[solved]W8 Group entry strategy paper - Submit Files

AG’s Objective & Strategy Requirements

Prior to entering Germany, the MR product line’s safety must be assessed and certified by the EFSA. Once certified, the products must conform to German labeling that requires both the nutritional content and brand information in German.
AG’s target buyers are German businesses that will buy in bulk, allowing more efficient access to the German multiple food allergy sufferers (end users) that constitute the $26M target market.
The selected entry strategy must meet the following strategic objectives:
Generate approximately half ($1.4M) of AG’s $3M revenue goal by 2015.
Control MR production in order to protect and leverage the safety of AG’s products.
Leverage AG’s knowledge of food allergies and product substitutions by controlling customer support.
Compensate for AG’s lack of knowledge of the German market and culture.
Compensate for AG’s lack of sales and marketing resources.
Conform to the start-up budget of $250K.
Establish cost effective transportation channels within Germany.
Entry Strategy Development

Three strategies were considered for reaching the German business buyer: establishing a branch office and hiring a direct sales force in Germany; establishing a joint venture (JV) with Hanneforth to produce ready-made food products; and the recommended strategy, contracting with a German food broker/distributor to market and distribute the MR branded product line to B2B customers.
Strategy #1: Direct Sales
AG would establish a branch office in Germany and hire and train its own sales force of experienced German salespersons who are experienced in the food allergy and intolerance groceries industry. These workers must also be qualified to work in Germany, have the proper driver’s license (driver/logistician), and the office manager will have managerial experience and be bilingual.
The direct sales strategy gives AG the most the most direct contact with its buyers, thus allowing for the best customer service, the most control over the MR “safety” branding message, and the best opportunity for customer feedback into the product modification process. The German sales force would be the first responder to customer questions and problems, acting as the customer's first source in customer service. AG would be responsible for finding and contracting with transportation companies to deliver the goods to the customer, and would be dependent upon the sales people to find such resources.
Start-up costs will be high for this strategy due to hiring of the sales force (initial salary and recruitment costs), initial building and vehicle costs (continuing as operational costs), as well as costs of the initial product, shipping, and tariffs for the first order of products. Because of the time required for the set-up and hiring processes, revenue generation takes much longer than in a distributor strategy.
A major factor limiting revenue potential is that access to the buyers is entirely dependent upon the expertise, knowledge and the number of sales people hired and their pre-existing access to and knowledge of the targeted buyers. A large number of sales people, at full loaded cost to AG, would have to be hired in order to cover the diverse range of B2B buyers and the full geographic territory of Germany. In addition to the high operating costs of managing a branch facility, managing a sales force makes the most demand on AG’s existing management resources, and it would be difficult for AG to manage its sales people without having sales expertise or knowledge of the German language or culture.
Other disadvantages are that AG would have to pay employees whether or not they produce, and it would be difficult for AG to terminate employees who are not producing.
Due the high start up costs and high operational costs of managing a sales staff and German office and transportation facilities, and because of the delayed and limited revenue generation, this strategy would take the longest of the three strategies to break even on the initial investment.
Strategy #2: Joint Venture
The JV strategy involves creating an entity (AG/Hanneforth) that would be responsible for baking and marketing fresh baked goods, a key strength of Hanneforth, to B2B customers that are in search of 100% allergen-free (AG’s strength) prepared foods. Hanneforth would bring the baking expertise and brand identity, as well as access to its existing network of buyers (institutions such as schools and bakeries). AG would supply the allergen-free ingredients. The JV would hire sales personnel and bakers and would pay the costs of delivering baked goods to bakeries. Both parties would acquire a new product line with first mover advantage (through the JV) in the niche market of 100% allergen-free products.
The JV between Hanneforth and AG will purchase ingredients only from the MR product line to produce a new food product that is different from Hanneforth’s current product line of gluten-free baked goods. In order to accommodate for Hanneforth losing any customers of its existing gluten-free baked goods, the percentage ownership will be favorable towards Hanneforth in a 60/40 split of all revenues earned. While this split limits the return on AG’s portion to 40% of the revenues generated through the JV, AG also locks in a buyer for its MR mixes, giving AG two revenue streams. Both AG and Hanneforth would share costs such as legal, administrative, sales force, and travel, in the same 60/40 split.
Any information about needed product modification would be channeled from the JV to AG's production facility, and new products would be shipped to the JV in Germany. AG will control and protect its intellectual capital by producing its baking mixes in the US, but the JV would own any new products developed. The risk of losing control over its trade secrets in production would be greatest in this strategy, since the partner would necessarily be exposed to that knowledge.
A JV requires shared management and, although not as much as the sales force strategy, would still strain AG’s limited resources. But the major risk of this strategy is to the MR brand. AG cannot control the safety of the JV’s products because AG will not control the baking process, although its mixes will be the basis for the baked goods. Creating an unsafe end product could tarnish the MR brand image, but even marketing MR ingredients under the JV brand would dilute the market value of the MR brand for potential purchasers. In addition, this JV agreement could pose a barrier to potential purchasers, since it commits AG to a long-term relationship that may not be valued by purchasers interested in the value of the MR brand.
Like the direct sales force, entering into a JV involves delayed revenue generation because of the time needed for finding and contracting with the most suitable JV partner. The JV could offer a larger sales and marketing staff than the direct sales force, and the costs of the staff would be shared. While this strategy gives AG a new revenue stream with the baked goods, the type of buyer access brought by the partner is restricted to those interested in baked goods, rather than the MR mixes themselves. Therefore, this limited buyer exposure drives the least revenue, and it brings the least brand recognition for the MR product line.


