The case explains the international strategy of an Argentinean confectionery manufacturer, Arcor Group. In 2003, the company could not get its targets with their globalization strategy due to financial ups and downs and the turbulent economy which was in pursuit to get to its normal shape. As a matter of fact, Arcor is the biggest candy and chocolate producer and exporter in Latin America; with export operations carried out in almost 100 countries. The company dealt with crackers, biscuits and packaged food items too with more than 1500 stock keeping units with its name in the domestic market. The company also enjoyed having five out of the top ten chocolate brands which constitutes around twenty five percent of market’s value. At domestic point, the company believed to market the superior quality with affordable prices so that a larger chunk of the market could be targeted successfully. The company wanted to be global in such a way that it sets up the production facilities and distribution hubs in many other parts of the world. The target in this regard was countries in Europe, Asia and North America. But, before going global, there were many potential macro environmental problems prevailing in Argentine including devalued currency, political turmoil and economic condensation in the country. Thus, such problems had deteriorated the local operations of the company and had to be stabilized before going international. It is supported by the fact that within a time span of one year; in 2002, revenues decreased by over 50 percent, from $650 million to $ 300 million. Also, international revenues of the company increased from $ 350 million to $ 450 million in the same period but the domestic revenue deterioration affected the company’s internationalization line of attack. As the domestic market has started to recover from the slump, Pagani, President of the company has started reorganizing strategy for going international with alternates in his mind regarding the target markets and the time to start international operations. He also thought of products to be injected in new markets, marketing activities to be conducted in such a manner that it increase customer base of loyal people and strategies to maintain an increasing pace of revenues from the international expansion under Arcor’s umbrella.
Problems faced by the company
Arcor has been facing many problems for maintain their going concern, both domestically and internationally. The biggest hindrance for the company is to maintain an accelerating pace of their operations in the worst macro economic problems in the country which are also accompanied by high level political instability. The result of such problems came in the form of reduced revenue figures. In 2002, the revenue gap swelled up to 50 percent, creating massive problems for the company. If taken niche look, there are multiple problems faced by the company for continuous struggle is the operational part to survive in such a competitive world.
As far as procurement is concerned, the company faces problems in terms of cocoa which is the main ingredient of chocolate manufacturing. Cocoa is grown in small numbers of tropical regions with a lot of demand and supply gaps which leaves price volatility behind for the company to tackle with. Also, the sky high prices of sugar by imposing 23 percent tariff on Brazilian sugar import is another problem faced by the company which has also caused an increase in cost of goods manufactured. If production is taken under consideration, it was seen that chocolate production is lot more investment and capital sensitive than candy production; mainly because of fluctuating supply and price patterns of cocoa. On the other hand, chocolate plant also needs heavy investment to be done for effective production output. In such capital and investment fluctuations in the economy, it is much difficult for the company to invest $ 100 million for such a plant for meeting demand pattern of the consumers. Also, there is a paradigm shift in distribution practices since the sales volume has increased dramatically in small kiosks and convenience store from super stores and hyper markets. In this regard, superstores are easy to handle on distribution ground; but handling niches in such cases needs strong market insights and approach for successful operations.
In confectionery business, advertising plays an important role for augmented sales figures and profitability; which price comes next. Thus, advertising budgets of the company are also swelling day by day in such worst economical conditions and deteriorated profitability ratios. This can be explained by the fact that chocolate has advertising to sales ratio of 3 to 6 percent.
Product differentiation in chocolates and bringing innovation in the process is much vulnerable to peruse since some of the chocolate brands are present over two hundred years and any change in ingredients and process of manufacturing can be disastrous. Thus, global branding of chocolates becomes difficult in such situations. In such conditions where chocolate branding is difficult, Mars as a competition has been successfully maintaining five brands under its name. This also increases threat posed by such competition and Arcor must devise sound strategies for branding purposes. Product development issues are also present in which 1 percent is the standard from research and development to revenues but this process is much time consuming also require excessive capital to advertise the new product. Marketing problems are also present; since the company has to change flavors and packaging according to the local markets. For example a product tastes more sweets in United States where it is less sweet in Brazil due to local tastes. Such requires technological advancement which requires up to $ 100 million investment. In such turbulent market, failure rate of newly introduced products is very high which exerts greater pressure on the company to maintain its profitability by reducing such default rates. In such competitive conditions, a new addition of product or private label created more problems to maintain profits by the company. Such a concept entails private labels in the food industry in both developed and under developed countries where there were many popular store brands, house brands, signature brands, no brand generic and other exclusive brands which were cheap to the consumer also satisfying the need patterns of the same. Such a market swelled to $ 1 billion in 2003 which explains that the companies have had huge losses due to such competition which is growing with a greater pace. Also, it is revealed that such market is going to be near $ 100 billion by 201. Thus, Arcor confectionery must device sound strategies in order to deal with all these problems and threat especially the emerging market in such case of product or private label. Also, the company should ensure wide scale applicability of their newly designed strategies since the confectionery market is getting homogenous day by day and maintains profits at a strategic level seems much difficult task of big players in the worlds like Nestle and Arcor to maintain a healthy profit base.
