* Universidad Autonoma de Madrid * Master en Direccion de Marketing * International Marketing * Shintaro Okazaki Case Study 1: Foreign Market Entry Evaluation: BRAZIL Diogo Areias Marion Scherzinger Marius Weitz 27. 10. 2011 Contents 1Foreign Market: Brazil1 2Brazil Luxury Market1 3SWOT- Analysis1 3. 1Strengths1 3. 2Weaknesses2 3. 3Opportunities2 3. 4Threats3 4Market Entry Strategy3 Bibliography4 Appendix5 Foreign Market: Brazil At this moment Brazil has 190. 7 million inhabitants and is the 7th biggest economy in the world, the first in Latin America, with a GDP of approximately 2088 billion dollars2.

Its economy has been expanding with the help of booming commodities (meat, cocoa, sugar cane, corn, rice and soya). The biggest Latin American economy currently has a 7,5% GDP growth rate and an increasing 7,3% inflation rate. The increasing inflation rate is linked to food and fuel costs or expectations of price and wage raises. (Employees expect higher prices and demand higher wages). Brazil has a large agricultural and industrial base, but the growing service sector has accounted for over 60 percent of the GDP in recent years. Brazil Luxury Market

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It seems paradoxical that a country with so many social problems such as Brazil, where over 20% of the population lives in poverty, can be so appealing for companies offering luxury goods. Compared to other countries in which the tourists are the principal consumers of luxury products, in Brazil these products are almost entirely consumed by local citizens. As the economy grows, wages increase as well and are generating a great opportunity for the premium brands. According to a GFK Consulting study, the reflection of this fact is the consumption of luxury products worth $6,5 billion per year.

Moreover, in the last five years this sector grew 60% and in 2010 the invoiced sales of luxury products increased 27% according to the same study. Another study of Goldman Sachs states that in 2025, the luxury market could represent 6% of the global market (approximately $60 billion). SWOT- Analysis Strengths * Brazil’s luxury market is growing fast. The middle and high classes buy a lot of status symbols and sales of luxury goods are high. The demand exists and might grow further. * Brazil imports were worth 20. 2 Billion USD in September of 2011. Unemployment rate gradually decreased the last ten years. In August 2011 it was reported at 6%. * The Brazilian Real exchange rate depreciated 4. 08 percent against the US Dollar during the last 12 months. Historically, from 1992 until 2011 the USDBRL exchange averaged 1. 78 reaching an historical high of 3. 95 in October of 2002. * Consumer confidence is on a high level with 112. 4 in September of 2011. * Brazil reduced its poverty during the last 10 years. Even though the poverty headcount ratio is still high, it decreased about 50% since 2000.

Together with the increase of higher education it will raise the populations’ ability to produce high valued goods and services, essentially, a country’s earnings. Less poverty lowers the long term cost of welfare to the poor, or to be more specific, general expenses. Weaknesses * Official data for the last three decades show that Brazil has one of the world’s most unequal distributions of income. But the GINI index decreased from over 60 in 1998 to about 55 nowadays and the government continues trying to reduce this inequality. * Brazil reached in 2010 a corruption index score of 3. . High levels of crime deter foreign investments in a country and increase the cost of business due to bribery and safe concerns of employees. If crime is epidemic, it could also affect laws and judicial procedures that ensure fair treatment for local businesses and foreigners looking to investing with the country. * Although the luxury goods sales increase, it is still difficult to export to Brazil, as the country has a complicated and inefficiently bureaucratic tax system. In the luxury market taxes reach up to 25%, varying by state.

