Opportunities And Risks Of Woolworth’s Overseas Expansion In Indonesia

Suitability of Selected Foreign Market

Business expansion is the stage when the company needs to fight with opportunities and perils. Business expansion deals with increasing the physical presence in different locations to increase the customer base as well as the level of profitability. The present report would analyze the opportunities and the risks of overseas business expansion with special reference to Woolworths. Woolworths is one of the largest supermarket chains in Australia. The organization was established in 1924 with its Headquarter in New South Wales. They have already expanded in different parts of the world and employs 202,000 employees globally (Appendix 1). This report would shed light on the different aspects of the expansion of Woolworths in Indonesia.    

Woolworths has been looking for foreign expansion for expanding its customers. While looking for overseas expansion, IG Market Analyst Evan Lucas considered South East Asia as the best choice for Woolworths. Indonesia has been selected for expansion, as the process of expensing in this country can be cheap (Theaustralian.com.au, 2013). The sales of the supermarket chain in Indonesia has increased by 5.6% from the last year. Expansion in Indonesia would further improve the sales of the business organization.  

Indonesia has been selected for overseas expansion of Indonesia because the stable economic and the political condition would increase the disposable income as well as the purchasing power of the individual. This would increase the growth of the grocery industry within the country. The government of Indonesia has also enhanced the flow of the Foreign Direct Invest (FDI) for boosting the growth in the grocery retailers. In the year 2016, the grocery retailers in Indonesia registered a current value growth of 8% while the number of the outlets remained static (Euromonitor.com, 2017).

It is important to note that the current market is changing due to globalization and excessive competition. Hence, before expansion, it is essential to the suitability of the foreign market. In this case, Porter’s Five Forces would be used to analyze the Supermarket Industry in Indonesia for evaluating the future success of Woolworths in this country. Porter’s Five Forces tool would provide a comprehensive, systematic and robust format to analyze the different factors that can create an impact on the Woolworths Supermarket Indonesia (E. Dobbs, 2014).   

1. The threat of New Entry (High): The market openness policies developed by Indonesian Government after the financial crisis helped to liberalize the retail and the grocery trade that also lifted all sorts of restrictions on foreign investment. This has increased the threat of entry to get a get extent. Moreover, the investment in the retail and the grocery industry is quite low. However, technological development and increased competition within the retail market has created some specific problems for the new retail business, which can hamper the entry to some extent. However, the support provided by the government enable the new entrants to overcome barriers in large extent (Euromonitor.com, 2017).      
2. Rivalry among Competitors (High): Competition among the retail business in Indonesia is quite high. The main retail outlets in Indonesia are 7-eleven (60.38%), Indomaret Point (20.45%), Lawson (12.14%), Family Mart (7.03%). These are the major retail players in Indonesia.  Indomaret is a quite famous and renewed brand that enjoyed rapid expansion. Hence, Woolworths needs to deploy effective market entry strategy.
3. The threat of substitutes (Medium): The growth of the supermarket in Indonesia was also followed by the growth of convenience stores in Indonesia. However, people still prefer to purchase from the local stores. It is forecasted that the share of the supermarket selling food products would increase along with per capita income. However, the threat from the local substitute would remain (Daryanto & Sahara, 2016).   
4. Bargaining power of Buyer (High): Existence of a large number of competitors in the food and grocery industry has increased the bargaining power of the customers. The customers can purchase their groceries as well as food products from supermarkets, hypermarkets and from small convenience stores. It is important to note in upper 20% of income class earn around 20% of the income class earn around $7,993 every year. This implies that Woolworths needs to maintain its price level while expanding in Indonesia (Pandin, 2009).
5. Bargaining Power of Suppliers (Low): The bargaining power of the suppliers are considered to be low. The established codes for the suppliers as well as a large number of the international brand has reduced the power of the suppliers in Indonesian supermarket industry.   

Income of Demographic Segments  

The GDP of Indonesia is 932.3 billion in the year which ranked 16^th in the world. The GDP of the country has increased positively. Although the income distribution within the country is unequal it can increase the demand of purchasing from the supermarkets. However, the rise of the middle class and their income has caught the attention of Australian business and Woolworths is one of them. The number of the middle class is expected to increase by 141 million in 2030. The expenditure of the Indonesian population on the Supermarket products has increased considerably. The food expenditure of Indonesia are illustrated below:

Figure 1: Retail Expenditure

Source: (Rangkuti & Wright, 2015) 

Policies

The government of Indonesia has focused on promoting the investment opportunity that gave rise to a favorable investment environment. For instance, GIC, which is the wealth fund, has aimed to make investments $546 million on PT Trans Retail in Indonesia (Straitstimes.com, 2016). The government of Indonesia has aimed to improve quality of the products supplied to the customers and also support the new retailers and increase the FDI within the country (Chang et al., 2013).         

