM Modi, to invest this way as it can create higher levels of FDI for India, thus Costco would not have to overcome many political barriers entering India.

Costco would be able to sell the same products generally in India however would have to take into account cultural differences. For instance changing the main meats that are sold (beef is less common in India) and perhaps introduce products specific for the Indian market such as dhaals , fresh herbs and spices as well as saaris within the clothing section. Additionally, Costco could realise location and experience curve economies. Costco could do this with any of the many Indian suppliers if they wanted locally produced products for fresh produce, which is preferred in Indian culture, whilst keeping their other international suppliers. By using a low cost strategy, Costco can exploit the experience curve. They do this through contagious improvement and pricing their products lower than competitors. As Costco grows, they can gain experience and provides the competitive edge over competitors, present or even potential. Another advantage is that Costco will show its long-term commitment to consumers and employees. Employees are an asset as they maintain customer relationships-a key driver to succeed in India’s competitive market but also very important in terms of culture, their IDV score is 48 supporting this.

This entry strategy is however generally the most costly method and Costco will face higher risk and capital start-up costs. It will also be slower than acquiring or a JV and Costco will have to work hard to establish themselves in the new market. They may have to deal with higher levels of bureaucracy and red tape even though the Indian government are improving on this. The risk for Costco in terms of setting up in a new culture is high, but they have successfully done this before

in different locations and can definitely adapt to the Indian culture.  Costco can become very successful in India but must adapt to consumer demand, something they can clearly do, and take into consideration stakeholders.

4.0- Conclusion

To conclude, India is a very attractive market for MNC’s even with the issues that MNC’s like Costco may encounter and shows a promising future for the retail sector. Its growing economy with greater consumers having greater amounts of disposable income outweighs issues like high levels of corruption and poverty. Analysing the conditions of Costco’s business and understanding the Indian market, the best entry strategy for Costco would be a Wholly Owned Subsidiary through a Greenfield Venture. Whilst at first costs may be high, for Costco to have full control of their operations and reputation globally, this is the way forward. In the long-term, Costco will be able to establish themselves as their own brand in India, gaining loyal consumers for when competitors enter the market and against current ones. The gap for a wholesaler to enter in the Indian market is clear, and Costco would be successful in entering this way. Costco has strategically placed themselves around the world successfully and entering India through a WOS would be the most effective way of entering India and the Asian market.

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