Globalization and Implementation Plan Essay
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This report will provide business and demographic information to determine a platform of business strategies and alternatives for Home Depot to re-enter or abandon the Argentinian retail market for home improvement centers. Home Depot must be very specific and strategic to try to re-enter the market due the abject failure in entering the market in 1997 and existing the market in 2001 from the lack of profits and community acceptance. Home Depot cannot afford another failure in Argentina or South America. (Home Depot.
Home Depot is the 4th largest retailer in the US, the 5th largest retailer in the world and ultimately the world’s largest home improvement specialty retailer. In 35 years, Home Depot operates 2,257 retail stores in 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, Canada, and Mexico. The foreign locations (294) generate just 12% of Home Depots’ total revenues. They have engineered entry and expansion into foreign markets through acquisition of smaller retailers and expanded upon their success.
The Home Depot, Inc. operates as a home improvement retailer. It sells building materials, home improvement products, and lawn and garden products, as well as providing installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me, and professional customers. It serves home owners, professional remodelers, general contractors, repairmen, small business owners, and tradesmen.
From the beginning, The Home Depot has developed strategic product alliances directly with leading manufacturers delivering the most exclusive products and national brands. They also provide a combination of proprietary products like Ryobi® tools, RIDGID® tools, BEHR® paint, LG® appliances, and Toro® lawn equipment. Home Depot has set the standard for innovative merchandise for the do-it-yourselfer and the professional contractors. In addition, they can provide exporting servicing for products worldwide. (Home Depot. 2013).
This portion of the report will review the demographics, economic markets, income levels and currency values, culture and along with the legal and political environment in Argentina and South America for Home Depot reentrance.
The total population of Argentina is just over 42 million people covering 2.8 million square kilometers (km). It is the 8th largest country in the world and speaks primarily Spanish and Italian along with English, German and French. The population is primarily located among five largest cities of the country in northern 30% of the country and within 600 km of the capital Buenos Aires with 13 million citizens. It has less than 1% population growth and the average age is 30 years old with a 98% literacy rate and 16 years of formal education. Regretfully, the average unemployment rate is estimated to be 10.2 and higher for females.
The income level for individuals per capita is $18,820 and ranks 73rd in the world. The labor force is comprised of 17M workers and ranks 36th in the world. The percentage of the population below the poverty line is 30%. Between the poverty line and the percentage of unemployment and contraction in the economy is does not provide a lot of discretionary money to be used for purchasing homes, maintenance, and remodeling.
The culture of Argentina is based upon traditional Roman Catholic values (92% membership) centered upon family values and 100’s of years of religious beliefs, values, dependence and fostering upon local relationships. The culture is also driven by personal relationships with the expectation of working with you to find solutions to consumer needs. Many Argentinians do not like the big box impersonal retail stores that do not have the personnel to spend time creating trust and loyalty with customers. (CIA Factbook. 2013).
International Considerations for Argentina and Home Depot:
The economy of Argentina is the 22nd largest in the world with a growth rate of 2.6% with a GDP of $475B in 2012. It has a diversified economy due to the many natural resources available to them. Manufacturing is the largest segment of industry with 20%; agriculture with 5% and the remaining in the services and tourism sector. The currency in Argentina is based upon the peso and the current exchange rates ranges for US dollars range from 1 peso to 4.1 to 4.6 dollars. Argentina is a member of Mercosur with Brazil, Paraguay and Uruguay implementing a Common External Tariff (CET) for non-members to pay tariffs up to 35%. This was implemented to protect those economies from the dumping of cheaper foreign goods. Argentina defaulted on its debt in 2002 leading foreign investors to flee and take their investments elsewhere. Since then, Argentina nationalized the $24 billion
pensions fund and limited the amounts of foreign purchases of land.
Argentina has not been able to pull out if the economic slump and economic growth has completely stalled. The optimistic view point for economic growth in Argentina in 2013 will be less than 3.5% for consumer demand, industrial production and exports. This will apply additional economic pressure for homebuyers to make purchase homes and banks willing to lend.
They have implemented a number of measures to keep dollars in the country restricting foreign currency exchanges and debt obligations in defending the value of the peso. These restrictions have effectively made it almost impossible to obtain US dollars for the purposes of real estate purchases. The federal tax agency’s authorization is now required before making any foreign exchange purchase. The implementation of these tight policy measures has the real estate activity in 2012 fell approximately 40%, making it one of the sector’s worst performing years in the country in a decade. “The number of commercial real estate transactions in Buenos Aires fell 46% to 6,315 and residential transactions fell 15% in 2012. (Bifani. 2013)
The legal system for Argentina has become very restrictive over the years to protect their business and economy from inflation and currency issues. They have the Argentina’s Customs Code (DGA), which registers all foreign importers and exporters. They apply import duties and taxes to all imports along import duties, statistical taxes, value-added taxes and excise duties. Argentina has strict regulations and fees regarding the purchasing of property by foreign interests, which limits the potential for revenues and growth. (CIA Factbook. 2013).