Risks in the Foreign Market

Distribution channels  

The easy distribution channel has made the supermarkets to distribute their products easily and efficiently. The hypermarkets and the supermarkets obtain the products from the domestic suppliers or from the manufacturers and the importers. The suppliers can also deliver the products to the distribution centers of the supermarket. Woolworths can get hold of different local suppliers who would deliver their products and finally it can sell it to the customers.

Opportunities

1. The consumer base of Indonesia is quite large and the population of the country is 258 million. Moreover, the rise of the disposable income and the rise of the middle class would create a suitable opportunity for Woolworths to attract the customers.
2. The availability of the imported products would be adjusted by the modern retail sector. The people of Indonesia with the rise of the purchasing power would accept the products that would be exported by Woolworths.
3. Duties on most of the food are only 5% excluding the 153 food products. This would increase the profitability of the business.
4. Indonesia does not produce enough quantities of beef, tree nuts and dairy products, which Woolworths need to take account of, for better capturing the market. The supermarket should offer good quality beef and dairy products to create a big customer base.

Threats

1. The purchasing power of the consumers are weak due to high inflation rate  
2. Poor taxation system within the country
3. Increased prices of the imported products can reduce the customer base od Woolworths as customers would prefer low-priced products
4. Product shelf life for shipment to Indonesia id major issue due to the extended time of transportation and customs clearance process.
5. High level of corruption and inconsistent regulation create challenge for foreign investors  
6. High level of Competition in the market  

Political Risk: The corruption and the incontinent regulation within Indonesia can affect the investment process of Woolworths. The instances of corruption in Indonesia from 2004 to 2011 incurred a loss 3.4 billion in business as per Corruption Eradication Commission (KPK). The inconsistent tax rules can create a significant burden for the foreign investors like Woolworths. The nature of non-binding is also a major threat to the business. The negative investment list created some restriction on the FDI and made the process of investment quite complicated (Kurniawan, 2012).

Economic Risk: The economy of Indonesia has improved and seen a major growth over the last few years. However, the inflation of the country has increased from 5.9% to 8.61% in the year 2013 (Tradingeconomics.com, 2014). Currency depreciation has increased the price of the product. Considering the high inflation rate, the Central Bank of Indonesia increased the rates of the interest, which in turn can reduce the consumer spending power (Elias & Noone, 2011).   

Social Risks: The price of the imported products would be higher as compared to the local products. Moreover, the culture, choice, and preferences of the people of Indonesia are different from that Australians (Manik et al., 2013). Hence, the products sold by Woolworths can turn out to be the biggest rejection by the Incisions. Woolworths need to consider the rice as well as the effectiveness of the products while selling it to Indonesia.

Competitive Risks: The competition in the retail industry is quite high. There is the threat of competitors as well as that of the substitute. As a result, increasing the market share in Indonesia is quite different. Hence, Woolworths need to develop some innovative aspect that would help to make their product more effective towards the customers (Global Business Guide, 2013).   

Woolworths targets the middle-class consumers of Indonesia, as, within a few years, the middle-class people will start buying clothes and food from stores due to their economic development (Elias & Noone, 2011). Hence, it will be a great opportunity for Woolworths to identify the needs of Indonesian middle-class people and develop products accordingly. However, the firm may face threat such as poor taxation system and a high inflation rate that limit the buying power of the customers. Further, the company may also face intense market competition in the supermarket industry of Indonesia, inconsistency in regulation and corruption may decrease the feasibility of target market if the planning is not done properly (Kurniawan, 2012).

Based on the acquired data, the critical analysis would be carried out on the modes and entry and the management requirement for the expansion for Woolworth in Indonesia.

Feasibility for Selecting Indonesia

The choice of the entry mode is often based on the business potential and the business target market. In this case, the target market includes the middle-class consumers of Indonesia for which it is essential to select such an entry mode that would help to attract the customers.

Franchising has been selected as the entry mode as it would help Woolworth to cay out commercial activity by allowing the local sellers to the sale the product (Wach, 2014).  

Franchisee option has been selected for expansion of Woolworths because it would reduce the cost of entry and increase the scope of expansion in the distant market (Chiou & Droge, 2015). The entry mode of Woolworths in Indonesia would be analyzed with the help of the external factors and the process it would help to overcome the identified risks.

Political Factor: The burden of taxation and inconsistent policies can be easily avoided. When small business owner purchases the franchisees there are chances of obtaining biggest tax deduction (Méndez et al., 2014). Moreover, the franchises would encounter less corrugation as compared to direct investment.

Economic Factor: The impact of the inflation would be minimal on the franchises. The rise in the price of the product would be same as that of the local products. This is because the products that would be sold by Woolworths would be purchased from the local supplier and manufacture.        

