Introduction to Allstar Brand
Allstar Brand is a United States based consumer products company that produces and sells ethical (prescription) pharmaceuticals, OTC (over-the-counter or nonprescription) drugs, and consumer products. It is an $8.9 billion firm that was formed in 1924 and competes with a variety of larger and smaller firms, depending on the product market. It has a number of leading brands in various product categories. Over the years, it has expanded its product category width through internal new product development and acquisition of brands as well as companies. Allstar has operations in Europe and alliances in Asia. These have proven to be very successful markets that performing exceedingly well. But these markets are maturing very quickly, and with increased competition and slowing populations, it is now necessary to look elsewhere for continued growth and profit margins.
The Allstar Board believes that to generate the kind of growth needed to drive their stock price, Allstar needs to develop a market presence in South America. South America is a region of great potential. With a population of approximately 450 million, the region represents a population that is 50 percent larger than that of the United States and Canada. The dominant national language across South America is Spanish, as is the case with Argentina. A variety of trade enhancement actions have put in place in recent years.
The MERCOSUR agreement was set up among the South American countries of Argentina, Brazil, Chile, Paraguay, and Uruguay, including association agreements (but not membership) with Bolivia. This agreement reduces trade barriers among these countries and has encouraged a variety of companies to establish production inside their borders to take advantage of low labor costs and fairly seamless access to neighboring markets. For accounting purposes at Allstar’s corporate offices, revenues and costs are converted into US$. Therefore, fluctuations in the exchange rate will affect consolidated reports directly.
Allsmile, a toothpaste brand, is a key asset of Allstar Brands. It is one of the company’s highest recognition brands in the United States. It is produced in the United States and in Germany for the United States and European markets, respectively. A large number of stock keeping units (SKUs) are produced. South Korean and Japanese manufacturers also produce Allsmile under license for distribution and sales in Asia. There have been reformulations of the brand, but as of today, the product formulations are essentially the same across all markets for a given SKU (although there are slight differences in packaging and in the type and intensity of flavoring that are thought to reflect regional preferences). With an entrance to South America, it may end up being cost effective to build a plant in South America instead of shipping products from the United States.
Current world toothpaste sales total approximately $10 billion. The largest country market for toothpaste is the United States, with $1.4 billion spent during the past year. Toothpaste is available in a number of sizes, delivery systems, textures (paste or gel), and formulations. The basic toothpaste product is a paste or gel with flavoring and one or more active ingredients that provide specific benefits to consumers. A general description of these variations in the United States market is listed below. It is important to note that not all companies produce all possible combinations as each company determines where the holes in the market are and where the most money can be made.
Below is a market attractiveness index for the potential countries Allstar could enter. We have listed five criteria which we believe most accurately provide the best comparative results. The importance weight displays the percentage of importance to the criteria compared other criteria. Under each country is a rating. The ratings illustrate the importance of the criteria in that specified country. The assessment combines the importance weight of the criteria’s and the overall assessment of the country. As you can see by this chart, we have determined that Argentina would be the best country to sell Allsmile toothpaste.
Background on Argentina
Argentina is a large country comprised of approximately 1,068,302.2 square miles, slightly smaller than 3/10 the size of the United States. It has a democratic government that was set up in 1983. It has a population of 39.9 million people of which about 49% are male and 51% are female. Of the population, 97.1% of the people ages 15 and higher can read and write. Eighty-eight percent of the population lives in urban areas. The population of Argentina is pretty steady and is only growing at 0.96%. At 97%, Argentina is comprised primarily of Spanish and Italian (white-skinned) people. The life expectancy of Argentina is quite high with males living to 76 years of age and women living to 80. The age structure of Argentina is typical of what it to be expected for a South American country. The Age Structure Chart below shows the different classifications.
Argentina currently has a strong economy compared to its neighbors. Argentina benefits from rich natural resources, a highly literate population, and an export-oriented agricultural sector. It has a large industrial section. Over the past decade however, the country has suffered recurring economic problems of inflation, external debt, capital flight, and budget deficits. Growth in 2000 was at negative 0.8%, as both domestic and foreign investors remained skeptical of the government’s ability to pay debts and maintain the peso’s fixed exchange rate with the US dollar. The economic situation worsened in 2001 with the widening of spreads on Argentine bonds, massive withdrawals from the banks, and a further decline in consumer and investor confidence. Government efforts to achieve a “zero deficit,” to stabilize the banking system and to restore economic growth proved inadequate in the face of the mounting economic problems.
The peso’s peg to the dollar was abandoned in January 2002, and the peso was floated in February. The exchange rate plunged and real GDP fell by 10.9% in 2002, but by mid-year the economy had stabilized. GDP expanded by about 9% per year from 2003 to 2005. Growth is being led by a revival in domestic demand, solid exports, and favorable external conditions. The government took corrective action and boosted spending ahead of the October 2005 midterm congressional elections, but strong revenue performance allowed Argentina to maintain a budget surplus. Inflation has been rising steadily and has now reached 12.3%. The unemployment rate for Argentina is currently 11.5% which translates to businesses the people have money to purchase products. As you can see on the Market Comparison Chart below, Argentina is the leader in GDP/Capita and is second in GDP Growth and CPI Growth.
Argentina, while smaller than some countries in South America, has a great infrastructure. Argentina has 21,183 miles of railways, 129,463 miles of highways, and 6,835 miles of waterways. In addition, Argentina has 11 ports and harbors and 1,333 airports. This expansive infrastructure makes doing business in Argentina very reliable and smooth. As mentioned before, Argentina falls under the MERCOSUR Agreement which allows for seamless transactions between the countries under the agreement (Brazil, Chile, Paraguay, and Uruguay, and Bolivia). This agreement reduces trade barriers among these countries and has encouraged a variety of companies to establish production inside their borders to take advantage of low labor costs and fairly seamless access to neighboring markets. The chart below shows the benefits of doing business in Argentina. It also points out the extra costs of doing business outside this agreement.
When deciding whether to build a plant in Argentina, we recommend looking at another country. It is important to take into effect all factors.
For example, one may at first glance think Mexico is the most suitable to manufacturing, and this may be the case if the company was going to do business in the United States or Canada. However, when doing business in South America, it is important to stay within whichever trade agreement you will be doing business under. Otherwise, high tariffs and duties will blanket your company. It is also very important to look at means of distribution, specifically shipping. The table below shows the per unit costs for shipping toothpaste from various manufacturing locations, assuming the usual shipping mode for each origin – destination combination. As you will notice, having a plant in the United States is not so valuable because imports to Latin America come with a high price on shipping comparatively from shipping from within Latin America.
As mentioned earlier, it is of great importance to note that in addition to shipping originating within Latin America, one also has no import duties or tariffs if shipping is done within the regional shipping agreements, such as is the case with the MERCOSUR agreement. Distribution channels in Latin America have traditionally been grouped into four categories: traditional, self-serve, hypermarket, and newly emerging is web purchases. Traditional channels are small, independent stores or open market areas almost exclusively served by wholesalers (indirect distribution). Self-serve is a more developed store where customers serve themselves, but that typically offers a narrow line of merchandise.
These may be independent or part of a regional chain but are almost all locally owned. Convenience stores and grocery stores would fall in this category. Hypermarkets are a new style of channel that is found primarily in cities. These are usually large stores with a wide variety of goods and typically purchase items directly from the manufacturer (direct distribution). Many of the hypermarket chains are foreign owned or allied with a global distributor, such as Wal-Mart or Carrefour. The chart below shows the toothpaste distribution within each channel.