At the domestic level, the company had an excellent market position with the concept of marketing supreme quality at affordable prices; which were ten percent low of the prices offered by the competitors. Such marketing concept also helped the company to get a positive share in the domestic confectionery market. The company also acted strategically to counter such problems of procurement, marketing and branding.
Assessment of alternatives
Due to such problems in procurement and supplier base, Arcor decided to vertically integrate and purchase farmlands of their own for excellent milk supply which is operated by their own management. Such a step proved excellent by bringing positive results for the company. The company started producing its own sugar cane for sugar, milked its own cows and used its own milk as the key ingredient as a supply to extract fructose and glucose. The company also vertically integrated into producing electricity and packaging solution also outsourced the same to third parties.
This has provided the company with a cushion to reduce risks due to over dependence on their suppliers. As a matter of fact, cocoa is still to be imported from tropical regions, but the domestic strategic decisions of vertical integrations seem to be viable for the company’s long term strategic goals. Problems related to production have also been addressed in a just way. Since, the production managers always focused on economies of scale for per unit product cost is tried to minimize by producing large volumes of products. In this regard, strategic investment in the latest technology is done by the managers so that cost could be cut in production and profitability ratios could be given time and space to get back to its normal position.
As well as distribution channels in niche markets are concerned, Arcor has had many options in mind. Out of all, they chose outsourcing as a viable option to choose. The domestic distribution was planned to be conducted using the company’s 160 third part distributors which were assigned the job to transport packaged boxes to their final destinations. Such a strategy proved good since it saved a lot of time and capital of the company to reach the market niches. Also, company utilized the strategic option of targeting key wholesalers and super markets directly. This also have a strong impact on company’s profitability in terms of targeting a massive audience visiting super markets. As a matter of fact, Arcor also educated its distributors to train them.
The company realized the fact that these distributors have to act as salesperson, promoters and deliverers on company’s behalf and have the company’s image on the frontline. Therefore, training them in such a way that they can be utilized as optimum resources for the company is the crux of training activities. Therefore, a budget of half a million dollars is segregated everyday to conduct such training sessions. Such an alternate to be used in such capacity seems favorable for the company since it provides greater evasion of risk. Also, company in such manner is able to reduce a lot of expenses related to wholesale and distribution. Thus, such steps ensured by the company seem to be of greater significance for the company on economic and operational grounds.
For marketing new chocolates and candies in the market, Arcor historically focused on distribution and wholesaling rather than on advertising. As a matter of fact, the company always relied on existing lines and distribution base rather than introducing new ones for new products. Also, the company successfully injected 120 new products in the markets each year. In 2002, the following the same expansionary policies, Arcor launched almost fifty new candy stock keeping units; which are five times greater than the competitors. If chocolates are concerned, the company focused on manufacturing four times more new chocolate if compared to its competitors. The company also focused on having low advertising budgets for new products in the market.
As explained by Falco, General Manager of Arcor, advertising is a complex task to be followed if new confectionery items are to be marketed. The company focused on maintain excellent distributors base. The reason was the time constraints it took to hire and train distributors to understand the new products and company’s existing distribution techniques. Doing so is more important than focusing on the media. Such strategy proved favorable for the company since it allowed the company to avoid expenses on advertising and focused on distributing new products to niches. But the changing business patterns of 90’s are showing a complete transformation and operations are getting advertisement centric. Therefore, the company has to change its strategy but so far, it has saved a lot of capital by focusing on its distribution and not going for massive advertisement. The company also decided to focus on increasing customer value by cutting costs from advertisement and product development budgets. This reorientation also seems to be fruitful for the company in such macroeconomic problems.