Strategy #3: Food Distributor/Broker
The recommended food distributor/broker strategy is a contractual agreement between Allergy Grocer and an established broker/distributor in the specialty food industry. The distributor will have access to the broadest range of business buyers -- institutional buyers that purchase the mixes to create food products and retailers and e-commerce businesses that sell the mixes to end users--giving the best potential for revenue generation and brand awareness. Distributors will likely have a more sizable sales force than a JV arrangement or a direct sales strategy, and there will be better coverage for the diversity of buyers spread around the country.
Because distributor sales efforts are spread across multiple products, AG will realize increased exposure of the MR brand at less cost. In addition, because the distributor provides in-county sales staff, administrative staff, and customer support, few AG resources will be needed to manage product sales.
The distributor will have experience, knowledge, wide and diverse buyer networks and at least 20 years history in servicing the specialty foods market. It will have warehousing facilities, and will manage inventory and delivery to buyers. The distributor will take title to goods, which reduces the financial risk to Allergy Grocer and improves cash flow. Its sales force will educate buyers on the benefits of this product line, but Allergy Grocer will provide the necessary training to the distributor staff.
The distributor agreement is fastest to enter because the contractual terms are common in the industry and there are a limited number of broker/distributors to evaluate. Unlike the direct sales force and JV, this strategy is also easily exited, as it will be on a contractual basis with a termination clause (60-days prior to renewal).
The distributor will likely have established relationships with other manufacturers of products that address the needs of gluten intolerant and single food allergy sufferers. AG will provide the selected distributor with the ability to offer a new and better product to businesses focusing on the multiple food allergy sufferer, while reaping the rewards from first mover advantage. The distributor will have first mover advantage with the MR product line because there currently are no competitors in the German market selling 100% allergen-free baking mixes.
The distributor will receive a unit price discount of 35% in year one, with an estimated price to the distributor of $8.45. The price to the end-user is recommended at $16.36, which covers distributor costs for import duties and shipping (16% and 5%, respectively, of wholesale), plus distributor’s markup (60% on distributor costs in year one). The price recommended to the end user is comparable to similar gluten-free products (in equivalent sizes) selling for approximately $14.50+ before shipping and handling.
COMPETITOR
Baking Mix (Online Price)
Internet Shipping and Handling US)
Total
Bob’s Red Mill (4 lb bag)
$15.00
$12.34
$27.34
Hanneforth (5 lb)
$14.54
$6.11
$20.65
Schär (USA) 19 oz
Product line does not include baking mixes; however bread mix for $6.09 shipping $9.05
General Mills (15 oz box)
$24.99
$9.99
$34.98
Enjoy Life
No baking mix but sells 100% allergen-free
Namaste (4 lb bag)
$13.98
$9.88
$23.86


The distributor will also recognize 60% of the excess selling price per unit as an incentive, if it is successful at selling units at the recommended premium price of $20.

Summary Alternative Strategy Comparison vs. Entry Requirements
CRITERIA
Food Broker/Distributor
Direct Sales
Joint Venture
Access to B2B Buyers
Broad reach, Diverse buyers,
Limited reach depends on individual contacts
Regional – not national – reach; buyers of finished products only


Protects intellectual capital (MR Brand) and controls product safety
Controlled by AG
Controlled by AG
Brand dilution and contamination risk
Access to distribution and communication channels
Distributor responsibility
AG must contract
JV responsibility
Customer Service Support
Customer service provided via Broker/Distributor and AG’s current service
Strong customer service by own sales
team
Handled by JV partner


The food distributor/broker strategy is recommended because it provides access to the largest number of buyers, to more diverse types of buyers and to the widest geographic dispersion of buyers--all of which drive the highest revenue. In addition, the shorter contracting time of the food broker/distributor strategy will drive faster revenue generation and requires less investment in start-up activities. The distributor contract is easiest to exit (via contract termination) when the opportunity to sell the company is presented, and the distributor requires less involvement by AG management in the sales process.