Market Considerations for Argentina and Home Depot
Is Argentina, the best possible country for Home Depot to reinvest into? Argentina ranks in the bottom 10 countries in the world for foreign businesses to do business in. Specifically for Home Depot, it takes 12 months for a construction company to obtain a construction permit, which double what it takes throughout the rest of South America. This would greatly impact Home Depot ability to build stores and expand within Argentina. The majority of businesses hours operate between 9am – 7 pm and can run to 9 or 10pm for retail stores. The business hierarchy is top down with ideas and instructions come from the top. They are very respectful of business protocol and will not break those social norms or status structure. With these facts in mind, it demonstrates Argentinians require time to develop trust and familiarity, especially for foreigners. Negotiations will take a considerable amount of time and you must be willing to argue and debate to get their support and consensus. They will not hesitate to interrupt and argue for the finer points of agreements before proceedings to the next step. (Communicaid. 2009). The following are business points regarding the desire to potentially expand into Argentina.
They have a value added tax (VAT) across the economy and a wealth tax. These taxes discourage both internal and external business to invest in larger business ventures due the country’s desire to confiscate profits from business people from investing. The government has huge political swings of ideology and purpose. This creates an environment that can propagate corruption, bribery and short term political or economic decisions to encourage voting support. They are a 60% tax evasion rate, which is triple that of US citizens. For many of the key economic indicators, Argentina ranks the bottom 25% in the world for doing business, economic freedom, human rights, taxes, and corruption. The inflation rate is about 10% and outside economists are reporting about 20%.
Credit cards have low credit limits restricting higher purchases and up to a 45% interest rate. This does not encourage businesses to take any risks or initiatives for business growth i.e.: construction businesses. (Chafkin, M. 2001). Overall according the financial reports, Argentina is now considered a third world country due to its difficulty with globalization and working with foreign countries. * They have established strict foreign investment guidelines prohibiting foreign ownership. * They have restricted construction companies for building and developing business areas. * They have high tax rates and low reinvestment rates back into their country. * They have problems with government corruption, bribery and ethics. Entry Modes (Globalization & Implementation Plan)
This portion will cover the various possibilities for establishing the Modes of Entry for Home Depot to reenter Argentina. Home Depot’s expansion in foreign markets has been less than successful such as the ones in South America, China and Southeast Asia. They have had some success in Canada and Mexico due to being substantial trading partners in the NAFTA agreement and similar ideology of home ownership and access to credit, Exporting: This mode of business entry will not effectively work for expanding and opening home improvement stores in Argentina at this time. Local competitors will prefer to source construction products from local suppliers rather than to purchase from foreign suppliers. They have implemented restrictions for international trade with tariffs and entrance barriers, which will increase the possible competitive pricing to become less attractive for Home Depot.
Turn-Key Operations: This mode of entry will not be a viable alternative due to the fact that Home Depot does not provide any explicit technology over the local DIY businesses such as EASY. This mode could damage Home Depot by training and possibly improving competitor’s ability to compete with Home Depot in other markets in South America like Mexico. Licensing: This mode of entry is similar to Turn-Key due to the lack of control over the foreign business and again Home Depot cannot provide any real production improvements other than economies of scale to existing or new business. It would only provide royalty fees to Home Depot and would not warrant the business investment.
Franchising: Franchising is similar to licensing. It works when companies have a strategic production process like such as mentioned in the text with Fuji-Xerox or even McDonalds. Home Depot does not provide the specialized processes or supply chain to support the development of franchising into foreign markets. Wholly Owned Subsidiary: This is the method and mode of entry Home Depot tried before and failed. At that point in time, Argentinians ability to own and purchase property was very restrictive for a majority of the population. Argentinians are not accustomed with reinvesting into their homes or dwelling.
They did not have the incentives to reinvest or the desire to learn how to perform the tasks that it would take to complete a successful DIY project. Also, Home Depot is not an Argentinian or Latin American business, which creates a lack of respect and loyalty. The Easy company growth is due to Home Depot building the model and Easy taking them and restructuring them for Latin American consumers. (Hill, C. 2011). Joint Ventures: This is the only method or mode of entry that makes sense for Home Depot to pursue. In the textbook, there are examples of Tesco and Jollibee competing with bigger more entrenched businesses by using joint ventures and investments to establish a foothold.
For Home Depot to renter the South American market and specifically Argentina, I believe the only choice Home Depot has is to engage in joint ventures with smaller DIY businesses in Argentina and gain some traction similar to Tesco in Europe and Asia. Also, EASY is now the big player in the market with 49 DIY stores. It is doubtful they would entertain any joint ventures without the ability to be the controlling partner or give up its majority interest.