With changing economic dynamics of the country, the company also aligned its strategies with the environment. For example, they changed the number of gum sticks in the pack to four and two rather than six. This strategy proved excellent since it did not allow for the company to collapse its revenues. Cost structures were also restructured by changing the input quantities and mix of the same in production practices. As the peso was getting devalued, more input ingredients were manufactured on the local level in order to avoid excessive prices. The cost of sugar was also getting sky high and the government was about to impose heavy taxation on import. Therefore, sugar cane production has strategically started by the company on a local level to extract fructose and glucose. On the other hand, the crop failure in Ivory Coast has also caused the cocoa prices to puff up by 80 percent in dollar terms, which has created many budgeting problems for Arcor. Therefore, the company has been utilizing other sources of cocoa procurement and replacing some of its chocolate variety and other products with the inclusion of wafers, cream and other ingredients. Due to depreciating peso and monetary constraints, the company decided to reduce its days to accounts receivable ratio and introduced a new window of 35 to 40 days from 90 to 120 days. Also, the supplies were stopped to retailers and wholesalers which were not acting in compliance with the new policy of the company.
In its expansionary policies, the company has been focusing on expanding its operations in United States/Canada, Latin America, Europe and Asian markets. In this regard, Mercosur countries are focused and the countries belonging to the Andean Pact. Also, a subsidiary unit is also established in Miami to distribute products in United States. The company also intended to move international headquarters of from Buenos Aires to Barcelona as macro economic conditions are not suitable in Argentine but did not do as the conditions started to get stabilized in the due course of time.
Suggested course of action
On a domestic level, the company has had many wise decisions. For example, vertical integration of farm lands with its own cows and land to grow sugar cane. Also Research and Development was done for sugar cane to extract fructose and glucose which must have helped the company to reduce the cost if compared to the import of sugar. Also, decreasing the window of accounts receivable is another noble step since it would allow the company not to lose in the case of further depreciation of the peso. The company also focused on distribution channels rather than advertising for new products and reoriented the focus to increasing customer value.
On an international level, the company made a right move to establish a subsidiary in Miami in 1993 for distributions in the country. In this regard, expanding business in United States and Canada seems to be the right move if compared to other countries under consideration. United States confectionery market is much depended on importing products from different countries. This factor can help Arcor to establish a sound company base in the region. The biggest charm in penetrating in the US markets is their zero tariffs on imports from Argentina. Thus, the conditions in the United States market seem favorable. More than 300 stock keeping units are injected in the country. On the strategic level, alliance has been formulated with Walmart, the biggest retail store chain in the country to for selling the products under the brand names of ‘Whisper’ and ‘Sweet Enticement’. Such alliances ensure the company’s long term sustainability in the markets. The Canadian market for confectionery was also larger if compared to the Argentinean one. The company also anticipates of getting $ 10 million revenue figure in Canada by opening its Sales office in Toronto and decided to utilize the same set of strategies which are followed in the United States.
Although logistic costs for transporting products from Argentina to United States were about $ 1700 per container in 2003 which was around $ 1610 in Europe. But the advantage of zero import tariffs is the biggest advantage which overcomes such difference in logistics and transport costs. As far as the European markets are concerned, it seems difficult to establish long term business activities in Europe since there are no existing set ups of the company in the region like they had in Miami since last ten years. Extensive marketing research would be needed in this regard. Also, if Asian markets are taken into consideration, the case explains that the company had negligible market knowledge about the Asian market and time is required to devising right strategies for Asian markets, therefore jumping into Asian markets gives the impression of being out of any possibilities. Therefore, shifting the focus of international expansion should be focused on the United States market due to market know how, demand pattern and zero import tariffs for products coming in the US land from Argentina. Growth prospects in Canada also seems to be fruitful since the market size in the country is huge and promising results in terms of sales figures are expected from the country too.
Arcor is an excellent example of competing with macro environmental problems in order to maintain successful operations and maintain profitability. The case gives excellent examples of dealing with problems on strategic, tactical and operational level. For example, the strategic move to vertically integrate the business and acquiring farm lands and cows in order to reduce cost proved viable for the company. On the other hand, aligning the organizational accounting practices with the macroeconomic problems of depreciating value of the peso were another noble step in which company decided to reduce the days to collect accounts receivable. Outsourcing distribution activities and training activities to distributors was another positive step ensured by the company as it helped the company to establish excellent relations with customers as well as its distributors. On the other hand, maintaining strategic alliance with a retail store giant like Wal-Mart explains strategic decision taken to augment in United States market for import tariffs are not applied from products imported from Argentina.