Social Factor: franchisee would help to address the needs of the local customers as the products would be obtained from a local supplier and hence it would satisfy the taste and preference of the customers (Kacker et al., 2016). However, some specific products would be imported from Australia maintaining authenticity.    

It is found that in the Indonesian market, a number of opportunities are there for Woolworths and to grab them, the firm needs to do proper planning and management of its resources.

Human resource management- In order to develop a proper HR planning, a firm needs to follow four steps are stocktaking, predicting the supply of employees, estimating the demand for staffs, implementation, and evaluation (Brewster et al., 2016). Woolworths needs to analyse the availability of its staff for implementing its business plan in Indonesia. It must ensure that it will be able to meet the demand of employee while implementing the plan of expanding business in Indonesia. If it feels that there is a shortage of employees within the firm, then it needs to carry out a recruitment and selection. Moreover, the existing staff must be provided with appropriate training of handling international customers, so that they can perform their tasks competently.

Operational functions- International operation management is innumerable of activities used by a firm to exchange various types of inputs such as labor, material and so on. An appropriately designed and organised operating system has an important role in determining the quality of products, services and productivity (Wild et al., 2014). Therefore, Woolworths does it operation management through developing one team, updating products, developing a cohesive brand, reducing cost and improving processes. The firm follows the Theory of Constraints (TOC) for managing its operations successfully. The TOC includes four stages are exploit constraints, subordinate processes, elevate constraints and repeat cycle (Woeppel, 2016). Using the process, Woolworths identifies the major constraints of expanding its business in Indonesia and then acts appropriately to handle it. For example, it provided training to its human resources to enhance their ability to work in the international market efficiently. Apart from that, to ensure the timely supply of the products, the firm should hire the local suppliers of Indonesia.

Threats and Opportunities for Woolworth’s in Foreign Market

Marketing and cross-cultural issues- Identifying the cross-cultural issue in Indonesia is important for developing the marketing plan effectively that does not hurt the ethical beliefs and behavior of Indonesian in any manner (Kaynak & Herbig, 2014). There is a huge difference between the culture of Australia and Indonesia that can affect the business activities of Woolworths negatively. If the firm fails to communicate with its potential customers appropriately for the difference in language, then it may result in significant loses. Further, the language difference may also affect the marketing activities for promoting the brand and its products. Therefore, the management and the employees of Woolworths need to gain proper knowledge regarding the cultural values and language of Indonesians.

Market analysis- Indonesia is the 6^th largest nations among all the developing countries. The economic condition of the country is developing very fast and its GDP growth rate is near about 6%. There is an immense potential for the retail industry in Indonesia. The government regulations are also supportive for the national and international marketers. It has a strong customer base due to the expanding youthful and middle-class demographics (Gbgindonesia.com , 2017).

SWOT analysis-

Table 1: SWOT analysis of Woolworths

(Source: (Woolworths.com.au, 2017)

Competition analysis- The traditional retail market is unable to maintain their position for the competition with the modern retail sector. Therefore, Woolworths have to face intense market competition from the major retail organisations of Indonesia such as 7-eleven, Lawson, Indomaret Point and so on (Gbgindonesia.com , 2017).

Strategies- In order to compete with the major retail players of Indonesia, Woolworths needs to develop effective strategies. Woolworths keeps its customers at the center of its business, which is an effective way of gaining customer attention and trust. Further, the firm needs to develop innovative ways of shopping, so that customers enjoy buying from Woolworths.

Working more solid for customers- In order to survive in the Indonesian market, Woolworths need to identify the needs and demands of the targeted customer group. Here, the firm needs consider the cultural values and beliefs of the customers as these have a direct impact on the purchase decision-making of the customers. Thus, after identifying the preferences of the customers, the company can develop its products based on that. In order to attract the customer attention of the Indonesian market, Woolworth must carry out loyalty programs. It would provide the loyal customers the chance of earning notable discounts on their shopping.  This will help the firm to develop a strong customer base in Indonesia.

Developing a strong partnership with the local suppliers of Indonesia- Woolworths needs to make partnerships with the suppliers of Indonesia so that it can deliver the products to the end customers in a timely manner. The partnership must be strong and trustworthy so that it can ensure smooth operations of the firm. In order to develop a competitive position in the modern retail sector of Indonesia, Woolworths needs to develop innovative fashion and food products and deliver them to the customers at first, so that it can earn the advantage of the first mover.

Potential Risks

Conclusion 

Doing international business effectively requires a wide range of resources and planning. While planning for expanding business in an overseas nation, it is important for the marketers to carry out an environmental analysis of the country for understanding the situation of the market of a specific industry. Therefore, carrying out an environmental situational analysis of Indonesia helped to gain all the necessary information of the retail industry. It helped Woolworths to decide its market entry mode and develop strategy effectively.

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