Opportunities * In the run- up to the 2014 FIFA World Cup and the 2016 Olympic Games in Rio de Janeiro, the government is actively working to improve security in the favelas in the city which, according to the municipal government, are the home of 1million out of Rio’s population of 6million. Furthermore Brazil is improving its infrastructure in advance of these events. Threats * The inflation rate of Brazil is rising. In a ten year analysis one can see that it is not shockingly high, but still an existing threat of higher inflation rates. The competition in the luxury market is on a high level despite the import difficulties. Most well known luxury brands are already in Brazil and will try to increase their shares as the demand grows. * The Real is getting too strong. If it gets stronger, the Real will hurt Brazilian exports. Market Entry Strategy As a company in the sector of luxury goods, the most important point before entering the Brazilian market is an exact definition of the objectives, which shall be achieved. According to those the possibilities for the market entry should be clearer. For this, a company producing luxury watches will e used as an example: * Extensive Market Coverage: Brazil is a huge market, not only in sales potential but also in geographical terms. To satisfy our wealthy customers, avoiding a long delivery time and a complicated distribution in general, the company should opt for a local market presence in order to be in control of the majority of the variables concerning local distribution. A direct export strategy would complicate the goal of extensive market coverage. * Exclusiveness in distribution ; image: Being a luxury brand „exclusiveness” is an omnipresent term when it comes to the desire of the customers.

Nevertheless, this factor is also crucial for the distribution of luxury goods, such as expensive watches. A local market presence would increase the level of control which is crucial in order to maintain the exclusiveness and to minimize the danger of taking damage to the brand image. * Acquisition of local knowledge: The Brazilian market is nowadays, as already stated in the SWOT analysis, receptive to foreign investments. As a European company entering, without having done business in the Brazilian market, it is recommendable to look for partners at the spot.

However, the form of the partnership is the clue. * Regarding the mentioned topics, which in reality would have to be analyzed profoundly, the best option for a market entry would possibly be a direct investment in terms of a Joint-Venture with a company, which is already a player in the Brazilian market. In that case, the advantage would be the possibility to share the client base and probably the distribution channels and therefore present a good starting point when it comes to distribution and sales of the watches.

Also, the contacts to the authorities will be advantageous in a country with a high level of bureaucracy, such as Brazil. When it comes to production of the goods, synergy effects evolve due to the technology and knowledge transfer of both companies. The clue is to find the right partner with whom aims and objectives of both companies converge. An intensive research and negotiation process is therefore the necessary requirement. * * Bibliography Economy Watch “Brazil Economy”, 15 March 2010 (Available at http://www. economywatch. om/world_economy/brazil/) Jornal Brasil Economico: “Sectores economicos que tem boas perspectivas de crescimento”, Eduardo Pocetti (Brazil BDO? s CEO), 7th September 2010 Marketing Research: Brazil Defence and Security Report Q4 2011 (available at: http://www. marketresearch. com/Business-Monitor-International-v304/Brazil-Defence-Security-Q4-6481221/) O? Neil, Jim and Stupnytska, Anna: “The Rise of Brics”, 3rd December 2011, Goldman Sachs (available at http://www2. goldmansachs. com/gsam/docs/funds_international/static_literature/all_country/20101203_strategy_series. df) The Economist: “Latin America’s biggest economy is more fragile than it appears”, 2nd July 2011, available at “http://www. economist. com/node/18774806 Trading Economics: Brazil Indicators (available at http://www. tradingeconomics. com/ brazil/indicators) Transparency International: The global coalition against corruption. Results 2010. (Available at http://www. transparency. org/policy_research/surveys_indices/cpi/2010/results) World Bank (available at http://data. worldbank. org/country/brazil) Appendix Source: O?

Neil, Jim and Stupnytska, Anna: “The Rise of Brics” pag. 16, 3rd December 2011, Goldman Sachs Source: O? Neil, Jim and Stupnytska, Anna: “The Rise of Brics” pag. 17, 3rd December 2011, Goldman Sachs Source: Trading Economics: Brazil Inflation rate. (http://www. tradingeconomics. com/brazil/inflation-cpi) ——————————————– [ 1 ]. World Bank [ 2 ]. Trading Economics: Brazil Inflation Rate [ 3 ]. O? Neil, Jim and Stupnytska, Anna: “The Rise of Brics” pag. 16, 3rd December 2011, Goldman Sachs