This portion will evaluate Argentina’s history of monetary policy and its effect upon the potential desire or ability for Home Depot to reopen home improvement retail stores there. Argentina history relating to financial and monetary policy has been turbulent and at a crisis stage numerous times. Argentina is working hard to revamp their economy and currency ratings. It has a GDP of $475B ranking 22nd in the world and one of the largest economies in South America. In 1998 Argentina entered a four year depression resulting from governmental tax increases, devaluing of its currency, freezing bank deposits, defaulting on foreign debt up to $93B, and finally removing the linkage between the peso and the US dollar. Some of international issues relating to Argentina’s reputation have been reducing the international trade/currency exchanges have been their protectionist’s policy and rated the worst in the world by the World Bank.
They have seized control over the largest oil and airline companies in the country. They are also being censured by the IMF for dishonest reporting of national statistics specifically inflation rates. (Singer, H. 2013). Argentina has attempted practically every single monetary system known today to their economy and all have failed resulting in financial crisis over the last 35 years. The flexible exchange rate system led to a hyperinflation and the currency board has led to dramatic recessions. During the first three crises, Argentina was using a fixed exchange rate to allow government control. The first crisis was in 1975 with the collapse of that stabilization plan resulting in the devaluing of their currency by 100% and more than a dozen followed the next year. The second crisis was to the Tablita plan in 1981; the Tablita plan was to reform banking regulations and capital account restriction affecting its currency and exchange rates.
It still ended with an 82% devaluation of its currency in one year. The third crisis occurred within 12 months in 1982 with Alemann Plan. This plan was designed around the banking and insurance industries connected to foreign currency exchanges. At this time, Argentina abandoned the fixed exchanges for a floating exchange system. The next strategy Argentina attempted was after the 2001 crisis and implemented a dual exchange rate system to manage and control their economy and currency values.
This allows them to use both fixed and/or floating system with the ability for different fixed and floating rates during the same period of time. The fixed exchange rates are used for essential imports and exports account transactions. The floating exchange rates are used for capital account transactions determined by the market critical to providing foreign cash reserves for the country. Usually, countries implementing dual exchanges rates are using protectionist control to protect their economy and financial markets such as China. (Investopedia. 2013)
Business Strategy for Home Depot to enter Argentina
This portion of the report is to provide a platform of business strategies and alternatives for Home Depot to re-enter the Argentinian retail market for home improvement centers. Home Depot cannot afford another failure in Argentina or South America. From the beginning, The Home Depot develops strategic product alliances directly with industry-leading manufacturers to deliver the most exclusive products assortments to customers. Home Depots expansion strategies have been very successful throughout North America when they have used acquisition strategies. Their expansion in Argentina did not produce the same results due to the lack of a substantial home improvement company to purchase. They chose to organically grow the market in Argentina. This strategy failed due to many different situations occurring during the same time frame: political failure of the government and presidential resignations, huge drop in their GDP, default on the foreign debt, currency failure, widespread unemployment and public riots.
It was like the perfect storm for the country and Home Depot. (Home Depot. 2013). In reviewing the many strategies that are available for Home Depot to re-enter the market in Argentina, there are many limitations based upon the history of Argentina and Home Depot. They definitely have the ability to leverage economies of scale for providing home improvement products at almost any price point that the consumers is willing to pay. These economies of scale would be too large for any competitive business to ignore.
Their major competitor, Cencosud is the company they sold their four stores to in 2001. It is the largest retailer in South America with over 1,045 retail store in a variety of markets. It is a $19B company with 125,000 employees. Home Depot is a $70B corporation with 331,000 employees in about 2,294 stores. This would be an extremely difficult acquisition and inevitably against their acquisition strategy of buying smaller businesses and expanding through gradual growth. This also limits the amount of exporting potential to Argentina through Cencosud due to the lack of exporting profits. (Cencosud. 2013).
All of these factors leave The Home Depot with a limited amount of possibilities to re-enter the Argentinian market. The best possibility is to partner with Cencosud in a strategic alliance or find smaller specialized retailers that are currently competing with Cencosud in Argentina and offer them very attractive distribution, pricing and profit sharing. I would find it difficult to invest in this country’s economy due the protectionist ideology of the government. Their policies have not created real economic growth and restrict the ability for foreign companies to invest without excessive tax on profits.
The current business environment, banking system and construction restrictions are not conducive for foreign involvement or investments. Home Depot has already attempted once, I believe it would take an even larger investment to overcome the negative perception in 2001. Also, they have a major competitor Sodimac in place and have had double digit growth since 2005. Their best expansion strategies for Home Depot to get back into go into Argentinian markets would be establishes strategic alliances with the smaller retailers for exportations, joint ventures directly with Fallabella and foreign direct investments to invest with either of the businesses if available depending upon the political complexity of the government. (Forbes. 2011).
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